How Damages Are Calculated in Securities Arbitration
If you have suffered investment losses due to broker misconduct, one of the most important questions is: how much can you recover?
Investors working with experienced securities fraud attorneys often have a better understanding of how damages may be calculated and what their claim may be worth.
Understanding how damages are calculated can help you better assess the strength and potential value of your claim.
What Types of Damages Can Be Recovered?
In a FINRA arbitration claim, investors may be entitled to recover several types of damages, depending on the circumstances of the case.
These may include:
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Compensatory damages (investment losses caused by misconduct)
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Out-of-pocket losses
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Market-adjusted damages
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Rescission damages (return of invested funds)
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Interest on losses
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Attorneys’ fees and costs (in certain cases)
The goal is generally to put the investor in the position they would have been in had the misconduct not occurred.
Common Methods for Calculating Damages
There is no single formula used in every case. Arbitrators may apply different methods depending on the facts and the type of misconduct involved.
1. Out-of-Pocket Losses
This is the most straightforward method.
It calculates:
What you invested – what your investment is currently worth
Example:
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Invested: $200,000
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Current value: $80,000
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Claimed damages: $120,000
This method is commonly used in cases involving unsuitable investments or misrepresentation.
2. Well-Managed Portfolio (Market-Adjusted Damages)
In some cases, damages are calculated based on how your portfolio should have performed if it had been properly managed.
This approach compares:
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Your actual losses
vs. -
The performance of a suitable benchmark or diversified portfolio
This method is often used in cases involving:
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Overconcentration
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Failure to diversify
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Mismanagement
3. Rescission Damages
Rescission aims to “undo” the investment.
This means:
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You recover your original investment
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Minus any income received (dividends, distributions)
This method is often used in:
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Private placements
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Illiquid or fraudulent investments
4. Damages for Excessive Trading (Churning)
In churning cases, damages may include:
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Trading losses
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Excess commissions and fees
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Interest and costs
Because churning often generates unnecessary transactions, damages may focus heavily on the fees and losses caused by excessive activity.
Key Factors That Affect Damage Calculations
Arbitrators consider a range of factors when determining damages, including:
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The type of investment involved
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The level of risk disclosed
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The investor’s age, objectives, and risk tolerance
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Whether the account was overconcentrated
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The role of the brokerage firm in supervising the advisor
Each case is highly fact-specific, which is why two investors with similar losses may recover different amounts.
Can You Recover 100% of Your Losses?
Not always.
While some investors recover a substantial portion—or even all—of their losses, arbitration awards vary depending on:
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Strength of evidence
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Type of misconduct
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Credibility of witnesses
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Legal arguments presented
In many cases, settlements occur before a final hearing, which can also impact the total recovery amount.
The Role of Expert Witnesses
In more complex cases, attorneys may use financial experts to calculate damages.
These experts can:
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Analyze account activity
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Reconstruct a properly managed portfolio
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Provide reports supporting damage calculations
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Testify during arbitration hearings
Expert analysis can significantly influence the outcome of a case, especially in disputes involving large losses.
How a Securities Attorney Can Help Maximize Recovery
Calculating damages is not just about math—it’s about building a persuasive case.
An experienced securities fraud attorney can:
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Identify the strongest damage methodology
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Gather account statements and evidence
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Work with financial experts
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Present a clear damages model to arbitrators
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Negotiate settlements
Proper damage calculation is often one of the most critical factors in maximizing recovery.
Speak With a FINRA Arbitration Attorney
If you have suffered investment losses and want to understand what your case may be worth, The White Law Group may be able to help.
Our FINRA arbitration attorneys represent investors nationwide in FINRA arbitration claims and can evaluate your potential recovery.
Call (888) 637-5510 for a free consultation.
FAQs
How are damages calculated in FINRA arbitration?
Damages are calculated based on the investor’s losses, the type of misconduct, and the method applied—such as out-of-pocket losses, market-adjusted damages, or rescission.
What is the most common method of calculating damages?
Out-of-pocket loss is the most commonly used method, but other models may be applied depending on the case.
Can I recover lost profits?
In some cases, investors may recover damages based on how a properly managed portfolio would have performed, though this is not guaranteed.
Do I need an expert witness to calculate damages?
Not always, but expert witnesses are often used in complex or high-value cases.