False Representations

False representations include either written or oral statements containing misrepresentations or omissions of information that are material to an investor and induce the purchase, sale, or holding of a security.

Under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) and Rule 10b-5 a misrepresentation or omission of a fact is material if a reasonable investor might have considered the fact important in the making of the investment decision. Also the Financial Industry Regulatory Authority (FINRA) Rule 2020 also 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.”

In order for the representation or omission of information to rise to the level of fraud, as distinguished from negligent misrepresentations, there must be scienter. Scienter refers to the mental state of the person such that their action was conducted in a manner other than in good faith. Scienter requires a showing of reckless or intentional wrongdoing. Scienter is found where either the person appreciated the propensity of the misstatement or omission to mislead or the omissions or misrepresentations were highly unreasonable constituting an extreme departure from the standards of ordinary care.

FINRA Rule 2210 also require representations to investors be balanced in light of all the information being provided to the investor. Advisers are prohibited from only listing the positive aspects of a security without disclosing downside risk and negative features in a balanced and fair manner. An intentional omission of the downside risk of an investment can also be a basis for a fraud claim. The benefit of the FINRA rules is that the standard by which a claimant or plaintiff pleads a fraud case are more relaxed as are the standards by which dismissal can be granted. Therefore pleading a violation of the FINRA rules in the FINRA forum greatly facilitates the ability to bring fraud claims. 

Fraud is a complex area of the law. Our clients' demand that we stay up-to-date on the law in this area. If you are in need of a sophisticated legal team to help navigate this area of law, our attorneys have that experience. If you believe you have been a victim of fraud, contact the lawyers at Gana LLP.

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