False Or Misleading Statements About A Company
Public companies are required to make regular disclosures concerning their company, including quarterly and annual reports. The purpose of these disclosures is to allow investors to make informed decisions.
Making false or misleading statements about a company limits an investor’s ability to make an informed decision about whether they should invest in the company. Someone accused of making false or misleading statements can face heavy penalties. If you’ve been charged or think you may be, you should immediately contact an experienced criminal defense attorney at Cofer Luster to discuss your legal options. To schedule a confidential consultation, you can contact us at 682-777-3336 or through our online form.
What Constitutes A False Or Misleading Statement?
Federal securities laws make it illegal for companies or individuals to provide false or misleading statements about a company. False or misleading statements may omit material facts about a company to make it appear in a better situation than it is.
Financial Statement Manipulation
One way that companies make false or misleading statements is through financial statement manipulation. Publicly traded companies are required to file statements quarterly, which may include the following information:
- The business’s operations providing assets or liability to the company.
- The risks that the company is likely to face in the near term.
- The business’s financial data over the last five years.
- The business’s outlook on its recent performance.
- The company’s explanation of its results or its outlook on the future.
- Financial statements.
Making false statements or omitting relevant facts on financial statements can result in heavy civil and criminal penalties for the company and the individual who knowingly made the false or misleading statements. The following are ways that financial statements are manipulated:
- Recording revenue before it actually constitutes revenue.
- Recording fake revenue.
- Increasing income by misclassifying the sale of assets as income.
- Shifting expenses so that it makes your financial statements look better.
- Failing to record liabilities.
Forward-Looking Statements
Companies are not allowed to make forward-looking statements that imply guaranteed outcomes. Instead, a company can only make statements about known facts about a transaction. Making statements that imply an outcome can be considered misleading statements because they induce people to make investment choices of inaccurate information. For example, suppose a company discloses a new project and implies that it is guaranteed to make a significant profit for the company—that can be considered a false and misleading statement.
Federal Laws Prohibiting False And Misleading Statements
Securities And Exchange Act of 1934 Rule 10b-5
False or misleading statements concerning the purchase or sale of a security is a federal offense. Under the SEC rule 10b-5, it is illegal for any person to directly or indirectly make any false or misleading statement of a material fact or omit to state a material fact. Examples of Rule 10b-5 violations can include officers making false or misleading statements to increase share costs, hide losses or low revenues, or give shareholders better returns on their investments.
Securities And Exchange Act of 1934 Rule 14C-6
Under rule 14C-6 of the SEC, it is illegal to make false or misleading statements concerning any material fact or to omit any material fact to make the statements accurate.
What Constitutes Material Information?
The term material means information about which an investor should be informed before buying or selling a security. Some examples of material information include:
- Assets
- Liabilities
- Revenues
- Company size
- Upcoming projects
If you believe that an average investor would use the information to make an informed decision about their investment, it will likely be considered material information.
Financial Industry Regulatory Authority Rule 2020
The Financial Industry Regulatory Authority (FINRA) makes it illegal to induce the purchase or sale of a security through manipulation. If someone makes a misleading or false statement to induce an investor into buying or selling a security, they can be charged under the FINRA rule 2020. In addition, FINRA can fine defendants and order them to pay restitution to individuals monetarily damaged by misleading or false statements.
Penalties For False And Misleading Statements
Investors who bring successful claims against defendants for making false or misleading statements about a company may be entitled to compensation for damages they sustained because of the false or misleading information. For example, suppose someone omitted a material fact that an average investor would use to make an informed decision, and an investor lost $100,000 because they invested based on false information. In that case, the defendant can be required to pay restitution to the investor of $100,000.
Examples Of False And Misleading Statement Cases
There are various examples where companies and individuals have been found guilty of making false and misleading statements about a company and inducing investors to buy or sell securities based on those misleading statements.
- Facebook: In 2019, the SEC required Facebook to pay $100 million to settle charges that it had made misleading disclosures regarding the risk of user data.
- Merrill Lynch: The SEC required Merrill Lynch to pay $10 million for distributing misleading offering materials.
- Medbox, Inc.: The SEC fined the founder of Medbox, Inc. $12 million for making false public statements about the industry’s performance and falsifying the company’s financials.
Contact An Experienced White-Collar Attorney Today
The securities defense attorneys of Cofer Luster understand that being charged with filing false or misleading statements can be extremely stressful, and we are here to help. We will review the facts of your case and develop a strong defense strategy that will preserve your rights and fight for your best interests. To discuss your legal options during a confidential consultation, contact us today. Call our criminal defense attorneys at 682-777-3336 or contact us online.
