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Elderly investors seeking income and relative stability of their principal are often encouraged by their broker or financial advisor to buy bonds (or bond funds).  Often, high-yield bonds, and their high risks, are not suitable investments for elderly and retired investors due to the higher probability (vis-à-vis high quality, investment grade bonds) that a loss of principal could occur.  However, most investors do not understand the high risks inherent in owning certain types of bonds generally known as “high yield bonds,” “high yield securities,” or in their purest form: “junk bonds.”  And, the amount of bonds underwritten (and, thus, sold to investors) by Wall Street firms has increased significantly in recent years.  Indeed, on August 18, 2019, the Wall Street Journal reported that over the past decade the low interest rate environment has caused corporations to “bulk up” on the issuance of debt and, more specifically, that “about half” of all investment-grade debt is now rated BBB, the lowest rating in the investment-grade category.     

Many investors simply do not appreciate the risks inherent in their fixed-income portfolios.  While bonds are often suitable for investors seeking steady income from their investments, it is critical to understand that not all bonds and bond funds are created equal.  Bonds and bond funds with higher relative yields pay more for good reason:  they carry substantially more risk than other, lower-yielding bonds and bond funds.  It is incumbent upon brokers and financial advisors to ensure that clients understand the risks associated with any and all recommended investments.  Indeed, the duty to fully disclose all material risks by financial advisors—particularly with regard to higher risk investments—is an age-old requirement in the securities industry.  Moreover, FINRA rules require a financial advisor to make a “balanced sales presentation” whenever recommending an investment—which, of course, means that the risks and costs should be fully and fairly explained to the investor.

Additionally, regardless of risk disclosures, FINRA Rule 2111 provides that brokers and financial advisors may only recommend investments that are suitable for the client, taking into consideration factors that include the client’s investment objectives, age, financial circumstances, and risk tolerance.

Unfortunately, brokers and advisors sometimes fail to comply with these standards.  To make matters worse, their failure is not always merely reckless: brokers and financial advisors may obtain higher commissions or fees by having their clients invest in high-yield bonds or bond funds versus the commissions often available to financial advisors for short-term, high-quality bond investments. 

Securities industry regulators have long focused on the risks involved with owning high-yield, or junk, bonds.  For example, the Financial Industry Regulatory Authority (“FINRA”) has warned that you should “slow down when you see ‘high yield.’” One reason an investor should “slow down” is that high-yield bonds typically have low credit ratings, meaning that there is a heightened risk that the issuers will default and stop paying interest on the bonds and/or be unable to return an investor his or her principal upon the bond’s maturity date.  Credit rating agencies (such as Moody’s or Standard and Poor’s) evaluate bonds and assign them letter-grade ratings based on the agency’s assessment of the bond’s credit quality.  (Specific bonds’ credit ratings are sometimes listed next to the bonds on monthly account statements.) These ratings range from “AAA” (for Standard and Poor’s) and “Aaa” (for Moody’s), indicating that the bond issuer’s capacity to meet its financial commitments on the bonds is extremely strong, down to “D” (Standard and Poor’s) or “C” (Moody’s), indicating that the bonds are in default.  Bonds rated BBB (Standard and Poor’s), Baa (Moody’s), or higher generally have low-to-medium credit risk and are referred to as “investment grade” bonds. Conversely, bonds rated BB (Standard & Poor’s), Ba (Moody’s), or lower generally have high credit risk and are aptly referred to as “junk” bonds. Bonds with lower credit ratings tend to offer higher yields to entice investors to purchase the bonds despite their weaker credit worthiness.  Indeed, this relationship between yield and credit rating is so strong that “high yield bonds” and “junk bonds” are considered synonyms in the industry.

The credit risk that accompanies most high yield bonds also makes them exceptionally sensitive to changes in industry or economic conditions.  Issuers of junk bonds are likely to struggle against industry or economic headwinds, exacerbating their risk of default. Additionally, during times of economic uncertainty, investors tend to sell riskier assets (such as junk bonds) and purchase lower risk assets (such as investment grade bonds or treasuries), which drives junk bond prices lower and further punishes investors who own junk bonds in their portfolios. 

While credit risk is the most common reason a bond offers a high yield, it is not the only reason.  For instance, a bond from a foreign issuer may offer a higher yield due to liquidity or currency risks.  But regardless of what risks are driving the yield, “high yield” reliably signals high risk. Many investors may not be aware of the relationship between high yields and risk, and others may not know enough about the complexities of the marketplace to even understand what would constitute a high yield—thus making it imperative for financial advisors to explain such risks in easy-to-understand terms.  
Instead of purchasing individual bonds, investors also sometimes purchase (and brokers and advisors recommend) bond funds.  Bond funds are funds that hold a portfolio of bonds. Bond funds can have advantages over individual bonds, such as by offering monthly (rather than semi-annual) payouts or easy diversification (by holding a large array of bonds).  But, bond funds are not necessarily sound or suitable investments. The holdings of a given bond fund may be skewed toward bonds with lower credit ratings, such as junk bonds, meaning that the bond fund still faces exceptional credit risks.  It may also be more difficult for investors to recognize the credit risk of bond funds’ holdings because bond funds themselves do not have a straight-forward credit rating like individual bonds. Further confounding the matter, it is not uncommon for bond funds to take on names like “Opportunity & Income,” “Enhanced Yield,” or “Income Advantage” that obscure the poor credit ratings of their holdings.  

