Misrepresentation, Omission and Fraud: How They Differ
Investors often call any experience of being misled "fraud." The law draws finer lines, and they can decide which claims you have.
 
Misrepresentation: what you were told was false
A misrepresentation is a false or misleading statement of fact. "This fund has never lost money." "You can take your money out any time." "There are no fees on this one."
A statement can also mislead when it is technically true but leaves a false impression, such as quoting a high yield without mentioning that part of each payment may be a return of your own money.
 
Omission: what you were not told
An omission is a failure to disclose a material fact. Silence alone is not always a claim; generally, there must have been a duty to speak. That duty often arises when a financial advisor recommends an investment, or when what they did say was misleading without the missing fact.
Under the Securities and Exchange Commission's Regulation Best Interest ("Reg BI"), brokerage firms must disclose material facts about fees, costs and conflicts of interest when they make recommendations to retail customers. RIAs owe their clients a fiduciary duty that includes full and fair disclosure of all material facts.
 
Fraud versus carelessness
Fraud generally requires proof that the person knew a statement was false, or acted with reckless disregard for the truth. Not every claim requires intent. Many states also recognize negligent misrepresentation, where a financial advisor was careless with the facts, though the requirements vary by state.
Claims are often brought on several legal theories at once, such as breach of fiduciary duty, recommendations that were not in your best interest and a brokerage firm's failure to supervise.
 
What a Misrepresentation Claim Usually Has to Show
The exact elements depend on the legal theory, the state and the forum. Four questions come up in almost every case.
 
1. Was the fact material?
A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to invest. Risk, fees, liquidity and conflicts of interest usually qualify. Vague sales talk, such as "this is a great company," is often treated as opinion rather than fact. A specific promise like "you can't lose money" is different.
 
2. Did you rely on it?
You generally must show that what you were told, or not told, influenced your decision to buy or keep the investment. Many states require that reliance to be reasonable. In some omission cases, courts have allowed reliance to be presumed.
 
3. Did it cause your loss?
This is called loss causation. A market decline by itself is not a claim. The question is whether your loss came from the very risk that was misstated or hidden. If you were told an investment was easy to sell, and you lost money because you could not sell it, that link is strong.
 
4. What are your damages?
How damages are measured depends on the claim and the forum. It may be your out-of-pocket loss or, in some situations, undoing the purchase.
 
Common Examples, and What Turns Them into Claims
 
"Safe," "guaranteed" or "can't lose"
FINRA's rules generally prohibit brokerage firms and their financial advisors from guaranteeing a customer against loss. When a risky product is sold as safe or conservative, the gap between the pitch and the real risk is often the heart of the claim.
 
Hidden or downplayed fees
Upfront commissions, ongoing fees and surrender charges can take a large bite out of returns. A financial advisor who calls a product "no-fee," or never mentions how they are paid, may have left out a material fact.
 
Liquidity misstatements
Non-traded real estate investment trusts ("REITs"), non-traded Business Development Companies ("BDCs") and private placements often limit or suspend redemptions. Investors told they can get out when they need to may find they cannot. Learn more about alternative investments.
 
Undisclosed conflicts of interest
A financial advisor may earn more for selling certain products, including the firm's own. Conflicts like these generally must be disclosed. A recommendation driven by a payout you were never told about can support a claim.
 
Structured notes and other complex products
Structured notes are bank-issued debt with returns tied to a stock or an index. They are sometimes pitched as "protected" or bond-like, yet the protection may vanish if the underlying asset falls past a set level, and repayment depends on the issuing bank's credit. See our page on complex products.
 
Private placements
Private placements are unregistered offerings with far less public information. FINRA has told brokerage firms that they must reasonably investigate the private placements they recommend. A financial advisor who repeats the sponsor's pitch without checking it may be responsible for what it got wrong.
 
Retirees and older investors
Misstatements hurt most when you cannot afford to wait out a loss. See our pages on poor retirement advice and senior fraud and elder abuse. If the whole investment turned out to be a sham, see Ponzi schemes.
 
How Brokerage Firms Defend These Cases
Daren spent years on the defense side, so he knows these arguments from the inside:

• "The risks were in the prospectus." Written disclosures matter, but they do not automatically defeat a claim, especially when your financial advisor's spoken assurances contradicted them.

• "Your account form says you wanted aggressive growth." Risk-tolerance boxes are often filled in by the advisor, and a form that does not match your age and goals can help your case.

• "The market caused the loss." That is why loss causation needs to be addressed from the start.

• "You were an experienced investor." Experience is not permission to be misled, although it can affect how reliance is judged.

 
Evidence That Builds the Case
A gap between what you were told and what the documents say is often the core of the case. Useful records include:

• Account opening forms and risk profiles, including any later updates

• Offering documents, prospectuses and any brochures or illustrations you were given

• Emails, texts, letters and your notes of calls or meetings

• Account statements and trade confirmations

• Your financial advisor's public record on FINRA BrokerCheck, or an RIA's Form ADV disclosure brochure

Write down what you were told, by whom and roughly when, while it is fresh, and keep everything.
 
Deadlines: FINRA's Six-Year Rule and Shorter Limits
Under FINRA Rule 12206, a claim is not eligible for FINRA arbitration once six years have passed from the occurrence or event that gave rise to it. The arbitration panel decides any dispute about eligibility, and a claim dismissed under the rule may still be pursued in court.
The six-year rule is not the only clock. It does not extend any statute of limitations, and many of those are shorter. For example, federal securities fraud claims generally must be brought within two years after the facts are discovered, and no later than five years after the violation. State-law deadlines vary by claim and by state. When a deadline starts can itself be disputed, so do not wait. If you think you were misled, call (914) 304-4051 or Request a Free Case Review.
 
Where These Claims Are Heard
Claims against brokerage firms usually go to FINRA arbitration. Claims against RIAs often go to arbitration before the American Arbitration Association ("AAA") or JAMS, depending on the advisory agreement, or to court. Claims against other bad actors are generally brought in court. For a step-by-step look at how Daren takes on these cases, see how investment loss recovery works.
 
Why Investors Choose Daren A. Luma
Daren has spent 26 years in financial-industry disputes. That includes 10 years with one of the largest (defense) law firms in the world and work as in-house counsel at one of the largest brokerage firms. He knows how brokerage firms evaluate customer claims, and he now uses that knowledge for investors. Daren personally handles each case.