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Did You Invest Based on False Financial Guidance?

When investment advisors provide investors with false financial guidance, investors can face substantial losses. Since investors rely on their advisors to help them grow their portfolios, this is a major problem. Investors need to be able to trust the financial guidance they receive; and, when they discover that they cannot trust this guidance, they can often seek to recover their losses in securities arbitration or in court.

In most cases, however, stock brokers and investment advisors are not the original source of this false information. Companies that offer stock to the public are required to publish financial guidance under federal law. More specifically, they are required to publish accurate financial guidance that paints a realistic picture of their revenue, costs, profits, earnings forecasts and other financial metrics.

So, if you invested in a company through an investment advisor or stock broker only to subsequently learn that you received false financial guidance, what should you do?

Pursuing a Claim Against Your Investment Advisor for Providing False Financial Guidance

While investment advisors have numerous responsibilities, these responsibilities can broadly be summarized in two categories: (i) they must conduct adequate research to provide informed investment recommendations, and (ii) they must provide suitable investment recommendations with their clients’ best interests in mind. Unfortunately, failures are common in both categories.

Let’s consider a common scenario: A company releases new financial guidance suggesting that its stock price is poised for sustainable long-term growth. An investment advisor learns about the guidance in a headline or news wire, downloads the guidance, and sends it to his or her clients with a general recommendation. Several clients respond quickly saying that they want to invest.

Instead of rising, the stock price drops. The next headline states that the company is under investigation by the U.S. Securities and Exchange Commission (SEC) for issuing false financial guidance. The price drops further, and the investment advisor’s clients are left wondering what went wrong.

So, what did go wrong? The answer is simple: The investment advisor did not do his or her job. The investment advisor did not analyze the company’s financial guidance, and the advisor did not provide suitable client-specific investment recommendations. Had the advisor analyzed the guidance, there is a good chance that he or she would have spotted red flags—and that the advisors’ clients could have avoided the losses they incurred.

Of course, investors have a certain amount of responsibility for their own investments. They must choose their investment advisors carefully, they must monitor their portfolios, and they must read the information their investment advisors provide. But, if this information is inaccurate, even investors who do their best to protect their portfolios can still end up facing fraudulent stock losses.

In this type of scenario, investors will often be able to pursue fraud claims against their investment advisors in FINRA arbitration. Investors pay fees (and often substantial fees) for the investment recommendations and portfolio management services they receive from their investment advisors. They rely on their investment advisors’ expertise and duty to act in their best interests. When investment advisors rely on false financial guidance—and when they should have known not to rely on this false guidance—investors can pursue claims for negligence, unsuitability, fraud and various other violations of federal securities laws and FINRA regulations.

Pursuing a Claim Against a Company that Publishes False Financial Guidance

Now, what about the company itself? Unfortunately, despite the laws against it, companies routinely publish false financial guidance. Sometimes it is inadvertent, sometimes it is intentional and sometimes it is the result of willful ignorance. But, regardless of why a company publishes false financial guidance, the fact of the matter is that the company has released material misinformation that has misled investors. This in itself is a violation of the law that entitles investors to legal remedies.

By its nature, financial guidance involves anticipating future events. No company can do this with absolute certainty. As a result, proving that a company’s forecasts are “false” can be difficult. In some cases, financial guidance that was valid at the time of its release will prove to have been misguided. This happens, and it is not necessarily indicative of fraud.

Federal securities laws provide public companies with a “forward-looking statements safe harbor.” This safe harbor establishes enhanced pleading requirements for investors who are seeking to prove that a company’s financial guidance was false. Two relatively common ways that investors can overcome this safe harbor and seek damages for a company’s release of false financial guidance are:

  • Knowingly Publishing False Financial Guidance – If an investor alleges that a company knowingly published false financial guidance, this can overcome the forward-looking statements safe harbor. This could involve alleging that the company intentionally falsified financial data, relied on improper accounting methods, shifted revenue or costs between accounting periods, or engaged in a variety of other types of fraudulent practices in order to provide apparent support for inflated financial projections.
  • Knowingly Relying on False Material Assumptions – Investors can also overcome the safe harbor by alleging that a company’s financial guidance relies on false material assumptions. For example, a company may make projections based on past revenue from a contract with a long-term customer. But, if the customer has already informed the company that it does not intend to renew the contract for the upcoming year, then basing the company’s guidance on its prior revenue would also generally be considered fraudulent.

These are just two of several possible examples. There are many other ways that companies can mislead investors with false financial guidance—and investors can pursue litigation against companies in a broad range of circumstances.

Speak with Zamansky, LLC About Your Legal Rights as a Stock Investor

Whether you invested in a stock on your own or through an investment advisor or broker, if you have suffered losses that you believe are attributable to false financial guidance, you should consult with a  lawyer about your legal rights. For a free and confidential consultation at Zamansky LLC, call 212-742-1414 or tell us how we can reach you online today.