Bond funds also can also have drawbacks and special risks beyond those of the bonds they hold.  For instance, bond funds have management fees called “expense ratios” that can be substantial and can eat into profits or add to losses.  In addition, bond funds may employ leverage, which can dramatically ramp up the risk of loss of the fund regardless of the quality of bonds they invest in.  Some bond funds have substantial sales loads, which are nothing more than commissions paid to the institution that sold you the investment (such as your brokerage firm).  (Indeed, these sales loads can be the primary motivation behind an unscrupulous broker’s recommendation of a particular bond fund.)    

When it comes to bonds and bond funds, high yields can lead to big problems in a portfolio.  If you have securities accounts under the guidance of a broker or financial advisor that you worry might have underperformed due to high-yield bond investments in your accounts, consider contacting an attorney who specializes in having investment performance analyzed and seeking recovery of investors’ investment losses.  To contact the Law Offices of Montgomery G. Griffin, click on the contact link below.  

As recently as March 5, 2019, Kiplinger published an article focused on the risks of “high-yield” or “junk” bonds.  Its headline did not mince words: “Junk Bond Funds Don’t Belong in Long-Term Portfolios . . . Safety-Minded Investors Can’t Overlook the Risk that Comes Along with Them.”

Before reading further, it is critical to understand two simple concepts:  (1) the terms “high yield bonds” and “junk bonds” are synonyms in the securities industry.  The terms refer to the same type of security:  a bond with a low-credit rating. In simple English, they are high-risk bonds.  But, many financial advisors avoid using the term “junk bond” when discussing prospective investments with clients, often instead directing the focus of their recommendation to the words “high-yield bonds”; and, (2) junk bonds pay higher rates of interest than high-quality bonds, but that higher rate of interest means that there is greater risk to losing some, or all, of your principal.

With the broad decline in interest rates over the past decade, the higher interest rates paid by junk bonds have made for an easy sales pitch in recent years by financial advisors to elderly investors since seniors often depend on the income generated by their investments to pay important living expenses.  The net result has been a massive accumulation of junk bonds by senior citizen investors. But many investors lack the necessary expertise or time to assess the risks of investments selected and recommended to them by their brokers. Often, elderly investors do not even realize that their portfolio owns junk bonds and is, thus, exposed to their inherent high risks.  In this post, we have provided 4 questions you can pose to your broker or financial advisor to help you determine whether your retirement funds are exposed to junk bonds and, if so, to what extent is that exposure?

The easiest way to determine whether your account is holding junk bonds may be to ask your broker or financial advisor directly.  But please note that there is an important caveat to this. No matter your circumstances, neither the Law Offices of Montgomery G. Griffin nor any other law firm can say what is legally advisable for you to do without being consulted and fully apprised of the facts of your situation.  If you have a securities account under the guidance of a broker or financial advisor and are concerned that the account might have underperformed due to unsuitable investments and/or inadequately explained junk bond holdings, you should first consider contacting an attorney who specializes in analyzing brokerage accounts and arbitrating investment mismanagement issues against brokers and financial advisors, such as the Law Offices of Montgomery G. Griffin.  Choosing instead to inquire with your broker or advisor without representation can have undesirable consequences. For example, your broker may dissuade you from pursuing meritorious claims stemming from his or her unsuitable junk bond recommendations. After all, if your broker or financial advisor defrauded you once (when recommending the purchase of an unsuitable investment, such as a junk bond), he or she is liable to do so again. In addition, you may unwittingly impair your legal rights, such as by squandering valuable time to file a claim before a legal deadline to do so.  To receive legal advice on your situation, you must consult an attorney.      

If you nonetheless simply wish to inquire with your broker or financial advisor to understand whether you hold junk bonds, below is a list of questions you might consider asking.  To retain a record of your correspondence, you may consider making this inquiry to your financial advisor in writing, such as through e-mail. 

1. Am I invested in any junk bonds?  This is the simplest and most direct question that might be asked.  Any broker or financial advisor should be able to review your portfolio and determine whether you in fact are invested in any junk bonds.  But it is a general question, and general questions beget general answers that may (intentionally or unintentionally) obscure important truths.  For instance, a broker or financial advisor may cleverly inform you that none of the bonds in your account are individual junk bonds but fail to mention that you hold a bond fund (a fund that holds a portfolio of bonds) that does hold certain individual junk bonds.  For that reason, asking the more specific questions below may be necessary.
   
