Also known as: deceit · fraudulent misrepresentation
Written by attorneys · grounded in primary & secondary sources — see below
A common-law tort imposing liability on one who makes a false representation of material fact with knowledge of its falsity and intent to induce reliance, causing pecuniary loss to a recipient who justifiably relies on the statement.
Xavier represented an insurer during settlement talks with an unrepresented claimant. Xavier stated that the primary policy represented the maximum available coverage even though he knew an umbrella policy supplied additional limits. The claimant accepted the offer in reliance on the statement and later discovered the extra coverage.
Tyler Taylor purchased equipment from Titan Industries after the seller claimed the machines had never been repaired. Taylor could have examined maintenance logs but chose not to. The machines later required extensive repairs that contradicted the seller's statement.
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Thaddeus Tran and his spouse negotiated a marital settlement agreement. Tran withheld information about substantial offshore accounts that the spouse had no way to discover. The spouse later sought to set aside the agreement after learning of the hidden assets.
Theodore Tucker bought land from True North Logistics after the seller claimed the parcel was zoned for commercial use. Tucker already possessed the zoning ordinance showing residential restrictions only. Tucker nevertheless closed the transaction and later sued when development plans were blocked.
Theo Thomas purchased shares from Trinity Pharmaceuticals after the company's CFO stated that pending regulatory approval was assured. Thomas knew the CFO had an incentive to close the deal quickly yet still relied on the assurance and suffered losses when approval was denied.
Timothy Tang consulted his longtime financial advisor at Tidal Energy before investing in a new fund. The advisor expressed the opinion that the fund carried minimal risk. Tang relied on that opinion because of their longstanding relationship and suffered substantial losses when the fund failed.
A plaintiff must show a false representation of material fact, knowledge of falsity or reckless disregard, intent to induce reliance, justifiable reliance by the recipient, and resulting pecuniary loss. Each element is distinct and must be satisfied independently.
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Reliance remains justified when the recipient could have discovered the falsity through investigation but chose not to do so. The rule protects recipients who accept the statement at face value unless the falsity is obvious or actually known.
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Knowledge of an adverse interest does not automatically bar reliance. A recipient may still justifiably rely on a factual misrepresentation even when aware that the maker stands to benefit from the transaction.
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Reliance on an opinion is justified when the maker purports to have special knowledge the recipient lacks, stands in a fiduciary relation, or has secured the recipient's confidence through other means. The fact to which the opinion relates must also be material.
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Contributory negligence does not bar recovery. A recipient who justifiably relies on a fraudulent misrepresentation may still recover even if negligent in failing to discover the truth.
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…to § 10(b) and Rule 10b-5 has been based on doctrines with which we, as judges, are familiar: common-law doctrines of fraud and deceit. See, e. g., Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 471-477 (1977). Even when we have extended civil liability under Rule 10b-5 to a broader reach than the common law had…