Brokers have an obligation to give an investor all of the information that the investor needs in order to make an informed decision about whether they want to make a particular investment. Typically, this includes things like the risk of loss liquidity limitations, and prepayment risks. When the broker fails to disclose important information, or, even worse, tells the investor incorrect information about the investment, the broker and brokerage company can become liable for losses that the investor suffers from that investment.
Allegations of misrepresentations and omissions can arise at any time particularly in volatile markets where investors may have incurred significant losses. It is important to seek the advice of counsel at the first indication that a potential risk may be developing.
Misrepresentation claims can involve and individual broker or they can encompass entire firms. These types of cases predominately fall under allegations related to isolated incidents of faulty advice. However, there are occasions when the misrepresentations and omissions become more systematic and can rise to the level of criminal fraud schemes. In this type of case, potential criminal liability could result.
Misrepresentation claims can range from isolated incidents of faulty advice to the level of criminal fraud schemes involving massive losses incurred by investors.
The range of criminal charges arising from misrepresentations and omissions made by a broker to an investor can encompass various federal and state fraud charges.
Most states have adopted the Uniform Securities Act of 1956 to protect investors from fraudulent activity. Section 410 of this act holds a person or brokerage firm accountable who:
“Offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact…(the buyer not knowing of the untruth or omission)…and in the exercise of reasonable care could not have known, of the untruth or omission…”
Under Section 410, a guilty party who commits this kind of fraud:
“…is liable to the person buying the security from him, who may sue…to recover the consideration paid for the security, together with interest…costs, and reasonable attorneys’ fees, less the amount of any income received on the security, upon the tender of the security and any income received on it, or for damages if he no longer owns the security…
Under this statute, fraud victims can make claims for a refund on the amount they paid for the investment, minus income previously received and/or minus proceeds received from selling the investment. Victims may also be entitled to interest, attorney’s fees and the cost of pursuing the claim.
Federal laws also protect investors from fraud. One of the most important ones, Section 10(b), Rule 10b-5 of the Securities Exchange Act of 1934, says this:
“It shall be unlawful for any person, directly or indirectly…
…(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact…or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
Rule 2211 of the Financial Industry Regulatory Authority, states about omission and misrepresentation:
(A) … No member may omit any material fact…if the omission…would cause the communications to be misleading.
(B) No member may make any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public. No member may publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.
Penalties for misrepresentations and omissions vary according to the type of conduct involved and the body adjudicating the allegations. FINRA and SEC claims are civil in nature, thus financial penalties and other non-financial remedies are available. If the misrepresentation rises to the level of criminal conduct imprisonment and fines may occur.
One of the primary defenses to a claim of misrepresentation or omission rests in alleging that the alleged statement(s) was not made with bad intent, or the intent to mislead or that the misrepresentation or omission was not material.
Allegations of misrepresentation involving securities contain generally the same elements when comparing New York and Federal law. These laws generally are harmonious on the elements of the intent behind the misrepresentation and the materiality requirement.
Large-scale settlements of misrepresentations cases by the SEC and FINRA have become more common in the post-2008 collapse financial environment. An example of this on a large scale is found in the case of the U.S. investment banking subsidiary of Japan-based Mizuho Financial Group paid $127.5 million to settle claims that it provided "dummy assets" to a ratings agency "that inaccurately reflected the collateral held" by a hybrid collateralized debt obligation (CDO) Mizuho structured, marketed and rated in violation of federal securities law.