Remedies and Damages - Chapter 9 - Securities Arbitration: Practice and Forms - Second Edition

Under the FINRA Code of Arbitration Procedure claimants seeking to initiate arbitration proceedings must specify the relevant facts and the remedies they are seeking in their statement of claim. During the course of the arbitration hearing, the parties should state specifically the remedy and amount of damages they are seeking, and present specific calculations of damages and the theories supporting such calculations. Information of this nature assists the arbitrators in awarding damages or other relief once the determination as to liability has been made. Several types of remedies are available in arbitration, reflecting the variety of situations that may be involved in claims presented to an arbitral panel for resolution.

§ 9.02 Damages

As most claims are submitted to arbitration for the purpose of recovering damages, perhaps the most important aspect of a claimant's case is a presentation with respect to damages. There are numerous types of damages that may be sought and recovered in arbitration. Accordingly, parties should prepare precise damage requests that are supported by both the facts and, where possible, applicable principles of law.

[1]—Actual/Compensatory Damages

In most disputes between investors and broker–dealers, the primary relief sought is monetary compensation. Compensatory or actual damages represent the actual dollar loss suffered by the complaining party and may include an award of interest or lost profits where the evidence supports such an award. The party asserting entitlement to damages bears the burden of establishing such entitlement. The testimony of expert witnesses may be helpful in setting forth the theory or method of calculating the damages suffered. If the claimant has adequately demonstrated the extent of his or her damage, the arbitrators should seek to make this party whole.

In preparing an arbitration claim, claimants should endeavor to set forth clearly each element of actual damage with the calculation. Not only will this assist the arbitrators in understanding the claim, it can also save precious time during the hearing so that the claimants can concentrate on convincing the arbitrators that they are entitled to an award.

There are a variety of methods used for calculating compensatory damages. One method is to calculate each trading loss (realized or unrealized) and add them together. Another method is typically referred to as out-of-pocket losses, which takes into consideration all of the activity occurring in the account, including deposits, interest, commissions, dividends, and distributions. Market-adjusted losses reflect a model index based upon the customer’s investment objectives. The additional income generated (or profits unrealized) are then compared to the losses actually sustained in order to generate a netdamage theory. A similar calculation is also frequently referred to as the well-managed account theory.