Misrepresentation in Securities Arbitration


MISREPRESENTATION IS ONE OF THE MOST used and abused claims in securities arbitration. A form of a fraud claim, misrepresentation involves knowingly making false statements that a listener will rely and act upon. Obviously, this violates a broker’s professional obligation to deal fairly with customers and breaches a customer’s right to accurate, truthful information when making investment decisions.

Misrepresentation claims are often regarded as easy to institute because there are usually no documents to disprove the claim. However, the law works the other way: It is the customer’s burden to prove that the misrepresentation was made and relied upon. For this reason, misrepresentation may not only be the most frequently made claim in arbitration, but also the arbitration most frequently lost by customers.

Usually, there are no documents establishing the alleged misrepresentation, so the parties are forced to recollect conversations. The customer swears a lie was told, and the broker swears it was not. This “swearing contest” presents a difficult case for arbitrations because the case rests entirely upon witness credibility.

As the burden of proving a claim is on the claimant, a swearing contest favors the defendant. If the customer and the broker are equally credible, the customer will never win the award. Still, a swearing contest can be a dangerous defense. More evidence is needed to convince an arbitrator to rule in the broker’s favor.

This evidence can sometimes come in the form of documents. As stated earlier, documents can’t prove there was no misrepresentation, but they can show that the customer had access to the correct facts. For the customer to win, he must not only prove that there was a misrepresentation, but also that there was a reasonable reliance upon incorrect information. If the truth was available to the customer, his reliance would be unreasonable and his claim should be denied.

A wealth of financial information is available online, and printed materials, such as annual reports, provide a detailed explanation of the financial status of public companies. A customer with access to such information would be hard-pressed to allege that the broker lied about such information. A customer who has the relevant 10Q in his possession at the time of the investment is virtually prohibited from making a claim about earnings.

Other alleged misrepresentations have related documentation. If earnings are in dispute, copies of the issuer’s public filings or secondary sources, such as S&P tear sheets and similar periodicals, can establish the truth.

The next step is to determine whether the customer had access to general circulation news sources containing accurate information. If these news stories exist, it’s important to show that the claimant had access to them through a subscription, reading habit or an online service.

If it’s possible to prove that the client had access to this information, the broker has proven that the claim is not valid. In the absence of this information, the broker must establish that he did not make the misrepresentation.

Although it is impossible to prove a negative, certain evidence can help establish that it was unlikely that a misrepresentation was made. Taped telephone conversations are the obvious answer, but practical considerations make this prohibitive. Broker/client correspondence may help to establish the nature and tenor of the relationship even if the correspondence does not directly relate to the dispute.

If the broker had materials containing the correct information at the time the misrepresentation was supposedly made, the arbitrators should be made aware of this. Common sense dictates that a person would not knowingly lie when documents could clearly establish the truth.

The single most important aspect of the defense of a misrepresentation case is the demeanor and credibility of the broker as a witness. Arbitrators are reasonably seasoned at judging witness credibility; brokers should make sure that they are adequately prepared for direct questions from the defense attorney, the customer’s attorney and the panel. This makes for a more relaxed — and more credible — witness.

No one likes to be called a liar. Still, remember: The burden of proof is on the client, and preparation and legwork can reveal an improbable claim — and form a successful defense.

Mark J. Astarita, Esq., is a securities attorney in New York City, and sponsor of The Securities Law Home Page on the World Wide Web (https://seclaw.com).This article originally appeared in the September 1996 edition of Research Magazine.

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Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | mja@sallahlaw.com | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.