The types of remedies available to a harmed investor depends on the facts of the specific case. Damages can range from “net out-of-pocket losses” (e.g. the loss in value sustained by the investment/portfolio) to a recovery of “well managed damages” (e.g. the difference between what the account made and what the account could have made had it been properly managed). In an appropriate case, “well managed damages” can thus even be awarded when the account was profitable―so long as that profit was less than what the account reasonably should have made.
FINRA provides the below guidance as to what types of remedies may be able to an investor for harm caused to their investment account/portfolio.
Actual Damages and/or Statutory Damages.
Actual damages, sometimes called compensatory damages, are a monetary sum required to compensate a party for their loss. These include:
Net Out-of-Pocket Losses.
The calculation of a claimant’s net out-of-pocket losses varies depending on whether the panel finds the wrongful conduct involves one or more specific trades or the management of an entire account. For specific trades, net out-of pocket loss is the purchase price of the security plus commissions minus the total of the value of the security on the relevant date plus dividends or interest received. For wrongful conduct involving an entire account, net out-of-pocket losses are calculated by taking the beginning account value, plus money and securities deposited, minus money and securities withdrawn, less account value on the relevant date. Arbitrators should look to the parties for instructions on these issues.
In addition, some claimants may argue that to award “full compensatory damages” it is necessary to look beyond a claimant’s net out-of-pocket loss. These “special” or consequential damages might include:
- lost profits in the form of dividends on stocks sold because of wrongdoing;
- taxes the claimant incurred because of the wrongdoing;
- loss of available funds in the claimant’s business;
- loss of financing; and
- commissions paid.
Benefit of the Bargain
The benefit of the bargain measure seeks to give the claimant the expected value of the investment. For example, the claimant’s measure of damages would be the amount the investment would have been worth if the respondent’s misrepresentation had been true, less what the investment is actually worth. The difficulty with applying the benefit of the bargain measure of damages is determining, with some specificity, the profits that the claimant would have reasonably received.
Well-Managed Portfolio Account
This measure of damage allows the claimant to recover the difference between what the claimant’s account made or lost versus what a well-managed account, given the investor’s objectives, would have made during the same time period.
Statutory Damages
Sometimes, a claim will be based upon a statute that explains how damages should be calculated. If a claim is based upon such a statute, the panel should look to the parties for guidance on how the law requires damages to be calculated.
Other Remedies
Rescission
Rescission is designed to place the claimant in the same position occupied before the wrongful transaction. It may include the return of the securities at issue. Disgorgement The arbitration panel may require the respondent to disgorge profits or commissions. The goal of disgorgement is to make the wrongdoing unprofitable and therefore deter the wrongdoing. Disgorgement might be available even where the claimant has not suffered net out-of-pocket losses.
Source: FINRA Arbitrators Reference Guide – February 2021 edition
If you have significant losses and any of the above potential abuses happened to you, contact the attorneys at PCJ Law for a free, informative consultation at 901-820-4433.