During our initial consultation with prospective clients, one of the first questions we are typically asked about relates to damages. Clients want to know what the value of their case is and how are damages calculated. While recoverable damages are usually specific to the client’s claim, there are two generally accepted damage theories utilized when you are asking “what is the value of my investment fraud claim?”. These theories are referred to as: 1) Net Out of Pocket Damages and 2) Well Managed Portfolio Damages. We explore these two damage theories below.
Investment Fraud Claim Net Out of Pocket Damages
When we think of Net Out of Pocket damages, we usually default to the concept of “money in/money out.” Under this damage theory, damages are designed to compensate a customer for all losses, which are the sum of all realized profits and losses (securities that were bought and sold), unrealized gains and losses (securities that were bought but not sold), interest and dividends received on the investments, and expenses incurred (such as margin interest or advisory fees). It focuses on a customer’s loss rather than on the potential gain, or lost opportunity cost.
Losses are typically measured from the date of the security’s purchase to the date the fraud was or should have been discovered. It is designed to places the customer in the same position they were in prior to the transactions in question. In recognizes the loss of invested funds but not the opportunity cost of those funds.
Well Managed Portfolio Damages
Well managed portfolio damages, or market adjusted damages, account for the actual net out-of-pocket damages and are adjusted to reflect what the investor made, or arguably would have made, had the funds at issue been appropriately invested. This theory of damages is used to account for lost opportunity cost relative to the funds used to invest. This method of calculating damages can be complex and difficult, and typically requires the assistance of an expert witness to complete the damage calculation.
Typically, well managed portfolio damages are higher than net out of pocket damages as it takes into consideration how the funds would have performed had the funds been properly invested. Market indices are often used to help compare market performance to the performance, or underperformance, of the investments at issue in the litigation. The most popular indices include S&P 500 Composite Index, NASDAQ Composite, Dow Jones Industrial Average, to name a few.
The benchmark used to complete this calculation typically corresponds to the client’s stated risk tolerance and investment objective in order to keep the analysis fair and consistent with the client’s investment goals during the period at issue in the litigation.
Other Damages with an Investment Fraud Claim
There are many other damages attendant to investment fraud cases, to include rescission, disgorgement, attorney’s fees, costs, forum fee assessment, and punitive damages, to name a few. Each case is unique and requires an independent analysis in order to determine what damages you can seek to recover in your investment loss case.
If you suffered losses related to the negligence of your financial advisor, we would be happy to set up a free consultation in order to assess your potential claim. Contact us to discuss your legal rights and potential options to recover losses. The Schwartz Law Firm represents investors in claims against third parties, including financial advisors. If you have questions about your potential claim or need assistance from an investment fraud lawyer, please contact us at 866-618-0545 or email Matthew Schwartz directly at [email protected].