2. What are the S&P credit ratings of the bonds I am invested in?  This is a more specific question with certain advantages.  When a bond is issued, credit rating services, such as Standard & Poor’s, analyze the bond and assign it a letter grade credit rating (for example, AAA or AA or A or BBB, etc.) that indicate the agency’s assessment of the credit risk of the bond.  In essence, the rating conveys the risk that the issuer of the bond will eventually default and fail to pay interest on the bond or, worse yet, fail to return your principal when the bond matures). Note that sometimes your monthly account statements reflect these credit ratings next to your bond holdings, allowing you to check the ratings yourself without inquiring with your broker or advisor. 
   Another advantage of this question is that even if you are holding only bonds with credit ratings above “junk” status (so-called “investment grade” bonds), it can be good to know whether their ratings are relatively low and therefore almost junk status.  The lowest investment grade ratings are Baa and BBB-. Such “almost-junk” bonds could behave very much like junk bonds (indeed, they may even get downgraded to a “junk” rating) and incur significant losses in an economic downturn despite their technical investment-grade status. 
   
3. Am I invested in any mutual funds that are holding bonds?  In addition to advising clients to hold individual bonds directly, financial advisors often construct portfolios where the client holds bonds indirectly by investing in a mutual fund that invests in bonds, such as bond funds (i.e., funds dedicated to holding a portfolio of bonds).  Bond funds can have advantages, but they also can have unique risks and drawbacks. Some bond funds hold junk bonds, others do not. In addition, bond funds may (a) have “sales loads” (often high commissions or fees paid upon purchase) and (b) employ leverage, which will increase the fund’s losses during a period of poor performance.  Bond funds can have complicated structures and strategies, making it even more important that your broker or advisor spend time fully explaining to you any risks and drawbacks pertinent to any bond funds you hold. 
   
4. If I am invested in any mutual funds that invest in bonds, do any of them hold junk bonds?  What credit ratings are the bonds they invest in?  These questions can be very difficult for investors to determine on their own.  Obtaining the accurate and complete answers may require poring through lengthy prospectuses or other paperwork, but that does not make the answers any less important, and your advisor or broker should be capable of performing this work.  If you invest in a fund that holds junk bonds, then you still have exposure to the risks of those junk bonds.  

If you fear that you own high yield, “junk” bonds and your broker or financial advisor did not inform you of the high risks often associated with those securities, you should consider consulting an attorney.  To contact the Law Offices of Montgomery G. Griffin, click on the contact link below.  

Disputes between aggrieved investors and their former brokerage firms are heard and decided in a highly specialized forum (FINRA arbitration) and they typically involve highly specialized issues (suitability, churning, calculating market-adjusted damages, complex securities, etc.).  To optimize your chance of achieving a substantial recovery, the lawyer you choose should similarly be highly specialized in the myriad of nuances defining the securities industry. In this post, we discuss 3 key reasons why the securities expertise of a lawyer matters.

Arguably the most important decision for an aggrieved investor occurs before a case is ever filed:  Whom to select as his or her counsel?  One can rest assured that Wall Street—with its enormous capital—will be strongly represented by a lawyer (or, as is often the case with disputes involving substantial damage amounts, a team of lawyers) with plenty of securities experience.  But, on the investor side, pitfalls abound for lawyers relatively unfamiliar with the securities industry or securities arbitration—despite the fact that plenty such “unsuitable” lawyers (and even non-lawyers) aggressively market themselves to clients via the Internet in search of representation against Wall Street and before FINRA arbitrators.  Conversely, lawyers with specialized knowledge and experience can often uncover and leverage critical edges in securities disputes that can lead to superior case results. The Law Offices of Montgomery G. Griffin has extensive specialized securities knowledge and experience, as demonstrated by Montgomery G. Griffin’s past as a financial advisor, FINRA arbitrator, and longtime securities arbitration investor advocate.  Below are 3 reasons why this kind of knowledge and experience matters: 

1. The Securities Industry Is a Complicated Industry, Subject to Complicated Laws, and Loaded with Complicated Subject Matter.  It is difficult to think of an industry as complex and sprawling as the securities industry.  There are:

• Many products (such as blue-chip stocks, small-cap stocks, corporate bonds, municipal bonds, open-end mutual funds, closed-end mutual funds, syndicate issues, options, warrants, LEAPs, junk bonds, ETFs, non-conventional investments, variable annuities, and so on); 

• Many players (such as brokerage firms, investment advisory firms, clearing houses, underwriters, financial advisors, issuers, investment bankers, wholesalers, and so on); and  

• A vast web of relevant rules, regulations, laws, and industry standards that have important implications for everyone and everything involved.  

