One of the most common allegations in a securities arbitration claim is that the broker made misrepresentations of fact or failed to disclose important facts which would have impacted the investment decision of the customer. FINRA Rule 2210, “Communications with the Public,” requires that brokers’ communications with investors be “based on principles of fair dealing and good faith, must be fair and balanced….” The rule further states that brokers “must ensure that statements are clear and not misleading within the context in which they are made.”
What does this mean to an investor?
What it means to an investor is that brokers and their firms are obligated to provide their clients with all the material facts concerning an investment prior to or at the time a broker makes a recommendation to a client. The broker is also obligated to not omit relevant, material facts that would be important to the client in making an investment decision. If the client relies on the misrepresentation in making an investment decision, or if the client would have relied on the omitted facts, and damages result from the misrepresentation/omission, the client has a cause of action against the broker.
Examples of misrepresentations/omission in the context of securities transactions are legion. For instance, a client could express an interest in purchasing the stock of a well-known pharmaceutical company. The broker tells the client about the company’s performance, prior year’s earnings, etc., but fails to mention that the company’s new promising drug will not be coming to market because of the negative results reflected in recent drug trials. After purchase, the price of the stock drops precipitously.
A client expresses an interest in increasing the return on his portfolio of stocks and bonds. The broker recommends that he use margin – borrow against the existing portfolio to increase the size of the portfolio, thereby increasing the size of profits. The broker fails to discuss what happens if there is a market correction – the value of the increased portfolio of stocks decreases significantly, the client starts getting margin calls and either has to deposit additional cash in the account or sell off securities to pay down the margin balance.
And that is just stocks and bonds.
Today, more and more complex products are available for retail investors. Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs) are products which can be difficult to understand and entail many and varied risk characteristics. Related products, such as inverse or leveraged ETFs, and non-traded REITs, are even more complicated and risky. Prior to the purchase of these and similar investments, brokers are obligated to fully describe the nature and risk characteristics of these investments.
A negligent misrepresentation/omission can, and does, frequently occur. If a broker mistakenly gives an investor incorrect information, or through oversight fails to advise the investor of a key fact, a claim for negligent misrepresentation/omission can be made. If a broker intentionally misleads a customer, a claim for securities fraud can be asserted.
If you believe your broker made a misrepresentation to you, or failed to tell you something that was important, regarding transactions your account, you should call the experienced securities attorneys at Lubiner, Schmidt & Palumbo