Specific Transactions: A Wholly Appropriate and Legally Supported Damages Approach in Many Instances

By Montgomery G. Griffin and Theodore S. Avery

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.