A strong familiarity with all of these moving parts is an extremely powerful tool—if not a necessity—for successfully handling securities arbitration claims and defenses.

To optimize your chances of prevailing over a Wall Street firm before FINRA arbitrators, your counsel should be able to readily answer questions like the following:

1. What index, or blend of indices, would most likely be applied by arbitrators to an underperformance (or failure to diversify) case?
2. How does a cost-to-equity ratio differ from a turnover rate when analyzing a potential churning case?  And, exactly what ratios and rates has the SEC held constitutes presumptive levels of excessive trading?
3. What is a close estimation of the amount hidden commissions taken out of the investor’s account by the brokerage firm and financial advisor?
4. Of the many securities expert witnesses around the country, who might be best for a case with critical supervision issues?
5. Who among the following four securities arbitrators are likely to be chosen by Wall Street firms during the arbitrator selection phase of a case?  Chad Weaver, Mason Dinehart, Samuel Y. Edgerton, Reed Bement?
6. What unique theory of damages did the California Court of Appeal fashion in the 1968 decision of Twomey v. Mitchum Jones?
7. What appellate case from Florida involving Shearson Lehman Hutton held that “there is no support to be found under federal or Florida law” for the damages theory known as “netting” (or sometimes called, “NOP”) (NOTE:  arguing that NOP is an appropriate damages theory is a favorite ploy of Wall Street firms in securities arbitration disputes)?
8. Under what circumstances can a deposition be taken in a FINRA arbitration matter prior to the hearing on the merits?
9. What category of documents typically held by the brokerage firm is likely the best evidence to use to support a market-adjusted damages analysis?  And, more preliminarily, does the FINRA Arbitrator’s Guide permit arbitrators to consider this damages theory?  (Bonus points for any attorney who knows that “yes,” the Arbitrator’s Guide specifically holds at page 66 that FINRA arbitrators are authorized to award an aggrieved investor market-adjusted damages.) 
10. How far (in percentage terms) did the tech-heavy NASDAQ Index plummet during the “tech wreck” of 2000-2002?  (Bonus points for any attorney who knows that it was an astonishing 80% drop from the top of the NASDAQ in 2000 to its nadir in late 2002!)
11. Where can a lawyer obtain transcripts from past testimony of so-called expert witnesses who Wall Street repeatedly uses during arbitrations in the FINRA forum?  

This list of 11 questions is a simple and short set of questions that are representative of the myriad of specialized nuances that your lawyer should readily know if you wish to maximize your chances of prevailing against the sharp and clever defense tactics Wall Street’s lawyers will cast upon you following the filing of your arbitration at FINRA.  While many lawyers who advertise on the Internet for new clients to represent against Wall Street firms claim to have certain expertise in the securities industry, the securities background of Monty Griffin, which dates back to 1980 (when he first worked for Merrill Lynch in Los Angeles while studying at UCLA), is matched by few.

2. Securities Arbitration Procedure Is a Unique Species of Arbitration.  A private arbitration proceeding, on the one hand, and a court case, on the other hand, are conducted and decided in two entirely different forums.  Each forum has its own unique—and different—set of procedural rules. Although some similarities exist, the differences—particularly when comparing a FINRA securities arbitration to a court case—are substantial.  Many court litigators have little experience with arbitration. Even if a litigator happens to have substantial arbitration experience (such as, for example, with employment arbitrations at the American Arbitration Association, or AAA), he or she may find him or herself to be a fish out of water in the securities arbitration arena.  Securities arbitrations have their own rules and customs that will likely be foreign to many practitioners. To be specific, the tip of the procedural “iceberg” with a FINRA arbitration demands that a lawyer have strong knowledge with FINRA’s own Discovery Guide, Arbitrator’s Guide, Regulatory Notices, and Sanctions Guidelines.  The detailed procedural and substantive information in each of these “vaults” can (and, in varying degrees, likely will) have enormous impact on the fate of an investor’s arbitration claim(s).

In addition, a FINRA arbitration is initiated by the preparation and filing of an investor’s Statement of Claim.  Most arbitrators tend to focus on the facts more so than the law related to an investor’s claim(s).  Setting forth a detailed and convincing set of facts is critical to constructing a strong foundation from which to launch an attack on a financial advisor and/or Wall Street firm gone bad.  Only lawyers who have developed a deep and detailed knowledge of the securities industry can thoroughly analyze a potential case and then draft such compelling Statements of Claim.

