Despite being in the industry for years, many advisors are still surprised at the complexity of the litigation process involving an RIA claim. In this article, we take a look at the anatomy of an RIA lawsuit, including the stages and timelines of a typical legal claim, plus what to do to protect yourself.

Pre-Litigation Negotiations

A lot of the legal work involved in an RIA lawsuit happens long before any trial in a courtroom may take place. In fact, many disputes never make it to trial — though even these disputes can be stressful, time-consuming and costly.*

Sometimes, a conflict between a client and an advisor can be resolved before an actual lawsuit is filed — though lawyers are still usually hired on both sides. This is known as pre-suit or pre-litigation negotiations. Depending on the issues at hand, this process may unfold over several weeks to months.

The aggrieved party will hire an attorney to send a demand letter. This document notifies the other party of a potential lawsuit and its claims and offers an opportunity to resolve the dispute before the suit is formally filed with a court after the given deadline. A mediator may be hired by the parties and their lawyers to aid in these negotiations and reach a resolution.

If pre-suit negotiations don’t resolve a design dispute and it does end up going all the way through the legal process, it will progress through five general civil litigation stages:

  • Pleadings
  • Discovery
  • Motions
  • Trial
  • Appeals

Often, parties voluntarily decide to settle the dispute and halt the process before going all the way through this process. This choice can save both time and money in a complex case. Arbitration is also sometimes utilized as an alternative to a more costly and lengthy trial process, and may be required in certain scenarios involving broker-dealers or their registered representatives according to FINRA rules.

Pleadings

The pleadings stage of a lawsuit begins with the aggrieved (suing) party (the plaintiff), filing a complaint with the trial court. The complaint outlines the parties involved, an allegation of actions and events and who bears responsibility for them, a list of claimed wrongdoings and a formal demand for a judge or jury to decide the case’s outcome.

In response to the complaint, the court issues a summons to the other party (the defendant). The summons serves as notification of the lawsuit against them and includes the pertinent case details, court, judge, plaintiff attorney information and a copy of the complaint letter.

After being served with a summons, the defendant and their attorney are allowed a set amount of time to file a written response with the court. This response provides the defendant an opportunity to give their side of the dispute and may include counterclaims against the plaintiff. The court uses the complaint and the answer to define the issues to decide.

With the complaint and answer in hand, the court will issue a schedule for the case (a scheduling order). It outlines the next steps and sets a timeline for the lawsuit. In simple matters, this process may go relatively quickly, with the entire pleading phase taking several weeks.

However, in a complex RIA lawsuit, even this first stage of litigation can be tricky. Seasoned attorneys will carefully strategize the order and timing of hiring experts, submitting written reports, deposing witnesses and other next steps in an effort to gain a favorable legal position. Pleadings in these cases can stretch on for months before moving on to discovery.

Discovery

The discovery stage of a lawsuit is all about gathering information. It is designed to give both sides an opportunity to learn as much as they can about the case’s facts and issues. Typical case discovery procedures can include:

  • Interrogatories – Lists of questions with requests for the parties written responses.
  • Requests to Produce – Requests for relevant documents and physical evidence.
  • Subpoenas – Requests of information from third parties that may be relevant to the case.
  • Depositions – Recorded non-court interviews under oath of the parties and witnesses.

Discovery is usually the longest part of an RIA lawsuit. Courts typically allow around six months for it. But with RIA disputes, discovery can take even longer. Standard document processes, including gathering, organizing, supplying and researching information, may take months more than normal. Numerous individuals may need to be deposed in depositions and each of these interviews (depositions) could take several days to conduct. Additional time would then be spent reviewing and analyzing the information learned. Lastly, information learned at any stage could change the trajectory of a party’s legal strategy for winning the case and have a huge impact on their next steps.

Motions

After discovery, an RIA lawsuit moves into a pre-trial stage. Often, this is called the motions stage of litigation due to the volume of motions typically filed with the court during this period, although some motions can occur as early as the pleading stage.

A motion is a formal request to the court by one of the parties for a ruling, order or judgement. Due to the time motions take to prepare and the freedom of courts when issuing a ruling, this phase of a case also often takes several months.

In an RIA lawsuit, pre-trial motions are used to narrow down the issues to be decided by a trial or potentially stop the process and avoid a trial altogether. Motions can be used to answer specific questions related to the law or the facts of the case. They can also address procedural questions.

