Misrepresentation & Omission of Material Facts


“financial advisors have a duty to disclose
all material facts”

Brokerage firm and its financial advisors that provide misrepresentation or omission of material facts concerning investment recommendations is a sales practice violation, according to the Financial Industry Regulatory Authority (FINRA). The two types of misrepresentations and omissions that may be committed are those that are fraudulent and those that are the result of negligence.

According to the Securities Exchange Commission (SEC), fraud claims filed under Section 10(b)(5) of the Securities Exchange Act of 1934 may involve some aspects of fraud, deception, misrepresentation, non-disclosure or omission of material facts related to the purchase or sale of a security. In general, SEC anti-fraud regulations provide that an investor may recover damages through a claim of fraud when the investment recommendations made:

  • was based on a misrepresentation or omission of a material fact;
  • was intentional, reckless;
  • was in connection with the purchase or sale of a security;
  • was relied upon by investors; and
  • fraud resulted in an investment loss.

An investor who reasonably relies upon the misrepresentation of a brokerage firm and its financial advisor and as a result of the reliance suffered investment losses or in the event of an omission or non-disclosure of a material fact, the investor proves that the financial advisor had a duty to disclose the material facts at issue, may recover damages. Remember, a securities fraud claim requires an intention on the part of the financial advisor to misrepresent or omit material information to an investor.

Most brokerage accounts are considered non-discretionary accounts which require prior approval by investors of all transactions executed in their accounts. As a result, investors must rely upon information provided by financial advisors for suitable recommendations in order for them to make the correct investment decisions. If the information is incorrect or incomplete investors are at risk and brokerage firms can be held responsible for investment losses. Misrepresentation or omission of a material fact can be made in any of the following situations:

  • inadequate due diligence was conducted concerning security offerings;
  • failure to disclose of all material risks related to an investment or investment strategy;
  • failure to disclose all costs related to transaction;
  • undisclosed forfeiture of vested benefits from the replacement of a variable annuity;
  • unrealistic assumptions for investment projections; and
  • inaccurate performance calculations.

Klayman & Toskes, P.A. can help you determine whether an investment loss is the result of a brokerage firm and/or its financial advisor’s misrepresentation or omission of a material fact. If an investor suffers losses as a result of a misrepresentation or omission of a material fact they may be able recover their losses in a FINRA arbitration claim for damages.

Do you have a case?

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