3. Securities Arbitration Is a Small World—Knowing It and Being Known in It Can Make a Big Difference.  A strong track record in the securities arbitration world—only developed over many years of experience and success—can have a big impact on the likelihood of success for any given case.  The reality is that the FINRA arbitration process throughout the USA is a small world where many of the same arbitrators, attorneys, expert witnesses, and brokerage firms repeatedly interact with, or do battle with, each other.  Having experience with different arbitrators or knowing their reputations can be invaluable during the arbitrator selection process, which among other things requires a lawyer to closely assess 35 prospective arbitrators chosen by FINRA for consideration on each and every case.  Similarly, being represented by an advocate known by arbitrators and brokerage firms for being strong, persistent, detail-oriented, and knowledgeable—a reputation the Law Offices of Montgomery G. Griffin proudly believes itself to have and have earned—can make all the difference in making sure that your claims are treated with full seriousness at all stages of the arbitration process, including settlement negotiations and the final hearing.

FINRA Arbitration Provides No Right to An Appeal 
By virtue of arbitration clauses embedded in new account agreements between investors and their brokerage firms, virtually all securities-related disputes are forced into FINRA arbitration, not court.  Unlike court litigation where a litigant has the protection of an extensive appeals system that can provide him or her an effective “redo” in the event of a trial gone wrong, participants in FINRA arbitration have extremely limited options for obtaining any relief if they are unhappy with the results of an arbitration.  Indeed, pursuing a formal appeal is not possible.

Securities arbitration litigants, in essence, have only one shot to put their claims or defenses on, making it paramount that they do everything they can to ensure that the opportunity is not mishandled or squandered.  The first important step that an investor can take to try to tilt the odds of prevailing in their favor is to retain a lawyer with unique and extensive experience working in the securities industry and dealing with the FINRA securities arbitration process.  Contact the Law Offices of Montgomery G. Griffin for a free consultation if you are concerned that your account has substantially underperformed relevant indices or that you have otherwise been the victim of misconduct by your financial advisor.    

In late 2019, the Law Offices of Montgomery G. Griffin (“LOMGG”) obtained another FINRA arbitration award on behalf of one of its clients against J.P. Morgan Securities, this one ordering J.P. Morgan Securities to pay the aggrieved investor market-adjusted damages.  Market-adjusted damages represent the difference between how a client’s investments performed versus how the client’s investments should have performed. This is in contrast to net out-of-pocket (or, NOP) losses, which are simply the difference between the amount the client invested versus the value of the investment(s) today.  Indeed, despite actually making a profit in his accounts at J.P. Morgan, the client was awarded $ 211,174.89 following an 11-day arbitration hearing.  The compensatory damages amount awarded matched to the dollar the market-adjusted damages calculations provided to the arbitration panel via expert testimony.    

The award did not come by accident; and it was consistent with settled damages law.  

J.P. Morgan, taking the position that the NOP theory of damages should be applied by the FINRA arbitrators, repeatedly argued that the investor had no damages since his accounts had made an overall profit.  The LOMGG responded, however, with exhaustive efforts to educate the arbitration Panel on the appropriateness and legality of awarding market-adjusted damages in a securities fraud case. In short, had the investor’s accounts been handled in accordance with his investment objectives, and not exposed to unsuitable securities recommended by the broker, the accounts would have made substantial profits that would have dwarfed the amount that was actually made since his new account agreements all indicated that he had a “growth” investment objective for the funds at issue and the growth-oriented S&P 500 index appreciated substantially during the period he entrusted management of his accounts to J.P. Morgan.  

For illustration purposes, according to the “NOP” analysis often advocated by Wall Street lawyers, the following scenario involving theft by the broker would mean that the aggrieved investor has suffered no ($0.00) damages:

Time	Event (assume simple interest and no withdrawals)	Account Balance
Day 1	Investor deposits $100,000 for broker to manage	$ 100,000.00
End of Year 1	Interest paid on investment @ 10% per year, $10K	$ 110,000.00
End of Year 2	Interest paid on investment @ 10% per year, $10K	$ 120,000.00
End of Year 3	Interest paid on investment @ 10% per year, $10K	$ 130,000.00
End of Year 4	Interest paid on investment @ 10% per year, $10K	$ 140,000.00
End of Year 5	Interest paid on investment @ 10% per year, $10K	$ 150,000.00
End of Year 6	Interest paid on investment @ 10% per year, $10K	$ 160,000.00
Year 7	Due to inadequate supervision by brokerage firm, the financial advisor steals $60,000 from the account	$100,000.00

The investor’s net out-of-pocket (NOP) loss is $0.00 since he or she still has $100,000.

The result above would, of course, be ludicrous.  And, applicable law is entirely against it. Nonetheless, Wall Street habitually tells arbitrators across America that this methodology is something they should impose on aggrieved investors.  

