Is There A Formula For Valuing Securities Fraud Losses?
Investors work with financial advisors, brokers and brokerage firms because these professionals are supposed to help grow the investor’s assets. Moreover, financial professionals are supposed to invest the client’s money in a way that is consistent with the investor’s time horizon, investment objectives and risk tolerance. When an advisor or broker recommends securities or employs strategies that aren’t aligned with the client’s objectives and the client loses money, there may be a case for the client to pursue securities fraud damages.
If a client can establish, whether in arbitration or in court, that he/she incurred losses due to securities or investment fraud, the question then becomes how to calculate the damages the client is owed. This calculation can be very complex, with the validity of arbitration awards and court awards often being challenged because the calculation was allegedly incorrect.
Based in California, Girard Bengali, APC, represents investors in FINRA, AAA and JAMS arbitrations and in traditional litigation against advisors and brokerage firms across the country. Our lawyers are leaders in taking on highly complex securities fraud cases. We have a full understanding of the law of damages in securities cases, which has helped us recover millions of dollars for clients who have been defrauded by the investment professionals they thought they could trust.
Two Theories for Recovering Damages
There are various types of damages available in securities cases, but perhaps the two most discussed are 1) Net Out-of-Pocket Damages (NOP), and 2) Market-Adjusted Damages, also known as Well Managed Portfolio Damages (WMP).
Net Out-of-Pocket Damages
NOP damages are calculated by measuring the total principal loss in a security and reducing it by the amount of income the investor received during the life of the investment. For example, say an investor bought a security for $100 and later sold it for $50. That is a principal loss of $50. But, let’s say she received $20 of income from the security during ownership. In this case, the net out-of-pocket loss is $30.
NOP damages attempt to put the investor back in the same position she was in prior to making the investment. Of the various methods for calculating damages, this is the most favorable for the brokerage firm.
Courts have frequently rejected NOP damages calculations because NOP would allow brokerages to churn their clients’ securities freely so long as losses don’t exceed gains.
Market-Adjusted Damages, aka Well Managed Portfolio Damages
Market-adjusted damages (aka WMP damages) utilize industry benchmarks to compute what an investor would have received had the portfolio been invested properly. The concept is that damage awards should reflect what the investor would have made had their money been “appropriately” invested.
This method of calculating securities fraud damages can be complex and difficult, but the end result of WMP calculations is that defrauded investors usually receive more compensation than they would under the NOP calculation.
Courts explain the WMP calculation in various ways, but the U.S. Supreme Court provided perhaps the clearest explanation in a 1972 case called Affiliated Ute Citizens v. U.S.: a plaintiff should be awarded the difference between “the fair market value of what he received and the fair market value of what he would have received if there had been no fraudulent misconduct” by the broker/advisor.
Another way to think of WMP damages is as a three-part calculation:
- Compute the market value of the plaintiff’s portfolio when the fraud began;
- Adjust this amount by the average percentage increase or decrease of the value of the Dow Jones Industrial Average, the Standard & Poor’s Index, or any other well recognized index of value during the period of the fraud; and
- Subtract from the resulting figure the market value of the portfolio when the fraud ended.
Our Law Firm Helps Defrauded Investors Recover Securities Fraud Damages
Girard Bengali, APC, is home to a dedicated team of lawyers and staff with decades of experience helping people who sustained losses at the hands of financial professionals. We fully understand damage calculation methods and how to pursue full compensation for you, whether in court or in arbitration.