A financial investment involves a risk-based activity in which a person contributes monetary funds to acquire a specific asset or item of property. This is done with the expectation of receiving a profit or some other financial benefit in the future. For instance, a person may choose to open a savings account with a particular bank based on the percentage of interest they can earn on their nest egg.

The primary purpose of financial investments is to purchase an item or asset that will eventually either increase in value and/or will generate a source of income that is higher than the amount of funds used to make the original investment. In other words, it is a mechanism designed to potentially amass wealth. 

It is important to keep in mind, however, that there are as many risks as there are rewards when it comes to investing. Oftentimes, the level of risk will depend on the type of financial investment being made. Some examples of financial investments include:

  • Stocks: In general, a stock represents the percentage of a particular company that the stockholder owns. Thus, a person who holds stock in a company is considered a partial owner and will receive a portion of the company’s profits that are equal to the amount of stock they own. 
  • Bonds: A bond is essentially a loan made to a government agency or company in exchange for a fixed interest rate that matures on a certain date. For instance, the federal government may issue a bond to an investor for $50. After the purchase is made, the investor will be given a bond to keep as proof that the government owes them $50, plus whatever interest accrued by the maturity date.
  • Real estate: Real estate can be purchased directly by entering into a sale of purchase agreement with a commercial or residential property owner, or by buying individual shares of a real estate investment trust (“REITs”). REITs operate similarly to mutual funds.
  • Commodities: Commodities are physical items that a person can buy, such as coffee, gold, and oil. Commodities may be sold and purchased for cash, or a person may enter into future contracts wherein the quality and quantity of goods will be set according to market standards on an exchange (e.g., Chicago Board of Trade).
  • Mutual funds: A mutual fund refers to a source of money contributed by a large number of investors that is used to make financial investments in a wide variety of companies. The fund may or may not be managed by an appointed individual. 
  • Retirement plans: If you are familiar with the terms “401K” and “Roth IRA”, then you may already know that these are different types of retirement plans. Retirement plans offer many benefits, such as certain tax incentives and guaranteed income upon retirement. It should be noted, however, that such benefits will vary by plan. 
  • Digital assets or cryptocurrencies: These are one of the newest types of investment vehicles. Although they can be used to make online purchases, they were originally viewed as a high-risk, high-reward investment. However, since the value of cryptocurrencies are based on market supply and demand, the reality is that they may not be worth as much as they once were and their values can fluctuate wildly on an hourly basis. 

Investment Service Industry Issues

There are many different kinds of legal issues that can arise in connection to the investment service industry. In general, however, the majority of these issues usually come up in one of three scenarios: when there is a dispute over a particular investment, when there is a conflict between an investor and their agent (e.g., brokers, financial advisors, etc.), and lastly, when there is a violation of the law.

Some common examples of investment service industry issues that may require the help of a lawyer include:

  • Distribution of shares or stocks: A corporate shareholder may want to seek legal advice from counsel if they have an issue with the way that a business’s stocks get distributed, or if the stock is not distributed in the manner agreed to in their contract (e.g., wrong price, improper delivery, wrong quantity, etc.). 
  • Inability to access funds: This may involve disputes over the ability to access certain funds. For example, a beneficiary to a trust may need to hire a lawyer if a trustee is refusing to grant them access to the trust, despite the fact that they are in compliance with the conditions of the trust (e.g., for charity purposes, when a beneficiary reaches the age of majority, etc.). 
  • Improper disclosure of information: There are certain pieces of relevant information that must be disclosed to investors before a purchase or else it may constitute fraud. A broker or other financial advisor can also be held liable if they disclose personal information to outside parties or about an investor’s personal agent. 
  • Disputes involving foreign investments: Foreign investments can lead to extremely complex legal issues since they involve both domestic and international finance laws. Thus, an investor who encounters an issue with a foreign investment would be wise to retain a lawyer who has experience with such matters. 
  • Breach of fiduciary duties: Many financial representatives have a fiduciary duty to manage an investment portfolio and invest funds in a reasonable and prudent manner. A party who breaches this duty may be held liable by the investor. Alternatively, an investor may also be able to sue for malpractice if the representative stole funds, borrowed money for personal use, and/or grossly mishandled their investments.