This post, in simple basics, provides a road map of the profound legal framework developed over decades by important appellate courts around the United States (dating back to at least 1978), and later accepted by FINRA as codified in its Arbitrator’s Guide today, which reveals that the market-adjusted damage method for calculating damages avoids windfalls to either the aggrieved investor or the brokerage firm by putting the investor in the position he or she would have held had the broker and brokerage firm not breached the parties’ bargain.  That bargain, of course, was to place the investor’s funds only in suitable investments and strategies consistent with the investor’s investment objectives and risk tolerance.  Typically, those investment objectives and risk tolerance are set forth on the investor’s new account agreements with the brokerage firm, just as was the case in the above-discussed J.P. Morgan case recently won by the LOMGG on behalf of one of its clients. 

The Sixth Circuit’s Famous Quote Crystallizing the Basis for Market-Adjusted Damages

The core underpinning of the market-adjusted method for calculating damages in a securities fraud case was probably best captured by this now-famous quote from the Sixth Circuit Court of Appeals in 2007 when it reviewed a FINRA arbitration award in a case involving Wall Street titan Lehman Brothers: 

Lehman’s out-of-pocket theory misapprehends the harm suffered by Plaintiffs and the facts of this case.  Plaintiffs gave $21 million to [the Lehman broker], not to hide under a rock or lock in a safe, but for the express purpose of investment, with a hope—indeed a reasonable expectation—that it would grow. Thus, the out-of-pocket theory, which seeks to restore to Plaintiffs only the $21 million they originally invested less their subsequent withdrawals, is a wholly inadequate measure of damages.  Had [the Lehman broker] invested Plaintiffs’ money as requested, their funds would have likely grown immensely, especially considering that Plaintiffs invested primarily throughout the mid-1990s, which, had they hired an honest broker or a watchful company that reasonably supervised its employees, would have placed their money in the stock market during one of the strongest bull markets in recent memory. (Bold added.)

This concept, that investors do not seek out full-service brokers or financial advisors so that they can “hide their money under a rock or lock it in a safe,” has been recognized by important courts around the country for decades.  Those have included:

Case/Court	Brokerage Firm	Issues Addressed	Market-Adjusted Damages Holding
Rolf  2nd Circuit Court of Appeals (New York) (1978)	Blyth, Eastman, Dillon & Co.	unsuitable transactions; securities fraud	The court instructed the district court to adjust the investor’s out-of-pocket loss by the average percentage return “of the Dow Jones Industrials, Standard & Poor’s Index, or any other well recognized index of value, or combination of indices . . .” during the period of misconduct.
Miley 5th Circuit Court of Appeals (Texas) (1981)	Oppenheimer	churning; securities fraud	The court expressly adopted Rolf,  explaining that this method “utilizes the average percentage performance in the value of the Dow Jones Industrials or [S&P 500] Index during the relevant period as the indicia of how a given portfolio would have performed in the absence of the broker’s misconduct.”
Hatrock 9th Circuit Court of Appeals (California) (1984)	Edward D. Jones & Co.	misrepresentation; churning	Expressly adopting the Miley court’s quote above
Davis 8th Circuit Court of Appeals (Missouri) (1990)	Merrill Lynch	securities fraud; churning	The court upheld an award of market-adjusted damages where the investor had made a profit despite securities fraud by the broker.

As shown above, some of the leading circuit courts of appeal around the country have found in unison since as far back as 1978 (with Rolf) that the appropriate method to calculate an investor’s damages is the market-adjusted measure.  

Wall Street’s Best Lawyers Have Repeatedly Lost the NOP Argument Before Leading Courts

These appellate decisions have been reached despite the courts being confronted with the finest arguments that money can buy, as the brokerage firms on the losing end of these decisions (including Merrill Lynch; Edward D. Jones & Co.; Oppenheimer; and, Lehman Brothers) were each represented by top-tier law firms and highly-accomplished lawyers.  But those Wall Street lawyers consistently retreaded the proposition that market-adjusted damages are supposedly “speculative” and thus violative of a basic premise of damages law that determining damages cannot be speculative in nature.  However, the Fifth Circuit in Miley in 1981 specifically addressed and rejected Wall Street’s (Oppenheimer & Co.) “too speculative” critique of market-adjusted damages method, stating that although calculation of market-adjusted damages may not be exact, “neither the difficulty of the task nor the guarantee of imprecision in results can be a basis for judicial abdication from the responsibility to set fair and reasonable damages in a case.”  (Bold added.)  

In sum, from coast-to-coast, whether it be politically liberal jurisdictions (New York and California), conservative jurisdictions (Texas), moderate jurisdictions (Ohio and Missouri), or against a backdrop of declining stock markets or rising stocks markets, leading appellate courts in the United States have consistently embraced the market-adjusted method for determining an investor’s “fair and reasonable” (quoting the Fifth Circuit in Miley) damages by comparing the actual result in the account to the result that would have been attained in a comparable index with an honest broker and a dutiful brokerage firm involved.  

