Investment negligence is a term that describes a variety of investment-related lawsuits, particularly those involving brokers and other financial professionals that were responsible for the mishandling or misappropriation of funds. The term was perhaps given its most high-profile media attention by the U.S. Securities and Exchange Commission (SEC), which filed an enforcement action against Morgan Stanley and Citigroup in 2012, citing that their financial professionals were responsible for investment negligence.
But what does it mean to invest negligently? Here are four things you should know:
1. Investment negligence lawsuits are complex and costly
Investment negligence cases should never be taken lightly—they are often very complicated, time-consuming, and expensive to litigate. In addition, firms that lose money due to investment malpractice may have to demonstrate actual loss via an economic expert who specializes in the economics of financial securities transactions. Therefore, it’s essential for firms with claims related to investment negligence to choose their legal representation wisely so they have the best chance at prevailing over the opposition. An experienced attorney at The Frankowski Firm will know how to properly prepare your case for depositions, hearings, trials, or appeals. Your counsel must also be knowledgeable about the relevant laws in your state concerning the specific type of negligence that you may be experiencing.
2. There are various types of investment negligence lawsuits
The phrase “investment negligence” can sound vague and ambiguous. But, in actuality, there are a few different types of legal action that fall under this category:
A suit in equity:
Several lawsuits may be filed in equity against brokers and financial advisors when they engage in deceptive practices or make false statements to investors. This type of negligence also includes cases involving negligent misrepresentation (failure to disclose information), breach of fiduciary duty (duty imposed by the law requiring the highest standard of conduct for managing others’ affairs), and investment advice malpractice (breach of standard practice).
Investment losses:
There are also various investments that clients may lose money on because the broker did not adequately research or execute them. For example, securities fraud can be committed if a broker makes secret profits on their account at the expense of an investor. In such circumstances, it is essential to consult with an experienced securities attorney to better understand the legal options available and take action.
Compliance violations:
Financial professionals may also violate compliance rules and regulations, such as SEC Rule 15c2-12, which requires brokers to have reasonable grounds for believing that an investment transaction is suitable for any customer before recommending it.
Suit by third parties:
Even outside of the U.S., the victims of financial advice negligence may receive compensation from financial advisers through suit by third parties (a person not directly involved in a business agreement).
3. Investment negligence is not the same as investment fraud
There are two main legal theories involved in cases of investment negligence: negligent misrepresentation and breach of fiduciary duty. Negligent misrepresentation may apply when brokers fail to disclose material facts about an investment. At the same time, a breach of fiduciary duty can occur when brokers act on their behalf instead of their clients’. Note that these two actions are also tied to separate legal standards, which means that they do not always result in the same outcome for plaintiffs (the person bringing the lawsuit). For example, intentional or reckless conduct will only be actionable if it results in actual loss; otherwise, it can only be grounds for equitable relief.
4. Investment negligence cases can take years to resolve
Investment negligence lawsuits often require extensive investigation and discovery, and they’re typically not resolved for months or even years—sometimes more than a decade after they were initially filed. For this reason, it’s crucial for firms filing such claims against financial professionals to find an attorney with significant experience handling these types of cases, so they don’t get bogged down in costly litigation.
Suppose you’ve lost money due to investment malpractice. In that case, there may be more than one party responsible for your losses beyond just the individual who made the actual investment decisions on your behalf (e.g., their supervisor, the brokerage firm). Therefore, it’s essential to option your legal representation carefully and make sure you hire an attorney who will fight for you—even if it means taking on additional defendants such as a brokerage firm or even another financial institution.
While there are various types of investment negligence suits, it is essential to consult with a financial professional to learn about potential legal action. If you believe your financial professional or firm has engaged in negligent behavior, it’s essential to speak with an attorney to learn more about your rights and potential options. An attorney can explain the options available and help you understand your requests if you suspect you have been involved in an investment-related lawsuit.
Founder Dinis Guarda
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