Investment disputes involve disagreements over financial investments such as stocks, bonds, commodities, trusts, and corporate assets. Since most investments are secured through contracts, many investment disputes arise over a breach of contract terms. For example, there may be a disagreement about the price of an investment.
The laws governing investment practices may depend on the state and the type of investment involved. In general, investment disputes are handled in civil courts of law, though some investment violations may also involve criminal matters.
If an investor determines that their account has suffered losses at the hands of a broker or advisor, they may begin legal proceedings.
What Are Some Common Types of Investment Disputes?
Investments disputes can be categorized in two ways:
- Disputes directly related to the investment
- Disputes between investors and agents (such as brokers or dealers).
Some investment disputes that relate directly to the investment may involve:
- Issuance of stock: Some stockholders may have complaints about how company stocks are distributed. There may be disputes involving terms like pricing, delivery, etc.
- Accessing funds: Disputes may arise over the ability to access funds. With trust fund accounts, the beneficiary may only be able to access funds to be used for a particular purpose.
- Disclosure of information: Investments should be made in accordance with the complete and fair disclosure of information to the investor. If investment information is not fully disclosed, it could lead to fraud or misrepresentation
- Foreign investment disputes: Foreign investments can become complicated due to an interaction of domestic and international laws
Investment disputes that involve investors and their agents can include:
- Breach of fiduciary duty: If an investor appoints an agent to handle their investment portfolio, the agent must invest the funds prudently and reasonably. A breach of such duties can lead to liability for the agent
- Malpractice: An agent may also become liable for malpractice, for instance, if they grossly mismanage funds or willfully access the investor’s money for their own use.
- Unauthorized disclosure of personal information: If a broker or dealer discloses an investor’s personal agent, it may lead to legal liability
Investment disputes can take many forms and involve a host of different legal issues.
What Happens Before a Lawsuit?
Investors can pursue legal action against their broker by filing a claim or lawsuit. Investors file lawsuits if they feel their losses were a direct result of a broker’s action.
However, losing money in an investment account isn’t grounds for filing a claim.
Filing a claim against a broker or other regulated entity means you will go through arbitration. Entities such as mutual funds that are regulated by the SEC or other regulators use the court system.
The most common cases against brokers are for negligence.
What Is Unsuitability?
Unsuitability is one of the most common allegations towards stockbrokers but one of the more difficult ones to prove due to its subjective nature. The plaintiff must prove that the broker or advisor knew or should have known that their trading pattern was inconsistent with the planned objectives. There is a significant amount of qualitative data to evaluate in unsuitability cases.
Evidence usually begins with documentation dating when the account was opened. The account-opening documents will likely contain a risk profile defining the customer’s risk tolerance and investment timeline.
What Is Churning?
Churning is one of the strongest allegations against a broker, but it’s one of the easiest to prove. Churning implies that an account was traded in excessive amounts. A significant amount of broker control over the funds must be validated. Evidence of excessive trading alone is not sufficient, especially if the plaintiff instigated the trades.
Churning is most common in a transaction or commission-based relationship. It is also known as excessive trading.
Courts use basic math to calculate damages. The formula divides the total amount of transactions by the unleveraged market values over monthly and annual time periods. There are many opinions on how much trading is excessive, but four to six times turnover has been recognized as an excessive amount in many cases.
Defense evidence may attempt to show that the gains offset the losses.
What Is Negligence?
Negligence and failure to supervise are subjective, but they are strong components of a case when proven. If allegations of negligence are proven, a claim for failure to supervise usually goes hand-in-hand.
A certain amount of control must have been present for negligence to take place. If an advisor controlled a significant number of trades and was negligent in execution or security selection, a legal basis for negligence has been established.
How are Investment Disputes Resolved?
In most cases, civil lawsuits can be filed in connection with an investment dispute. Lawsuits usually involve issuing monetary damages awards to reimburse the plaintiff for their losses. Punitive damages typically aren’t allowed except in cases involving gross recklessness or willful violations.
Many investment disputes are resolved through alternative dispute resolution methods like arbitration. In arbitration, a neutral third party is appointed to help the parties reach a conclusion, resulting in a binding decision. Many investment agreements involve signing an arbitration clause, which requires the parties to forgo their right to litigation in the event of a dispute.
Should I Hire a Lawyer for Assistance With Investment Disputes?
In some cases, class-action lawsuits occur simultaneously with individual suits. There are benefits to pursuing claims with class actions, but parties with unique claims may be better off filing independently.
Selecting the right attorney and expert witness early in the process can change the direction of your case. Personal injury and trial lawyers have good crossover skills and are typically well-equipped to handle court cases where trial experience is beneficial. It’s important to hire an attorney with at least some experience in the securities industry.
Investment disputes can be complex. They usually require the assistance of a lawyer. If you are involved in an investment dispute, you may wish to contact an experienced financial lawyer in your area. Your attorney can help determine your legal course of action and provide assistance in court if you need to file a lawsuit.
Keep in mind that if your legal team is large enough, it will most likely work on a contingency basis and share a percentage of the restitution. There are also fees to be paid for filings and court costs.
You should be prepared to answer questions during cross-examination. Cross-examination may occur in court or by experts on either side of the case. Brokerages take allegations seriously and often have deep pockets to defend themselves. Be prepared to accept any scenario. You may win the case with no compensation. You may lose the case and be held responsible for the entire cost of the court and legal fees.
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