Can I Sue an Investment Advisor for Fraud?

What counts as fraud by an investment advisor

Fraud is a false statement of a material fact, or the concealment of one the advisor had a duty to disclose, that you relied on and that cost you money. A bad year in the market is not fraud. An advisor who called a private note "fully secured" when it was not, who did not mention that she was paid by the sponsor of the fund she recommended, or who moved money into a product you never approved has done something different, and Texas law treats it differently.

Three patterns come up most often in Dallas investor disputes: misdescribed risk (an illiquid or speculative product sold as conservative), undisclosed compensation or conflicts, and unauthorized or concentrated trading. Each can support a fraud claim, a fiduciary-duty claim, or both.

Which laws apply

Texas common law

Texas recognizes fraud, fraudulent inducement, negligent misrepresentation and breach of fiduciary duty as separate claims. An investment adviser who manages a client's money is in a relationship Texas courts treat as fiduciary, which means the adviser must put the client's interest first and disclose conflicts. Fraud and breach of fiduciary duty both carry a four-year limitations period under Texas Civil Practice and Remedies Code section 16.004, measured from when the claim accrued, with discovery-rule arguments available when the wrong was hidden.

The Texas Securities Act

The Texas Securities Act was recodified without substantive change into Texas Government Code Title 12, effective January 1, 2022. Two parts matter here. Section 4008.052 makes anyone who sells a security by means of an untrue statement of a material fact, or a misleading omission, liable to the buyer for rescission or damages, with no need to prove intent; the seller escapes only by proving the buyer knew the truth or that the seller could not have known it with reasonable care. Section 4008.101 adds a claim specific to advisers: an investment adviser or adviser representative who commits fraud in providing advisory services is liable to the client for damages, and one who gave advice without the required Texas registration is liable for the fees charged.

The deadline for the adviser-fraud claim under section 4008.104 is three years from when you knew or with reasonable diligence should have known of the violation, and never more than five years from the violation. The full statute is covered in the Texas Securities Act guide.

Federal law

Section 206 of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-6) forbids any adviser from employing a device or scheme to defraud a client or engaging in a practice that operates as a fraud. The SEC's 2019 interpretation describes the adviser's federal fiduciary duty as a duty of care and a duty of loyalty that cannot be waived. The limit for a private investor is that the Supreme Court held in Transamerica Mortgage Advisors, Inc. v. Lewis (1979) that section 206 gives no private damages action; an investor may only void the advisory contract and recover the fees paid under section 215. Damages for the investment loss itself come from Texas law, or from Rule 10b-5 when the fraud was in connection with buying or selling a security. The federal fraud rule is explained in the Rule 10b-5 guide.

Court or arbitration

It depends on your paperwork. If the advisor worked for a brokerage firm, FINRA Rule 12200 lets you compel arbitration before FINRA, and most brokerage agreements require it. If the advisor was a registered investment adviser, the advisory agreement often names a private arbitration provider instead, and if it says nothing, the case goes to a Texas state court or, for federal claims, federal court in Dallas. Arbitration changes the pace and the discovery, not the substance of the claim.

Example

Suppose a retired engineer in Plano gives an adviser $600,000 to manage "conservatively." The adviser places $350,000 of it in two private real estate funds that pay the adviser a placement fee the engineer never hears about, and the account statements describe the funds as "income holdings." Eighteen months later the funds suspend redemptions. The market did not cause that loss; the undisclosed conflict and the misdescription did. The engineer has a Texas Securities Act claim against the adviser as seller, a fiduciary-duty claim for the hidden fee, and a possible claim against the adviser's firm as a control person. If the advisory agreement has an arbitration clause, that is where the claims are heard.

What you have to prove

• A false statement or a hidden fact. Written materials, emails and account notes matter more than memory of a conversation.
• Materiality. The fact would have mattered to a reasonable investor's decision.
• Reliance. You acted on it. Signed subscription documents that recite risks are the usual counterargument.
• Loss caused by the fraud. Under the Texas Securities Act the measure is largely mechanical: rescission returns what you paid with interest, less income received. Under common-law fraud you must tie the loss to the lie, not to the market.
• Intent, for some claims only. Common-law fraud and Rule 10b-5 require knowledge or recklessness. The Texas Securities Act seller claim does not.

What the advisor will say

Expect four defenses. First, that every risk was disclosed in the offering documents you signed. Second, that the loss was market-driven and would have happened anyway. Third, that you ratified the trades by accepting statements without objecting. Fourth, that the deadline has passed. Each is answerable with the right facts, which is why the documents and the timeline are collected before any demand is sent.

Evidence to gather now

• The advisory or account agreement, including the arbitration and fee pages.
• Every account statement and trade confirmation for the disputed period.
• The offering documents and marketing pieces for each product, with the date you received them.
• Emails, texts and your own notes of calls, in the form you have them. Do not edit or reorganize originals.
• The adviser's public registration record and any disciplinary history, which is free to check online.

When a litigator should look at the facts

Early. The deadlines above run from discovery, so the date you first saw a red flag can become a contested fact. A litigator can read the agreement for the forum clause, separate the market loss from the fraud loss, and decide whether to name the firm as well as the individual before anything is sent to the other side. Tina Wysk represents investors and advisory firms in securities and investment disputes in Dallas courts and in arbitration; see securities and investment disputes for how those matters are handled.