Broker Misrepresentation and Omissions – Investment Fraud
Misrepresentations and omissions refer to deceptive practices in investment offerings where vital information about the investment is misrepresented or withheld from potential investors. This can include false statements about the investment’s potential returns, risks involved, or the background of the individuals promoting the investment.
Omissions occur when crucial details that could affect an investor’s decision are not disclosed. Brokers commonly use misrepresentations and omissions in investment fraud schemes to lure investors into making uninformed decisions.
Broker-dealers and financial advisors must not give out false information, make misleading statements, or leave out facts that a reasonable investor would consider when making an investment decision.
FINRA Rules for Misrepresentations and Omissions
The following rules require firms and representatives to disclose all material facts and material information to a customer. If, instead, a broker or their employer made a misrepresentation or omitted relevant information about the investment, an investor may have a claim if the investor relied upon the information to make a decision to purchase, sell, or hold a security.
FINRA Rule 2020 Use of Manipulative, Deceptive or Other Fraudulent Devices– prohibits members from effecting “any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.”
For the misrepresentation and omission of information to be considered broker fraud, separate from negligent misrepresentations, there must be scienter, intent, or knowledge of wrongdoing.
FINRA Rule 2210—Communications with the Public requires registered representatives to give the full story behind an investment, not just highlight the positive attributes. If an advisor makes omissions about an investment, such as the downside risks, that could be considered fraud.
FINRA Rule 2010 Standards of Commercial Honor and Principles of Trade– says that broker-dealers must operate with the highest standards of commercial honor in their dealings with investors, including supervising their brokers and reporting incidents of misrepresentation and omission.
Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) and Rule 10b-5 says that a misrepresentation or omission of a fact is material if a reasonable investor might have considered the fact necessary in making the investment decision.
Examples of Misrepresentation and Omissions
Last week, we reported that the SEC charged Tony Liddle, a broker from Wisconsin, with fraud in the form of misrepresentation and omission, leading to 13 of his clients losing $1.9 million. The SEC alleges Liddle misrepresented GWG bonds and other alternative investments, claiming those investments were not risky. GWG Holdings Inc., which sold $1.6 billion in bonds backed by life settlements, filed for Chapter 11 bankruptcy protection last April. Investors still don’t know what the L bonds are valued at, if anything.
In a separate case of broker misrepresentation and omission, GPB Capital Holdings, a New York-based registered investment adviser, was accused of a massive “Ponzi-like scheme” that allegedly defrauded 17,000 investors across the U.S. out of more than $1.7 billion. According to FINRA, on April 27, 2018, GPB Capital sent a letter to many broker-dealers that sold GPB Capital offerings. The letters allegedly state that GPB Capital was in the process of registering certain classes of securities issued as limited partnerships with the SEC. This routine process set off the broker misrepresentation and omission scheme and is an illustrative example of the form they can take.
As part of that process, these offerings were required to file audited financial statements. The letters further stated that the delivery of these audited financial statements would be delayed pending the completion of a forensic audit. According to the findings, while these firms learned of the delays, their registered representatives recommended and sold GPB Capital securities to numerous unsuitable customers in light of their investment profiles. Failing to consider an investor’s profile can be a form of broker misrepresentation and omission.
Despite the announcement, many sales were reviewed and approved by firm principals. These firms were sanctioned, fined, and ordered to pay restitution to investors for the misrepresentation and omissions.
For yet another example of broker fraud and omissions, in December 2022, we reported financial advisor and insurance rep Gautam Arora (CRD#: 5443201) was reportedly arrested in California after an investigation by the state’s Department of Insurance found he allegedly sold $100,000 of fraudulent investments to four victims as a part of a broker misrepresentation and omission scheme.
According to the statement, Arora reportedly recruited individuals to work for him in a multi-level marketing agency. “He obtained victims’ private financial information through an alleged ‘financial review,’ then solicited victims to invest in his fictitious investments.” Arora allegedly made numerous material misrepresentations of fact and reportedly failed to disclose his poor personal financial status to clients. The California Department of Insurance, which alleged that Arora had overdrawn bank accounts and high credit card debt, stated that the victims were led to believe that their investments were “legitimate.” Arora’s actions represent one of the most prominent recent broker misrepresentation and omission examples.
National FINRA Attorneys
FINRA operates the largest securities dispute resolution forum in the United States and has extensive experience providing a fair, efficient, and effective venue for handling securities-related disputes.
If you believe that your financial advisor misrepresented or omitted information, don’t wait to take action. Please call the White Law Group at 888-637-5510 or schedule a free consultation using our contact form with a national FINRA attorney. We can evaluate your case and determine if you were a broker, misrepresentation, or omission victim.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to representing investors in FINRA arbitration claims against brokerage firms throughout the United States.
Our FINRA arbitration attorneys have handled over 700 FINRA arbitration claims involving unauthorized trading, unsuitable investments, fraud, negligence, churning/excessive trading, and broker misrepresentation and omissions.
For information on The White Law Group and its representation of investors in claims against brokerage firms, visit https://whitesecuritieslaw.com.
Frequently Asked Questions
What damages and restitution might I be entitled to if I win a FINRA arbitration claim for broker misrepresentation and omissions?
You may receive several forms of damages and restitution if a FINRA arbitration panel rules in your favor. This includes:
- Net Out-of-Pocket Loss: Out-of-pocket losses refer to the amount of money an investor loses due to broker fraud. If, for example, you initially gain $5,000 based on the investment recommendation of your broker but eventually lose $10,000, you would only be rewarded $5,000. It does not account for gains you may have experienced had you worked with a different broker.
- Trading Losses: Unlike out-of-pocket losses, trading losses do not account for any investment gains you have experienced. Returning to the example above, you would be rewarded $10,000 rather than $5,000.
- Well-managed Portfolio Losses: Unlike the previously mentioned damages, well-managed portfolio losses account for opportunity costs. By that, we mean you would receive the amount you would have gained had your broker effectively managed your investments.
FINRA arbitrators may also award punitive damages for particularly egregious cases.
What is the statute of limitations for filing a claim related to broker misrepresentation or omission under FINRA rules?
Claims may be filed within six years of the alleged broker fraud. However, the broker or their employer may raise a statute of limitations of less than six years in defense. A securities fraud attorney can advise you of any statute of limitations that may apply to your case.
How does a forensic audit help in uncovering broker misrepresentation and omission?
A forensic audit typically involves thoroughly examining a broker and their employer’s financial records to detect fraud. In cases of misrepresentation and fraud, audits often include analyzing communications between brokers and their clients to determine if the broker misrepresented the risk or potential gains associated with a potential investment or if they omitted material information the investor could have used in deciding whether to follow the recommendation or not.