Securities Law Definitions

Material Misrepresentations or Omissions

Misrepresenting, or omitting material facts, is the classic type of securities fraud. This type of violation occurs more during the offering process, where a company is selling its stock and is accused of making a misrepresentation on the offering documents The claim does arise in regulatory actions and arbitrations, but is typically a less frequent event in the retail sales practice violations.

Here the customer alleges that the broker intentionally misled him or failed to disclose a material fact about an investment. While Courts require proof that the broker acted intentionally or recklessly, arbitration panels often use the level of sophistication of the customer in deciding whether he was misled. Here, as in most of these claims, the credibility of the customer, and the broker are crucial to the arbitration process, and, as discussed in Avoiding Customer Disputes, the documentation maintained by the parties may be determinative of the outcome.

If proven, an intentional misrepresentation claim can have serious consequences for the broker, as it is a violation of Rule 10b-5, and a matter taken very seriously by the regulators. A serious enough violation could lead to criminal charges.

For more information, see Typical Customer Disputes at the Securities Law Home Page.