What are Some Common Financial Investment Violations? 

Many financial investment violations are based on committing offenses that are expressly illegal under various federal financial investment laws. For example, the Securities Act of 1933 governs transactions that involve securities, such as stocks, bonds, futures, preferred shares, and exchanged-traded funds (“ETFs”).

The Act requires those who intend to offer or sell securities to register them with the U.S. Securities and Exchange Commission (“SEC”) and to disclose certain important information about the security being sold to the investors. The law also prohibits any acts that constitute fraud, deceit, or misrepresentation in connection with the sale of a security. Offerors who refuse to comply with the Act’s requirements may be subject to both civil and criminal actions. 

Another significant law in this space is the Sarbanes-Oxley Act of 2002 (“SOX”). The law aims to protect stockholders and the general public from fraudulent business practices and accounting errors that occur in the financial sector. It also imposes strict rules on certain financial institutions in order to increase transparency and to improve the accuracy of corporate disclosures. Entities who violate SOX can face steep criminal penalties. 

One other violation that frequently comes up in connection with financial investments is known as, “insider trading”. The laws prohibiting insider trading are mainly based on an extensive collection of case law as well as the Securities Exchange Act of 1934. Insider trading refers to the crime of buying or selling a stock based on confidential information that is not available to the public, which results in personal gain. 

A person who is charged and convicted of insider trading may need to return all of the profits they made from the unlawful transaction, will potentially have to pay a criminal fine of up to three times the amount of what they gained, and/or can also face a term of imprisonment. 

What are the Legal Consequences of Financial Investment Violations? 

There are a number of different legal consequences that can result from a financial investment violation. Some of the most common types of penalties for such violations include:

  • Being sued in civil court;
  • Having to pay a monetary damages award;
  • Paying attorneys’ fees and court costs;
  • Attending alternative dispute sessions (e.g., mediation, arbitration, etc.);
  • Having to pay civil and/or criminal fines (depending on the case);
  • Serving a prison sentence (if the violation involved committing a criminal offense); and
  • In exceptional cases, such as those that concern willful violations or gross recklessness, paying some amount of punitive damages (in addition to a monetary damages award).

What Do Financial Investment Lawyers Do? 

In general, financial investment lawyers can provide a wide range of legal services and can perform a number of different legal tasks. The specific types of services and tasks that a particular financial investment lawyer may offer will depend on the area of law in which they practice. For example, a lawyer who specializes in tax law can assist a client in filing taxes and explaining various tax regulations that may affect them or their business. 

Another popular practice area for financial investment lawyers is trust and estates. These types of lawyers can help their clients draft estate plans, set-up various kinds of trusts, and/or form valid wills.

Financial investment lawyers who focus on insurance and annuities can be an extremely useful resource for clients looking to create a retirement or long-term savings plan. Such lawyers will be able to discuss the five main categories of annuities and can determine which option is best suited for their clients’ needs. 

One final important field of law that financial investment lawyers tend to specialize in involves banking matters. Lawyers who handle banking matters can assist clients with a variety of legal issues concerning all sorts of bank documents (e.g., mortgages, loans, etc.), can settle disputes with banks or other lenders, and can provide guidance on both federal and state regulations that affect banking matters.

Do I Need an Experienced Financial Investments Lawyer?

In general, most people will typically consult an individual employed by the finance industry (e.g., stockbroker, private wealth advisors, etc.) when they want to make an investment. However, there may be certain instances when it might make more sense to hire a financial attorney, such as when there is a dispute over how money was invested or if a broker committed fraud to persuade a person to use their services. 

Therefore, you may want to speak to a local financial attorney if you suffered financial harm based on the advice of a broker or are involved in a dispute over funds with some other type of financial representative. An attorney who has experience in handling financial investment matters can discuss your options for legal recourse and can explain what rights you have under the applicable laws.

Additionally, your lawyer can also help you to potentially recover damages for your losses and can provide representation in court.