When discussing investments with your broker or advisor, he or she should discuss with you the risks associated with any investment opportunities. Discussions of risk include the likelihood of your losing money in the transaction, any potential risk to your portfolio overall, and other associated risks that could possibly result from the investment. If all your broker or advisor wants to discuss with you is the tons of money you will receive from the investment, your broker is misleading you and leaving out important information necessary for you to make an informed and educated decision concerning the purchase or sale of an investment. A broker’s failure to advise you of the risks of any investment is negligent and a violation of FINRA rules and regulations, and your broker’s negligence potentially entitles you to a recovery of your damages.
Misrepresentations and omissions of information encompass a large portion of securities fraud cases and are often litigated together. Both the broker and the brokerage firm may be held liable for any misleading statements or omissions concerning their clients’ investments. FINRA rules and regulations, as well as state and federal securities laws, prohibit brokers from making false statements or omissions of material facts in connection with the purchase or sale of securities. FINRA Rule 2020 states that its members cannot “effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.” Rule 10-b(5) of the Securities and Exchange Commission addresses misleading statements and omissions, stating that a broker may not make an “untrue statement of a material fact” or “omit to state a material fact” in connection with the selling or buying of a security. Material information is that which the average investor should be informed of before buying or selling a security, and would include the risks associated with the investment, the broker’s fees and other costs incurred, and the company’s financial health if the transaction concerns a company’s stock.
A broker’s use of false or misleading facts is an affirmative action made by the broker to convince you to invest in what the broker is selling. False statements often include (unrealistic) guaranties, price predictions, or purported special information regarding an important contract, approval, earnings announcement, or other newsworthy event. Be wary of any promises made by your broker. Brokers have a duty to disclose all material facts and information when recommending stocks, securities, investment strategies, or financial products.
Omission, on the other hand, is the failure to disclose any risks known or discoverable by the broker about the investment. Omission includes the broker’s failure to disclose the broker’s or brokerage firm’s compensation related to the investment, the broker’s relationship with the issuer, the domination and control of the market for the security by the brokerage firm, the limited market for the company’s stock, or the lack of any appreciable assets or operating history of the company. Omitted information is often material information pertinent to the investor’s decision of whether or not to invest.
Hopefully, your broker offered you full and fair disclosure of any and all material information related to your investments. Unfortunately, some brokers are dishonest and make untrue statements or omit facts necessary for you to make informed decisions. If your broker “sold” you on the promises of an investment, and these promises later turned out to be false, or you learned of certain risks concerning the investment you wished you had known before investing, you should contact a securities fraud attorney to discuss your rights.