In some cases, one party may attempt to win the case during the pre-trial stage based on undisputed facts or testimony revealed in the course of the discovery process. This is done by asking the judge for a motion to dismiss or a motion for summary judgement. If successful, such a motion can stop the process and avoid the cost of a trial.

Motions in advisor dispute lawsuits are often strategic. A party may ask the judge to exclude certain witness testimony or evidence that could benefit the opposing party’s position. In order to file such motions successfully, a party’s attorney must have sufficient time to review discovery materials and thoroughly explain their legal reasoning in their motions.

While trial preparations are serious and it may seem like a trial is inevitable at this point, many cases do resolve around this stage in the process. Some may be terminated through a motion to the court, but many are resolved in negotiations between the parties ending in a settlement.

Trial

If pre-trial motions or negotiations fail to bring a lawsuit to a close, it will move on to the next stage of litigation: the trial. Many books, movies and television shows dramatize the trial phase for effect, but most trials are mundane and orderly affairs. A great deal of communication between the judge and attorneys for each party will have already taken place beforehand, so that the focus can be on each side presenting their best argument for their client on the remaining questions.

However, the timeline for civil trials can be less predictable than for other stages of litigation. Some trials last a few days, others can last weeks when the case is more complex, such as an RIA lawsuit. The number of witnesses and the volume of evidence presented often impacts the length of a trial. Scheduling conflicts, court availability or other unexpected issues arising during the trial can also prolong the expected length of the proceedings.

Appeals

At the conclusion of a trial, the losing party has an option to file an appeal with the court of appeals. The court of appeals reviews the trial court, and (if needed), the supreme court reviews the court of appeals. An appeal is a challenge of a previous legal determination by a lower court. Appeals are directed at a higher court, usually the state appellate court.

It’s important to understand that an appeal is not a request for a “do-over.” Instead, most appeals focus on reviewing a trial court’s case for legal errors only. Only very rarely would an appellate court review factual evidence or consider overriding a judge’s or jury’s findings in a case.

If an appellate court reviews a case, it will issue a decision (an opinion). An opinion can affirm the trial court’s decision if no errors were found in the trial court proceeding. If a legally meaningful or substantial error was found, the appellate court can reverse the trial court’s decision or send the case back to the lower court for a new trial with instructions about avoiding the error. Because of their technical nature, appeals can be lengthy — they can extend the legal process by a year or more. However, advisor lawsuit appeals can be even longer.

Protecting Against an RIA Lawsuit

With the complexity, length of time, stress and cost involved, RIA lawsuits are best avoided. Your first line of defense is to practice good risk management in the course of business, such as:

  • Setting realistic expectations with clients on strategies, investment vehicles, outcomes and timelines.
  • Understanding common RIA risks, such as excessive fees, trade errors, cyber risks, theft of funds and employee claims.
  • Practicing good communication, with timely responses, returned calls and clear instructions.
  • Letting clients own important decisions, empowering them to make decisions after advice on risks and benefits.
  • Documenting professional advice and decisions in writing, including your advice against any unadvisable investments or strategies.
  • Avoiding the appearance of conflicts of interest in favor of yourself, another party or a competing
  • Handling any complaints you do receive proactively, staying aware of issues and providing a way forward.

However, not all lawsuits can be avoided. It’s in these instances that the right insurance makes all the difference. Lockton Affinity Advisor specializes in insurance solutions that meet the unique needs of businesses in the financial services industry, including exclusive, proprietary coverage and broad market access to all the top carriers. Our tailored solutions meet custodian requirements and address top risks, including E&O, Cyber and Crime exposures.

To get started today, request your price indication or call (844) 406-5958 to speak to one of our insurance experts.

 

*For further reading on these topics, see:

Chiariello, Dominic and Chiariello II, Gerald. (September 26, 2024). Ask an Attorney: How Long Does a Civil Litigation Case Typically Take? Chiariello & Chiariello. https://www.chiariello.com/blogs/4666/how-long-does-a-civil-litigation-case-take

Smith, Rustin (n.d.). Stages of Civil Litigation. Stewart, Melvin & Frost. https://smf-law.com/legal-briefs/stages-of-civil-litigation/

Wiese, Michael D. (March 13, 2023). Civil Lawsuits: The 8-Step Process From Start to Finish. Smith, Haughey, Rice & Roegge. https://shrr.com/news_events/civil-lawsuits-8-step-process/