Investor Misrepresentation And Omission Claims Escalate


The subprime and credit crises have resulted in a surge of fraudulent misrepresentation and omission cases against Wall Street firms. A rising stock market concealed many such abuses because values were rising, making fraudulent misrepresentations and omissions hard to identify. Recently, however, many of these misrepresentations and omissions have become apparent. For example, many risk-averse investors with conservative objectives have recently discovered that they have sustained huge losses on investments that were misrepresented to them as being very safe and conservative.

Perhaps even more critical than what was affirmatively misrepresented to investors in these cases is what the firms and their brokers omitted to disclose to investors about these securities. The bedrock principle of the securities laws is the duty of complete and truthful disclosure. Once a broker undertakes to disclose any information about a security to an investor or potential investor, the disclosure must be complete and truthful in all material respects. This is an absolute requirement. It applies to every broker (whether discount or full service), every security, and every person who receives any information about a security (rich or poor, financially sophisticated or not, whether or not that person has an account with the broker). If a broker fails to provide complete and truthful disclosure, and the undisclosed information would have been important in deciding whether or not to invest, the investor has a legal right of action against the broker and the firm to recover resulting losses and damages.

In recent months, we have filed a number of securities arbitration claims on behalf of investors involving auction rate securities, Morgan Keegan Bond Funds, and the Schwab YieldPlus Fund. These claims have been based, in large part, on fraudulent misrepresentations and omissions to disclose material information about those securities.

Major brokerage firms affirmatively misrepresented auction rate securities as liquid, short-term investments that were similar to money market instruments with interest rates that would reset at periodic auctions based on the bids submitted by market participants. Those firms include UBS Financial Services, Bear, Stearns & Co., Inc., Citigroup Global Markets, Inc., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated/ Morgan Stanley DW Inc., RBC Dain Rauscher Inc., A.G. Edwards & Sons, Inc., Piper Jaffray & Co., SunTrust Capital Markets Inc., Wachovia Capital Markets, LLC, and Bank of America Securities LLC.

In addition to their misrepresentation claims, many auction rate securities investors are pursuing claims based upon these firms’ failures to disclose that they knew the auction rate securities market was becoming increasingly risky, that there were many negative developments in the auction rate securities market, that brokerage firms’ top management was concerned about mounting pressures on the firms’ holdings of auction rate securities, that they were considering (or in the process of) unloading such holdings on unsuspecting buyers; and that they planned to let the auctions fail leaving thousands of customers “holding the bag.”

Similarly, Morgan Keegan bond fund investors are pursuing claims based on the firms’ misrepresentation that the funds were safe and broadly diversified, as well as Morgan Keegan’s omissions to disclose, among other things: that its bond funds were overconcentrated in exotic, untested, illiquid mortgage securities; that it had information that suggested the U.S. housing market was overpriced and over built; that its bond funds would experience significant losses if average housing prices flattened or declined; that many of the bond funds’ holdings were securities backed by exotic mortgage instruments that were experiencing high delinquency and default rates that exposed mortgage holders to far greater risk of loss than traditional mortgages, and that its own economist was on record as stating that “I am certain that a housing bubble has developed that could lead to serious housing price contraction and possible financial problems in the future.”

In the same vein, Charles Schwab misrepresented its YieldPlus Fund to money market investors and others as a safe, short-term investment, and a suitable, slightly higher-yielding alternative to money market funds with a share price that “may fluctuate minimally.” In reality, as of November 30, 2007, 46.2% of the Schwab YieldPlus Fund was invested in mortgage-backed securities, and only 6.6% was invested in short-term investments! YieldPlus Fund investors are pursuing claims against Charles Schwab based not only on its misrepresentations, but also on its omission to disclose, among other things, the important fact that its YieldPlus Fund had significant exposure to thinly-traded mortgage-backed securities that were at risk of suddenly becoming impossible to sell at the prices at which they were being carried on the fund’s records, because the small number of market makers might disappear, leaving the fund with no one to buy their securities when they wanted to sell them.

Misrepresentation and omission claims can be unique to the individual (such as when a broker makes verbal misrepresentations to individual customers) or common to a large group (such as when there are written misrepresentations in offering documents or sales materials). Claims unique to the individual are usually not appropriate for class actions because they are based on facts that are not common to the class as a whole but which vary from individual to individual. In cases where the misrepresentation or omission is common to a large group of people, both class actions and individual claims may be appropriate.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and individual investors in misrepresentation/omission cases and other investment disputes. For further information, please contact us.