Failure To Disclose Risk
A half truth is a whole lie.
“A half-truth is often a whole lie,” or more accurately, as Benjamin Franklin is believed to have put it “A half truth is often a great lie.” Frances M. Barbour, A Concordance to the Sayings in Franklin’s Poor Richard, July 1758 Poor Richard’s Almanac, vii, 245 p. 23cm. (Gale Res. 1974).
As one court stated “to warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit. As one court observed, disclosure provides “no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away.”
Much too often securities brokers are trained to sell products, and in connection with this training are generally focused on a particular product’s favorable characteristics, which are presented to customers, and completely avoid a meaningful discussion of risk, which is left to the fine print.
Optimistic statements are different that misleading statements of existing fact. A prospectus, even if literally accurate, still can be misleading and support a claim for securities violations.
Omitted or Undisclosed Information
Omitted information is material if there is a substantial likelihood that a reasonable shareholder would consider it important or the omitted information “might give a reasonable investor pause.” In re Craftmatic Securities Litigation, 890 F.2d at 641 (“Omitted information is material if there is a substantial likelihood that a reasonable shareholder would consider it important”) (quoting, TSC Industries, Inc. v. Northway Computers, Inc., 426 U.S. 447, 458 (1975).
Moreover a brokerage firm and its sales representatives cannot escape liability for negligent misrepresentation of the nature of investments by pointing to cautionary language and disclaimers contained in the offering materials. A customer has the right to believe that the broker read the prospectus or offering materials, and the mere delivery of a prospectus to the customer does not bar these claims.
Cautionary language is not necessarily sufficient, in and of itself, to bar liability, if the omitted fact is one that a reasonable investor would consider significant in making the decision to invest, such that it alters the total mix of information available about the proposed investment). See, e.g. Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994).
The mere delivery of a prospectus does not bar these claims. Griffen v. McNiff, 744 F. Supp. 1237, 1252 (S.D. N.Y. 1990) (“existence of cautionary language does not bar plaintiffs from maintaining their claims”); In re Trimble Navigation Sec. Litig., 1997 U.S. Dist. LEXIS 14011 at *22 (N.D. Calif. April 28, 1997) (“bespeaks caution doctrine applies to shield defendants from liability only for optimistic statements not from misleading statements of existing fact”); McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576 (2d Cir. 1990), cert. denied, Wherehouse Entertainment, Inc., v. McMahan & Co., 1991 U.S. LEXIS 3954. “a prospectus, even if construed to be “literally” accurate, still can be misleading and support a claim for securities violations.”).
See, e.g., In re: Convergent Technologies Securities Litigation, 948 F.2d 507, 515 (9th Cir. 1991)(when examining risk disclosure it is necessary to look at the particular risk and the magnitude of those risks); see also, Huddleston v. Herman & MacLean, 640 F.2d534, 544 (5th Cir. 1981), aff’d in relevant part and rev’d in part on other grounds; Romani v. Shearson Lehman Hutton, 929 F.2d 875, 879 (1st Cir. 1991) (“It is necessary to determine whether potential investors were warned in a meaningful way of the specific risks associated with the investment.”); Isquith v. Middle South Utilities, Inc., 847 F.2d 186 (5th Cir. 1988), cert. denied, Middle South Utilities Inc. v. Isquith, 488 U.S. 926 (1988)(quoting, Greenapple v. Detroit Edison Co., 618 F.2d 198 (2d Cir. 1980)).