This post begins a series exploring Lost Gains securities arbitration cases.
A record eleven-year (and nearly uninterrupted) bull market has caused a decline in the number of FINRA securities arbitration claims. In short, very few investors have lost money during this period. Indeed, on a calendar year-end basis, the worst annual decline in the S&P 500 price index has been 6.25 percent, in 2018, and this would be even less if dividends were included.
Chart 1: S&P 500 v. FINRA Annual Arbitration Claims
In Chart 1, above, it can be seen that since the end of 2008, the S&P 500 price index (green line) has increased by 258 percent and the number of FINRA arbitration claims (red line) has decreased by 47 percent. These trends are certainly well known to securities litigators.
After this record-setting bull market, one would suspect there would be some FINRA arbitration cases arising from customer accounts that did not appreciate, i.e. that the client lost out on the gains that were to be had. However, these claims have not been prevalent.
In this post, I will explore some reasons why Lost Gains cases are not more common, as well as the common types of Lost Gains cases that I have seen brought.
First, I need to make a distinction, most claimant’s attorneys make lost gains claims, but tend not to bring lost gains cases.
Lost Gains Claims
In a typical FINRA customer arbitration, the brokerage client has lost money in her account. The claimant will usually plead damages from the principal (out-of-pocket) loss and what the account would have made if it had been invested suitably, this is known as the market-adjusted damage (“M-AD”).
The M-AD damage is a lost gain claim. In essence, the claimant is saying, but for the unsuitable recommendations of the broker, her principal would, first, not have declined, and second, it would have appreciated.
Lost Gains Cases
Lost gains cases are different from lost gains claims because, in them, the claimant did not lose money on her investmentd. That is, the account was profitable (or flat) over the period at issue.
Thus when a lost gains case if brought, it only contains the lost gain damage claim, there is no out-of-pocket loss claim.
Reticence to Bring Lost Gains Cases
I believe attorneys are reluctant to bring Lost Gains cases for a number of reasons, including the following:
First, the claimants are perceived to be unsympathetic. They either didn't lose money or actually made money, just not as much as they could have but for the allegedly unsuitable investment recommendations or other violative behavior by the broker.
Second, because there are no out-of-pocket losses, the damage claim rests entirely upon the market-adjusted damages theory. While panels frequently award market-adjusted damages, they are less common than awards of out-of-pocket losses.
Third, since Lost Gains cases are perceived to have the headwinds described above, they are typically only brought for large clients who can make seven- or eight-digit damage claims. Since fewer investors have accounts large enough to support such claims (likely $10 million or more), this necessarily reduces the number of potential claims.
Despite these issues, lost gains cases are brought, and can be won.
Two Common Fact Patterns in Lost Gains Cases
Although there are many fact patterns that could give rise to a Lost Gains case, I want to discuss two types that I have had experience with. Importantly, they both involve abusive behavior and are not of the sour grapes variety, i.e. where the market was up 20 percent and the client was only up 17.
Those types are:
- Where the broker appropriates the investment gains for herself through abusive commissions and/or fee structures, (“broker appropriation”), and;
- The failure of the broker to follow client instructions (“failure to follow”).
In my next post, I will explore these fact patterns in more detail.
 Data obtained from Bloomberg and FINRA.
 This is anecdotal as FINRA arbitration statistics do not track Lost Gains claims. To get a sense of these case filings, I have surveyed a number of securities litigators across the country.
To learn more about fiduciary expert Jack Duval, click here.