Misrepresentation and Omission
“Sellers” of securities (including both issuers and brokerage firms) have affirmative obligations to disclose all material facts and risks that are associated with a security that they are recommending or selling to an investor. Misrepresenting and omitting to disclose material facts is the most common type of misconduct associated with the sale of securities. The disclosure of risks and negative facts is counterintuitive to the sales process. For this reason, many “sellers” of securities fail to satisfy this obligation.
The essence of these obligations is to ensure that the investor receives a thorough, fair, and balanced presentation of the nature, risks, benefits and issues regarding a particular investment.
As noted, the duties include both a duty not to misrepresent a “material” fact to an investor and not to omit to disclose a material fact to the investor. A material fact is one that a reasonable person would consider important in deciding whether or not to invest. Misrepresentation is an element in most if not all securities arbitration and litigation claims. A material misrepresentation may be intentional or negligent. Misrepresentations are grounds for recovery if financial losses resulted from a customer’s justifiable reliance on the misrepresentation.
Similarly, a material omission (or silence) regarding a fact that the seller (broker) is under a duty to disclose provides a ground for recovery of financial losses resulting from a customer’s justifiable reliance on the absence of disclosure. One example of such an omission is commonly called a “half-truth” – in other words, the broker tells a story but it is not the whole story. If “the rest of the story” is “material,” it cannot be lawfully omitted. Thus, a failure to disclose the risks of a particular investment would be a material omission that, if justifiably relied upon, would entitle a customer to recover losses attributable to the omission.
Although many sellers of securities (both issuers and brokerage firms) argue that they satisfied their disclosure obligations by the delivery of a prospectus, private placement memoranda or similar document to an investor, this is often not true for one or more of the following reasons:
- Often the prospectus, private placement memoranda, or other disclosure documents contain misrepresentations of material facts or omit material facts.
- Often the prospectus, private placement memoranda, or other disclosure documents are not delivered to the investor until after the investor has purchased the investment.
- The Financial Industry Regulatory Authority (“FINRA”) has repeatedly concluded that “simply providing a prospectus or offering memoranda does not cure unfair or unbalanced sales or promotional materials …”
- Generic or boilerplate disclosures in prospectuses, private placement memoranda, or other disclosure documents do not satisfy disclosure obligations when specific risks or negative facts are known to exist.
If you have investment losses or problems involving misrepresentation and omission, call the lawyers at Page Perry for experienced representation at (770) 673-0047 or (877) 673-0047 (toll free).