Determining Fair and Reasonable Damages, Investors Don’t Entrust Their Savings to Financial Advisors to “Hide Their Money Under a Rock”: Leading Authorities Agree that An Investor’s Damages Should Be Adjusted for Market Movement

By Montgomery G. Griffin and Theodore S. Avery

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:

TimeEvent (assume simple interest and no withdrawals)Account Balance
Day 1Investor deposits $100,000 for broker to manage$ 100,000.00
End of Year 1Interest paid on investment @ 10% per year, $10K$ 110,000.00
End of Year 2Interest paid on investment @ 10% per year, $10K$ 120,000.00
End of Year 3Interest paid on investment @ 10% per year, $10K$ 130,000.00
End of Year 4Interest paid on investment @ 10% per year, $10K$ 140,000.00
End of Year 5Interest paid on investment @ 10% per year, $10K$ 150,000.00
End of Year 6Interest paid on investment @ 10% per year, $10K$ 160,000.00
Year 7Due 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 damagesHad [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/CourtBrokerage FirmIssues AddressedMarket-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)
Oppenheimerchurning;
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 Lynchsecurities 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.