FINRA Instructs Its Arbitrators That Market-Adjusted Damages Are Appropriate

Finally, as discussed on the Law Offices of Montgomery G. Griffin’s Case Results page, in addition to the overwhelming cascade of judicial appellate support for the market-adjusted measure of damages, the FINRA Arbitrator’s Guide expressly informs arbitrators that the market-adjusted measure of damages allows the investor to recover the difference between what the investor’s account(s) actually made or lost compared to what a well-managed account (given the investor’s objectives and risk tolerance) would have made or lost during the same time period. In today’s world, with an S&P 500 Index that has soared by over 300% since 2009, applying a market-adjusted analysis to a defrauded investor’s claims can lead to substantial recoveries in keeping with Miley’s “fair and reasonable” damages objective.  

If you believe your account(s) has been mismanaged and underperformed the historically unprecedented market performance dating back to March 2009, contact the Law Offices of Montgomery G. Griffin for a free consultation.

It is common for aggrieved investors to base their securities arbitration damages analysis on the losses or underperformance associated with specific transactions in their accounts, as opposed to netting out the results from all of the transactions in their accounts. When investors do this, Wall Street’s lawyers frequently retort that the focus on specific transactions is tantamount to “cherry picking losses” and that it “skews” the damages analysis, postulating instead that the damages analysis should take into consideration all of the transactions executed in the investor’s account(s). Sometimes Wall Street’s lawyers representing “Firm A” even attempt to lay claim to gains made by the aggrieved investor in the investor’s accounts at “Firm B” in order to attempt to reduce the damages incurred at “Firm A.” Rest assured, however, that Wall Street’s lawyers invariably make these arguments only when these nifty damages theories would diminish the overall damages number sought by the aggrieved investor. Indeed, in handling hundreds of securities arbitration cases since 1996 to the present with damages ranging from approximately $50,000 (on the low end) to over $40 million (on the high end), Monty Griffin has never seen a Wall Street lawyer for Firm A suggest that arbitrators should include trading results at Firm B if those results add to the investor’s losses at Firm A!

Contrary to these tactics, however, focusing on select transactions without regard to other transactions is completely appropriate in many instances and (unlike Wall Street’s hocus pocus proposed damages calculations) the select transaction analysis finds exceptionally strong legal support—both from FINRA itself and appellate courts in some of the most influential circuit courts across America.

Limiting a damages analysis to certain transactions finds its roots in common sense. When the Law Offices of Montgomery G. Griffin takes a case and pursues damages associated with select transactions rather than the customer’s account(s) as a whole, it is invariably the case that the broker or financial advisor’s misconduct is limited to (or most readily demonstrable in) those select transactions. It may be the case, for instance, that a broker or financial advisor established mostly suitable securities positions for a customer but also established several positions that were unsuitably concentrated. Or, perhaps the broker or financial advisor engaged in a consistent management strategy that was suitable for one time period (such as during the working life of the customer) but became unsuitable in another period (such as when the customer retired and began to face increasing medical expenses). In such instances, it is completely intuitive that the customer’s case—and any damages analysis—should be focused on those limited transactions (e.g. the unsuitably concentrated positions or the transactions that became unsuitable in light of changed life circumstances) since there is nothing obviously inappropriate about the other transactions. By this same token, a brokerage firm should not be permitted to point to the benefits that its appropriate actions bestowed on a customer in hopes of convincing arbitrators to offset or diminish the harm its inappropriate actions caused. As it is sometimes said, suitable gains cannot be used to offset unsuitable losses.

Selective Transaction Logic Is Routinely Applied by Courts to Other Areas of Law

Indeed, this logic is applicable throughout all areas of legal liability. Imagine, for example, that a patient with several medical conditions consults a doctor, and the doctor prescribes suitable medication for two of the conditions but negligently (or fraudulently) prescribes an unsuitable medication for the third condition, causing harmful results on the patient. It is obvious that the patient should be able to hold the doctor liable for his error in prescribing the third (unsuitable or fraudulent) medication, and it is equally obvious that by getting it right with the first two (suitable) medications the doctor should not be exonerated for causing harm to the patient with the third (unsuitable) medication. If the doctor could point to his success with the two suitable medications to offset his malpractice with respect to the third (unsuitable) medication, it would mean that providing suitable medical treatment gives the doctor a free license to engage in medical malpractice on other occasions, a patently ridiculous result. This common-sense insight is not suspended when one enters the securities arbitration arena, even if being pushed on arbitrators by Wall Street lawyers.

