What is Negligent Misrepresentation?

Registered investment advisors (RIAs), brokerage firms, and any other party offering any type of investment have a legal duty to fairly represent the opportunity.

To some extent, this is true with any product. Under federal law, a company or individual may face legal repercussions for false advertising, regardless of the product being sold.

Though, when it comes to investment opportunities, those selling or recommending an investment are held to a far higher standard.

Indeed, those selling investments can sometimes be held liable for misrepresenting the nature of a product without ever telling a lie.

Here, the experienced investment fraud attorneys at Sonn Law Group discuss the concept of negligent misrepresentation. We explain what it is, how courts assess legal claims based on it, and what investors should do if they have been the victim of a negligent misrepresentation.

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The Three Different Types of Misrepresentations

For legal purposes, the term misrepresentation is defined as “an inaccurate statement that has the effect of inducing a person into action.”

In other words, for a legal claim to be brought on the grounds of a misrepresentation, there needs to be both:

1. A false statement, and
2. Actions taken that relied on that false statement.

Legal misrepresentations fit into three different categories. First, there are innocent misrepresentations. These occur when the seller of a product or the person recommending an action has a legitimate grounds to believe that they are actually telling the truth.

On the other end of the spectrum, there are fraudulent misrepresentations. A fraudulent misrepresentation occurs when a person or company purposely misleads a buyer, either with an active lie or an intentional omission.

Negligent misrepresentations fit into a category that falls in between innocent misrepresentations and fraudulent misrepresentations. This type of misrepresentation occurs when a person or business makes a false claim, while attempting to induce action, but it does not involve a direct lie.

Instead, it involves either:

1. A person making a false statement that they genuinely believe to be true, but that they failed to do their due diligence on; or
2. A person making a statement without knowing whether or not it is true.

The Required Elements of Negligent Misrepresentation

To recover compensation on the basis of a negligent misrepresentation, an investor must be able to satisfy all of the required legal elements.

Specifically, there are five different things that you will need to prove to bring a successful negligent misrepresentation claim:

1. A false statement must have been made by the defendant;
2. The defendant must have had no reasonable basis to believe their statement was accurate;
3. The defendant must have made the false statement with the purpose of trying to induce action (investment) by you;
4. You must have actually believed the misrepresentation, and you must have actually taken action based on that statement; and
5. You must have suffered real financial damage.

Context Always Matters in Negligent Misrepresentation Cases

As a legal concept, negligence must always be assessed with consideration towards the specific circumstances of the case at hand. Put another way, in a negligent misrepresentation claim, the standard of care owed to you by the defendant matters. Certain people (and businesses) have heightened obligations to provide customers or prospective customers with careful answers and accurate information.

In some cases, the seller may only owe you a low standard of care.

For example, if you purchased a used car on Craigslist for $1,000, then the seller of the car has a legal duty to provide you with fair and accurate information. If they lie to you about the condition of the vehicle, they can be held legally liable.

However, because that seller is held to a relatively low standard of care, it would be unreasonable of you to rely on certain information they provide. If you start to ask questions about the crash test reliability of the vehicle, and they unintentionally give you a false answer, it would be extremely difficult to hold them liable for a negligent misrepresentation.

On the other hand, certain sellers and advisors are held to very high standards. For instance, if you ask your financial advisor a question regarding the suitability of a specific variable annuity for your account, and they unintentionally give you a false answer, you may be able to hold them legally liable should you suffer investment losses. This is because financial advisors are held to a very high standard of care, thus relying on their advice is entirely reasonable.

Take Action Now: Request Your Free Consultation Today

If you have lost money because of a negligent misrepresentation, you need to take action now.

Our team is standing by, ready to help. At Sonn Law Group, we have extensive experience handling negligent misrepresentation claims.

For a free, no-obligation review of your case, please do not hesitate to contact us online or call our firm today at 844-689-5754.