Misrepresentations by Investment Brokers Leading to Legal Claims
One of the most common types of securities fraud is called misrepresentation. This usually occurs when an investment broker, in trying to sell a client on a stock or other security, makes a false statement about some aspect of the transaction. A related charge is omission, which is the failure to provide important information. These are serious violations of U.S. and many state security laws, and victims of misrepresentation or omission may have the right to bring a claim against their broker.
Rule 10b-5 Prohibits Misrepresentation and Omission
The federal law that addresses misrepresentation is 17 C.F.R. §240.10b-5, also called Rule 10b-5. Rule 10b-5 is the basis for many investor-led securities fraud lawsuits. It prohibits brokers (and anyone involved in the purchase or sale of a security) from engaging in several fraudulent practices. After first prohibiting general fraud, Rule 10b-5 then addresses misrepresentation. Specifically, it says that a person may not make an “untrue statement of a material fact” in connection with selling or buying a security. It also prohibits omission of material facts.
Understanding Rule 10b-5
To violate Rule 10b-5, a broker must either make an untrue statement or omit some fact, and the statement or omission must concern a material fact.
The code defines “material” to mean information of which the average investor should be informed before buying or selling a security. Although the code does not give specific examples, some facts generally considered to be material include:
The risk associated with the particular investment;
If the transaction concerns a company’s stock, that company’s financial health;
The broker’s fees, commissions, and other costs involved in buying the security; or
Other information specific to the security, such as bond ratings.
These are just a few examples of facts that could meet the definition of material. If you think your broker has misrepresented or omitted something that you should have known before investing, contact an experienced lawyer in your state.
Bringing a 10b-5 Misrepresentation or Omission Claim
Claims for misrepresentation and omission are similarly litigated, since the same law prohibits both. To bring a private claim under federal law, the plaintiff must prove several elements: a material misrepresentation or omission; scienter, which means a broker’s intent; the investor’s reliance on the misrepresentation or omission; an economic loss; and loss causation, or a connection between the broker’s actions and the economic loss.
The Securities and Exchange Commission (SEC) is charged with enforcing compliance with federal securities regulations, which means the agency may bring claims against people or businesses suspected of misrepresentation or omission. In a case brought by the SEC, it does not have to prove reliance and loss causation.
By law, plaintiffs who bring a successful 10b-5 claim are entitled to “actual damages,” a term not specifically defined in the code. At a minimum, it includes the amount of the original investment. However, there are several methods by which 10b-5 plaintiffs may choose to calculate their damages. This may involve hiring an expert witness with specialized knowledge of the investment industry.
Rights Under State Laws
In some cases, state laws may be more favorable for investors. Claims under state laws may involve different elements, so an investor may want to ask an attorney for more details.