A broker or investment firm may be liable to a customer if that broker makes a material misrepresentation of fact or fails to disclose certain important and material facts during the course of the sale or recommendation of a stock, security, investment strategy or financial product. A misrepresentation is an affirmative act of making a false or misleading statement of fact, while an omission is the failure to disclose essential facts. Federal and state securities laws, as well as rules established by self-regulatory organizations such as the Financial Industry Regulatory Authority (“FINRA”), make it unlawful for a broker or firm to make a misrepresentation or omission in connection with the recommendation of a stock, security, investment strategy or financial product. Brokers and advisers have an affirmative duty to disclose all material information when they recommend a stock, security, investment strategy or financial product. Negligently or intentionally making misrepresentations or failing to disclose any material information can result in the losses and damages to an investor’s portfolio.
Full and fair disclosure of material information means that the broker or investment firm must be honest, cannot make any untrue statements, and cannot omit any facts necessary for a customer to make an informed investment decision. Often times, misrepresentations regarding investments include unrealistic rates of return, omissions regarding risks or failure to disclose conflicts of interest. For example, it could be considered a material omission if a broker discloses all of the advantages of a security, but fails to disclose the disadvantages. Information is material when a reasonable and rational investor would consider the facts important when deciding whether or not to accept the broker’s recommendation.
The Federal Industry Regulatory Authority, Inc. (“FINRA”) has set forth rules and interpretive material governing a firm and broker’s obligation to make fair and balanced communications with the public. For instance, FINRA Rule 2210, which governs Communications with the Public, requires that a broker’s communications with the public be fair and balanced. As such, if a broker’s communications with an investor fails to disclose certain facts, or makes material misrepresentations, the broker could be found to have violated FINRA Rule 2210. FINRA has also published various articles educating investors about how to avoid being the victim of misrepresentations and omissions and has also published interpretive materials for firms and brokers reminded them of their obligation not to make misrepresentations and omission, including FINRA Notice to Members 03-8 (Advertising Modernization).
Contact Lax & Neville LLP with your questions about misrepresentations and omissions. Our attorneys have the experience needed to analyze your portfolio activity in lights of the facts disclosed to you by your broker and formulate a strategy to potentially recover your losses and/or damages.
