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Misrepresentations and Omissions

Misrepresentations and omissions often disguise the risk associated with a particular investment. A brokerage firm or broker can be held liable if that firm or broker misrepresents material facts or omits to disclose material facts to the investor regarding an investment, and that client subsequently loses money on that investment. A broker has a duty to fairly disclose all of the risks associated with an investment. A broker must also not make omissions that are material or even remotely material. To be on the safe side, everything must be disclosed. If the broker fails to make the proper disclosures and engages in omissions, that broker and his employer can be held liable.

It seems obvious that a financial advisor cannot lie, misrepresent or withhold the salient features of an investment. The concept is of utmost importance in securities matters as misrepresentations and omissions are specifically codified in both Federal and State securities legislation. Therein, legislators understood the paramount importance of consumers getting all the important information about investments. However, the legislative intent goes further. It was specifically intended that Broker Dealers and Financial Advisors could not hide behind "boilerplate" documents such as a Prospectus or other written disclosures. In so many situations, the financial advisor would make certain representations that were either false or seriously distorted explanations of the investment. These misrepresentations/omissions would generally run contrary to the Prospectus or similar document. Most of the time the advisor in question would not have actually read the Prospectus himself, and sadly if they had read the document, they may not have understood it. The law understands that a seller of securities cannot knowingly or inadvertently misrepresent the important features of an investment and then rely on a legal document to exonerate his actions. An investor has the right to rely on the assertions and promises of his or her financial advisor and the brokerage firm.

There are several situations in which we have encountered broker misrepresentations and omissions. In a series of cases we handled, the broker told all his clients that a particular mutual fund was designed for conservative investors. The prospectus painted a different picture. However, in fairness, just about every prospectus for a security paints the dourest picture possible. It is a document written by attorneys, for attorneys. As such it covers every conceivable mishap and assumes the worst-case scenario. When the case was heard the FINRA Panel concluded that indeed an investor has the right to rely on the verbal assertions of the advisor. Moreover, a brokerage firm can't then rely on boilerplate language.

In a similar situation, a broker represented a product, a non-traded REIT, as a safe fixed income alternative. The Offering Memorandum was clear that it was a risky investment for wealthy and sophisticated investors only. The client trusted the assertion of the advisor and reasonably relied on those representations, even though the client was not a good fit for the investment. In the end the advisor and firm could not rely on the legal document as a defense. The law recognizes the affirmative duty to not make misrepresentations and omissions in the sale of a security.

In the end a financial advisor and an investment firm have to be diligent in their day to day conduct with the investing public. Given the sacred fiduciary bond between advisor and client, financial professionals must go out of their way to ensure that everything repeated to a client is one hundred percent accurate. The firm must supervise every single financial advisor under its control to ensure all communications are fair and balanced. There can be no short cuts. The duty is absolute and there are consequences for failure. Almost all investors have jobs themselves. As such they are well aware of their duties. Regardless if you are a Physician or Refinery Worker; or an Engineer or food service professional, there is a standard that must be adhered to. This is especially true in the financial services industry.

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