Securities Fraud: Omissions and Misrepresentations

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Brian Kuester
Attorney Brian Kuester
Omissions and Misrepresentations Team Lead
Former US Attorney
Former District Attorney
Ellen Comley
Attorney Ellen Comley
Omissions and Misrepresentations Team Lead
Senior Counsel
Roger Bach
Roger Bach
Omissions and Misrepresentations Team Consultant
Former Special Agent (OIG)

Both securities trading firms and issuers have a legal obligation to provide correct information about the nature of the investment or security instrument. Misrepresenting material information or omitting it entirely can amount to securities fraud. For issuers of securities, it does not matter whether you intended to deceive investors, or even if you took all reasonable steps to ensure that the information was accurate – the law imposes strict liability.

Given how easy it is to make omissions or misrepresentations to investors and the steep penalties that come with a conviction for securities fraud, both issuers and traders – individual and corporate – need to take precautions to avoid legal liability and get effective representation if they are ever accused of securities fraud.

The securities fraud defense lawyers at the national law firm The Criminal Defense Firm has helped numerous clients in the past who have been accused of misrepresenting or omitting material information to investors. With our legal representation, securities fraud defendants have raised strong legal defenses that have either mitigated their legal liability or overwhelmed the allegations made against them.

What is an Omission or Misrepresentation in Securities Law?

Like most cases of securities fraud, allegations of omissions or misrepresentations begin with Section 10(b) of the Exchange Act of 1934 (currently codified at 15 U.S.C. § 78j(b)). This section of the statute makes it unlawful to use any “manipulative or deceptive device or contrivance” in connection to the purchase or sale of a registered security. It also gives the U.S. Securities and Exchange Commission (SEC) the power to promulgate regulations that further define what practices are “manipulative” or “deceptive.”

One of the resulting regulations from the SEC is the wide-reaching Rule 10b—5, now codified at 17 C.F.R. § 240.10b—5. Subsection (b) of this Rule states that one way for securities trading to be manipulative or deceptive is for someone to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made… not misleading.”

There are three extremely important elements here:

  1. Material information
  2. Omitting information
  3. Misrepresenting information

So long as the information is “material,” omitting or misrepresenting it can amount to securities fraud.

Material Information

Information is “material” if there is a substantial likelihood that a reasonable person or shareholder would find it important to know when transacting securities (17 C.F.R. § 240.12b—2). Not all information is material. However, if a reasonable investor would deem it important when buying or selling a security, it can amount to securities fraud for a party to omit it or misrepresent it.


An omission is simply not mentioning something. By leaving it out, though, securities traders and issuers can drastically alter how investors perceive the risks and value of a stock, bond, or other security instrument.

In order to amount to securities fraud, the omission generally has to be done knowingly – the trader has to know that he or she is leaving something out or not disclosing it, though not necessarily for the intent of defrauding someone. However, this requirement is not necessary for issuers of securities, who are held liable for even accidentally omitting material information from a registration statement under Section 11 of the Securities Act (15 U.S.C. § 77k).


A misrepresentation is a statement of fact that is either false or that obscures the truth. There are three types of misrepresentations:

  1. Innocent misrepresentations, which are false statements that are made by a party who is unaware of their falsity at the time they are made,
  2. Negligent misrepresentations, which are statements that the party making them did not verify as true before making them, and
  3. Fraudulent misrepresentations, which are false statements that are known to be false or that are made with a reckless disregard for whether they are true or not.

Importantly, opinions, predictions, or exaggerations are not prone to misrepresentations. Only statements that are, or purport to be, factual or representative of the truth.

Just like with omissions, the misrepresentation generally has to be done knowingly for it to amount to securities fraud. However, issuers of securities are strictly liable for all misrepresentations made in their registration statements.

How Securities Fraud Investigations Begin

The SEC is tasked with enforcing the Securities Act and the Securities and Exchange Act. They often investigate allegations of omissions or misrepresentations in securities trading based on any of the following:

  • Information provided in public disclosures
  • Whistleblower allegations
  • Investor complaints

When it comes to a misrepresentation or omissions concerning a security transaction, investor complaints are likely the most common trigger to an investigation. Many of these investors, however, are merely unhappy that their endeavors did not pay off and are looking for someone to blame. Nevertheless, the SEC can initiate an investigation to ensure that the investor was not deceived into making a transaction that they would not have made, otherwise. Some important factors that the SEC will investigate will be:

  • Whether new information was provided after the trade was completed
  • How the trader described the price, risk, and potential rewards of completing the trade
  • Whether different information was provided to other investors

Any of these signs can be used as evidence that the investor was deceived.

How to Respond to an Allegation of a Misrepresentation or Omission

Securities professionals and firms get accused of misrepresenting or omitting material information all the time – many times for little to no legitimate reason. However, it is still critical to take every case seriously from the start and respond to it in the correct fashion, or else you can make your case more difficult to win in the long run. The most basic elements of a good response to one of these allegations is to:

  1. Hire a securities defense lawyer or law firm, and
  2. Refuse to disclose any information to law enforcement, the SEC, or a state agency investigating the claim without consulting your lawyer first.

By taking these preliminary actions, you can put your defense team in a good position to craft a defense strategy that is tailored to your interests without divulging potentially incriminating evidence that ends up hurting you in the months ahead.

Frequently Asked Questions About Misrepresentations, Omissions, and Our Firm

Q: What are the Penalties for a Conviction for Securities Fraud?

The penalties for a criminal conviction for securities fraud can be extreme, with prison sentences of up to 25 years not outside the realm of possibility. While convictions carrying this maximum sentence are rare, that does not mean that the average conviction is trivial.

Generally, criminal convictions for securities fraud will require disgorgement of the funds obtained through the misrepresentation or omission, plus a criminal fine. Together, these can easily run into the millions of dollars.

There will also be the reputational damage that you or your firm suffers from the conviction. This can drastically undermine your ability to function as a business or as a securities professional. However, the SEC may make that concern moot if it uses the conviction as the impetus for an administrative action against you, suspending you from the securities industry or even permanently banning you from it.

Q: Is Securities Fraud a Crime?

Securities fraud can be a crime. However, it is important to remember that it can also be pursued civilly or even administratively by the SEC.

These prosecutorial options weigh heavily on the best defense strategy to take against a securities fraud allegation based on omissions or misrepresentations. While some securities fraud allegations require a level of intent to amount to a criminal offense, civil liability generally does not. Additionally, while criminal cases of securities fraud have to be proven beyond a reasonable doubt, civil cases only require a preponderance of the evidence to impose the substantial penalties that come with a civil judgment.

Having effective legal representation with the foresight to see what the best defense strategy will be for your given case and interests is essential. Even skilled attorneys can make significant mistakes in the early days of your defense that end up hurting you later on if they do not have substantial experience handling the intricacies of securities fraud cases.

Q: Why Doesn't The Criminal Defense Firm Call Itself the Best SEC Defense Firm?

Because that is something that a law firm’s clients should say, not the law firm itself.

However, the senior attorneys and investigators – many of whom spent years working at the SEC before joining our firm – that make up our legal team have created a track record of results that have left our prior clients eager to provide glowing testimonials about our work, both inside the courtroom and outside of it.

How The Criminal Defense Firm Can Help

The Criminal Defense Firm is a white collar defense law firm that legally represents securities firms, individuals, and issuers across the country. We have a long track record of successes in this field and are more than capable of creating a defense strategy that takes your concerns to heart and protects both your short and long term interests.

Contact us online or call our law office at (866) 603-4540.

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