What Are Your Rights if Your Broker Omitted Material Facts About an Investment?
As a retail investor, you rely on your stockbroker to provide the information you need to make informed investment decisions. You rely on your stockbroker to provide information that is not only accurate but also complete. If you don’t receive all of the information you need, you might not be aware of the risks you need to consider, and you might end up making a bad investment decision despite carefully considering all of the information your broker provided.
In this scenario, what are your legal rights?
Stockbrokers Can (and Should) Be Held Accountable for Omitting Material Information
If your stockbroker omitted material facts about an investment, you can—and should—talk to a lawyer about filing a claim in FINRA arbitration. The Financial Industry Regulatory Authority (FINRA) requires brokers to disclose all material facts about investments to their clients, and the federal courts have long recognized this duty as well. As one federal court explained more than 50 years ago:
“[A stockbroker] cannot recommend a security unless there is an adequate and reasonable basis for such recommendation. He must disclose facts which he knows and those which are reasonably ascertainable. By his recommendation, he implies that a reasonable investigation has been made and that his recommendation rests on the conclusions based on such investigation.”
Today, FINRA arbitration is the easiest and fastest road to financial recovery for most investors who have suffered losses due to broker misconduct. Whether your broker intentionally withheld material information or was negligent in failing to provide all of the information you needed before deciding to invest, you are entitled to recover any losses for which your broker is responsible. Going to court is an option as well, but it is unnecessary in most cases.
When Omitted Facts are Considered “Material” to an Investment Decision
When making investment recommendations, stockbrokers are not necessarily required to disclose every single fact about a particular investment opportunity. Instead, the obligation to disclose only applies to facts that are material to the customer’s decision to invest.
So, what makes a fact “material”? Generally, a fact is considered material if a reasonable investor would consider the fact when deciding whether to invest or when deciding how much to invest in a particular stock or security. If a fact is trivial or inconsequential, disclosure is unnecessary, and failure to disclose it will not give rise to a claim for broker negligence or fraud.
Good stockbrokers will want their customers to have as much information as possible. They will only make suitable investment recommendations, and when making these recommendations, they will provide their customers with the information they need to decide whether to move forward. Of course, providing investors with as much information as possible helps protect brokers as well—as there is generally no risk involved with providing “too much” information to customers.
Why, then, do stockbrokers omit material facts in some cases? There are two primary reasons. In the vast majority of circumstances, a broker’s omission of material facts is the result of either:
- Broker Negligence – Sometimes, brokers will mistakenly omit material facts from their disclosures to investors. They may inadvertently fail to include material facts in their written summaries or investment recommendations, or they may inadvertently fail to attach relevant documents to their emails.
- Broker Fraud – Omissions of material facts can also be indicative of intentional broker fraud. In some cases, unscrupulous brokers may knowingly withhold information from their customers in order to facilitate trades that generate substantial commissions and fees.
Negligent vs. Intentional Omission: A Distinction Without a Difference (In Most Cases)
Whether a stockbroker’s omission of material facts is negligent or intentional, your legal rights as an investor are generally the same. In cases involving broker negligence and broker fraud, investors have the right to go to arbitration to recover their investment-related losses. Stockbrokers have a duty to avoid negligence, and intentional broker fraud is strictly prohibited under FINRA’s Rules and federal securities laws.
With both types of claims, investors who file for FINRA arbitration can recover losses including:
- Loss of principal
- Loss of investment returns
- Arbitration costs
- Attorneys’ fees
However, there is one important distinction between cases involving ordinary broker negligence and intentional broker fraud. In cases involving egregious broker misconduct, defrauded investors may also be entitled to punitive damages. These damages are intended to punish the broker and deter future fraud, and they are awarded in addition to the compensatory damages listed above.
Proving that Your Stockbroker Omitted Material Facts
If you have a claim against your stockbroker for omitting material facts about an investment, to recover your losses, you will need to prove it. Ultimately, this involves hiring a lawyer to conduct an investigation, conduct discovery and perform a comprehensive analysis of the information that you were (and weren’t) provided. But, to assist your lawyer with assessing your claim, there are some preliminary steps you can take as well.
Most importantly, you should gather all of the information you received from your stockbroker about the investment in question. Take your time, and make sure you collect everything—you don’t want your broker to respond to your complaint by forwarding an email he or she previously sent that contains the information you claim you didn’t receive. Also, document how and when you learned the material fact in question, and gather your account statements showing when you purchased and sold the stock or other security. These records will help your lawyer perform an initial claim evaluation, and your lawyer will be able to use them as the starting point for his or her investigation.
Do You Have a Claim Against Your Stockbroker for Omitting a Material Fact?
If you have questions about filing a claim against your stockbroker for omitting material facts about an investment, we encourage you to contact us for more information. Call 212-742-1414 or request a free initial consultation online to speak with an experienced attorney at Zamansky LLC in confidence.