Misrepresentations and omissions are a standard cause of action made against brokers, financial advisors, and their firms. The basic concept is that a financial advisor sold an investment by either misrepresenting material facts or by omitting to disclose material facts. This is a basic fraud claim and there are major differences between fraudulent misrepresentations under the common law, misrepresentations filtered through state securities laws, and misrepresentations that are negligent.
A hypothetical scenario common to investor cases involves an investment recommendation made by a financial advisor to invest in a particular investment. During the sales pitch, the financial advisor represents that the particular investment is a great investment and that the company undergoes audits by a reputable accounting firm twice a year. Based on the representations by the broker, including that the company undergoes semi-annual audits by an accounting firm, the investor invests $100,000 into the company. The broker is paid a 10% commission for the solicitation. After a year and a half, the company is sued by the SEC for securities and accounting fraud, including misappropriation of investor funds. It turns out the company’s financials were never audited and that no accounting firm was ever retained to perform audits. The investor’s $100,000 is gone. In this situation, the investor would certainly have viable causes of action against the financial advisor and his brokerage firm, including for common law fraud, negligent misrepresentation, and for violations of the state securities act.
The elements of common-law fraud are (1) a false statement of material fact; (2) defendant’s knowledge that the statement was false; (3) defendant’s intent that the statement induce plaintiff to act; (4) plaintiff’s reliance upon the truth of the statement; and (5) plaintiff’s damages resulting from reliance on the statement. Hart v. Boehmer Chevrolet Sales, Inc., 337 Ill. App. 3d 742, 751 (2nd Dist. 2003). In the hypothetical above, in order to win the common law fraud claim, the investor would have to prove that the broker knew the company did not undergo audits and that he misrepresented that information with the intent to induce the investor to invest in the company. That can be difficult, but when the broker’s 10% commission relies on the investor investing in the company, that may not be a stretch. Clearly, under this circumstance, the misrepresented fact about audits was material to the investor’s decision to invest.
Under state securities laws, like the Illinois Securities Law of 1953, 815 ILCS 5/12, the elements of a cause of action are similar to common law fraud with a critical difference. There is no requirement that the investor prove that the broker acted with intent – known as scienter. See Foster v. Alex, 213 Ill. App. 3d 1001, 1005-06 (5th Dist. 1991); Allstate v. Robert W. Baird, 756 F. Supp. 2d 1113, 1162 (D. Az. 2010); and Schwitters v. Tomlinson, 1996 US Dist. LEXIS 1397*3 (N.D. IL. Feb 9, 1996) Further, statutory claims include specific remedies including recovery of costs and attorney’s fees.
Negligent misrepresentation involves the breach of a duty to use care in obtaining and communicating information upon which others may reasonably be expected to rely in the conduct of their affairs. Zimmerman v. Northfield Real Estate, Inc., 156 Ill. App. 3d 154, 163 (1st Dist. 1986). To prove a claim of negligent misrepresentation, one must prove: (1) a false statement of material fact; (2) defendant’s carelessness or negligence in ascertaining the truth of the statement; (3) an intention to induce plaintiff to act; (4) action by the plaintiff in reliance on the truth of the statement; and (5) damage to plaintiff resulting from such reliance when Respondent is under a duty to communicate accurate information. Board of Education v. A, C & S, Inc., 131 Ill. 2d 428, 452 (1989). In the investment context, proving negligent misrepresentation is much easier than proving fraudulent misrepresentation because a plaintiff does not have to prove the advisor knew the information he provided was false. Here, if the financial advisor was simply negligent and assumed the company underwent routine audits and was wrong, then the claim would be viable still.
Financial advisors, investment advisors, and the companies they work for, are obligated by law to provide accurate information about the investment they recommend to investors. These advisors are in a far better position than their clients to understand the key facts and information about the investments they recommend. Experienced investor-rights and securities attorneys at Stoltmann Law Offices understand the intricacies of these causes of action and know how to win these cases.