FINRA Expressly Instructs Its Arbitrators That Awarding Selective Transaction Damages Is Permitted

But one need not rely on common sense to reach the conclusion that focusing on specific transactions is appropriate in many cases because multiple areas of applicable legal authority have already clearly stated that it is appropriate. FINRA’s Arbitrator’s Guide—the most authoritative guidance FINRA provides to its arbitrators—itself explains that damages can be sought for specific transactions or the entirety of the account. In its section on net out-of-pocket losses on page 65, for instance, the Arbitrator’s Guide states, “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,” explaining that when the wrongful conduct is limited to specific trades, the damages analysis should be focused on just those trades. (Emphasis added.)

Various Leading Circuit Courts Have Long Held That Awarding Selective Transaction Damages Is Permitted (and a deterrent to securities fraud)

Beyond FINRA, courts around the country have pointed out for many years (indeed, decades) that it is absurd for brokerage firms to try to argue that an aggrieved investor should not be entitled to losses or underperformance damages incurred from wrongful conduct because there otherwise were profits in the investor’s account(s). In Davis v. Merrill Lynch, Pierce, Fenner & Smith, 906 F.2d 1206 (8th Cir. 1990), for example, the Eighth Circuit was faced with an account that a broker had heavily traded, generating substantial costs for the account. In that case, the brokerage firm (Merrill Lynch) argued to the Court that it should not be liable for any of the costs it generated because the account returned cumulative net profit of over $53,000. Id. at 1218. The Court flatly rejected Merrill Lynch’s argument, even classifying the argument’s implications as “disturbing”:

The implications of [Merrill Lynch’s] argument are disturbing. If we were to adopt Merrill Lynch’s view, securities brokers would be free to churn their customers’ accounts with impunity so long as the net value of the account did not fall below the amount originally invested. . . . Because [the plaintiff] . . . would have earned over $50,000 more than she did had her account not been churned, it is nonsensical to argue that she did not suffer actual damages as a result of the churning.
Id. at 1218–1219 (emphasis added).

The Ninth Circuit, which covers California, reached the same conclusion. In Nesbit v. McNeil, 896 F.2d 380 (9th Cir. 1990), the Court was also confronted with an actively traded account that had an overall net gain. The court rejected the same argument about offsetting damages incurred with other gains in the client’s portfolio, stating summarily that “there is no reason to find that [the aggrieved investor] should be denied a recovery because their portfolio increased in value, either because of or in spite of the activities of the defendants.” Id. at 386 (emphasis added).

Similarly, the Eleventh Circuit, which covers Florida, also reached the same conclusion in a case involving another large Wall Street firm. In Kane v. Shearson Lehman Hutton, Inc., 916 F.2d 643, 646 (11th Cir. Fla. 1990), the court was faced with a case where the aggrieved investor sought to rescind specific inappropriate transactions and thereby be compensated for the losses incurred in them. The brokerage firm argued that gains in non-rescinded transactions should be used to offset the damages in the rescinded transactions, an approach the court referred to as “netting.” The Eleventh Circuit dismissed this “netting” approach, and commented that, “there is no support to be found under federal or Florida law for the ‘netting’ theory . . . .” Id. at 646. The court pointed out that, instead, “[w]hat is found . . . is the intent to have securities antifraud provisions enforced stringently to deter fraud.” Id. (Emphasis added.)

Even Alabama, more recently, has joined in on deriding the dubious damages arguments routinely made by Wall Street firms, i.e., that losses in specific inappropriate investments should be offset with gains generated elsewhere in appropriate investments. In Burke v. Ruttenberg, 102 F. Supp. 2d 1280, 1302 (N.D. Ala. 2000), an Alabama district court pointed out that such an approach is akin to using profits from un-breached contracts to offset losses in breached contracts:

[The defendant’s calculation] would only be appropriate if the purchases and sales of shares made at a profit could be offset from the loss calculated by the Court. However, a plaintiff’s claim is determined on the basis of each individual share; just as a plaintiff is not required to offset the gain realized from a contract that has not been breached by a defendant against the losses accrued from those contracts actually breached by the defendant.

Little can be done to stop Wall Street lawyers from attempting to fool investors and their counsel, and/or arbitrators, into accepting flawed and legally unsupported damages calculation theories. However, much can be done by experienced securities arbitration counsel for aggrieved investors to stop Wall Street from succeeding, including by being well-versed in controlling and applicable authorities, such as those discussed above. Indeed, in a recent FINRA arbitration decision, the Law Offices of Montgomery G. Griffin successfully recovered underperformance damages for select (unsuitable) transactions in an investor’s accounts despite no overall losses in the investor’s accounts, even while the opposing Wall Street lawyers claimed throughout the case that the damages analysis was tantamount to “cherry picking.” This yet again underscores why it can be important to choose an attorney who concentrates on analyzing and presenting securities performance issues when disputes arise with brokerage firms. If you have concerns about the performance of securities transactions done on your behalf under the guidance of a broker or financial advisor, please do not hesitate to contact the Law Offices of Montgomery G. Griffin today.