Omission of Facts in Securities Regulation

Investors often rely on the information provided by financial advisors or brokers before purchasing a stock, security or committing to an investment strategy. After all, these individuals are legally required to disclose all relevant facts about a financial product or opportunity so that clients can make sound investment decisions. 

Unfortunately, some brokers intentionally misrepresent or omit material information about an investment to push people into buying. Generally, the underlying reason for this dishonest act is to sell more of a product so the brokers can earn higher fees and commissions. 

If your broker or advisor failed to disclose a material fact about an investment and you suffered losses as a result, you may have a legal claim for economic damages. 

What is Considered a Material Fact?

An omission of material fact occurs when a stockbroker or advisor withholds information that a person would consider important when deciding whether or not to push through with a particular securities transaction. Material facts are entirely separate from information deemed to be trivial or unimportant. 

According to the Financial Industry Regulatory Authority (FINRA), misrepresenting or omitting a material fact concerning investment recommendations is a sales practice violation. It may be a legal cause of action for claiming damages. 

Below are the types of information that are material and, thereby, should be fully disclosed to customers:

  • All known risks associated with an investment or investment strategy
  • Financial information about the company offering the security
  • All related fees, other charges, and commissions
  • Analytical or technical information

Misrepresentation and Omission: What’s the Difference?

A misrepresentation is the act of making false or misleading facts about an investment. Omission, on the other hand, is failure to disclose material facts relating to it. 

Federal and state securities laws and rules established by the FINRA state that brokers and advisors have a duty to disclose all material information when recommending a product or investment strategy. This means the brokers and advisors must always be honest; they cannot tell “half-truths,” make false statements or omit any facts that can help a customer make an informed investment decision. 

Misrepresentation happens when brokers promise clients unrealistic rates of return or withhold information about specific risks or conflicts of interest. For example, an advisor discusses the advantages of purchasing a particular security but fails to disclose the disadvantages. When the provided information is incorrect or incomplete, that is an omission or non-disclosure of a material fact. 

A financial advisor’s misrepresentation or omission of material fact related to an investment may cause serious damages or losses to an investor’s portfolio. This act is a violation of SEC Rule 10b-5 of the Securities Exchange Act of 1934 and can result in grave consequences for the offender. If the violation is serious enough, it can even lead to criminal charges and imprisonment. 

The Elements of a Fraud by Omission Claim

A fraud by omission of fact claim is valid if the plaintiff can demonstrate the required legal elements. 

Note that the required elements may vary depending on the jurisdiction and the types of facts involved. But generally, the complainant and attorney must present the following evidence to make a successful investment fraud by omission claim. 

  1. Intent on the part of the financial advisor to omit material information to an investor.
  2. The brokerage firm and/or its financial advisor must be proven to have a professional responsibility to disclose the material facts at issue. 
  3. The defendant committed the misrepresentation or omission of material fact to influence you to take action.
  4. You relied upon the misrepresentation or omission of a defendant’s incomplete disclosures.
  5. You suffered damages or losses as a result of the reliance on the material misrepresentations and omissions.

Signs That a Misrepresentation or Omission Occurred

It can be difficult to verify whether you have been supplied with accurate and complete information, especially if the broker has taken extra steps to conceal his or her misconduct. 

Here are some signs that could indicate a material misrepresentation or omission has been committed:

  • Upon doing your independent research, you discovered some previously undisclosed information, such as fees, risks, and company information, that seems concerning. 
  • The paperwork you received regarding your investment differs from what your broker described. Inconsistencies are usually a telltale sign that something is amiss. 
  • You learned through media reports that the product or company you invested in is being investigated for fraud. 
  • You incurred far higher losses than you thought was possible, which means you may have been in an unsuitable investment. 

Do I Have a Legitimate Claim for Omission?

The Serafini Law Office can help you determine whether your investment loss can be attributed to a misrepresentation or omission of a material fact. 

Mr. Richard A. Serafini has 40 years of law experience and is well-equipped to handle your case. 

The Serafini Law Office currently offers legal services to the following cities and states: Miami, Fort Lauderdale, Boca Raton, West Palm Beach, Florida, and New York. 

Contact us at (754) 223-4718 for a free consultation. 

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