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What are market adjusted damages?

Market-adjusted damages are a type of damages often applied by courts and arbitrators in securities cases. This model of damages enables a customer to compare a market benchmark with the actual losses incurred in an account to show the customer’s losses compared to a market index or a hypothetical portfolio that is near the asset allocation in which the customer should have been invested.

An example of a market-index benchmark would be comparing the S&P 500’s performance over a certain time period with the actual losses in the customer’s account during the same time period. When you compare how the S&P 500 performed to the actual losses in the customer’s account, the question is, would the customer’s accounts have performed better had they been invested in line with the S&P 500?If so, the customer may be able to recover not only his or her actual losses, but also the gains that would have been achieved had the portfolio been invested in line with the S&P 500.

Another type of market-adjusted damages is called well-managed or model portfolio damages. An example of a well-managed or model portfolio for a moderate growth investor may be a portfolio consisting of 60% stocks and 40% bonds. If you compare how a 60/40 stock-bond portfolio performed during the same time frame as the customer’s actual losses were incurred, you would then add the additional gains that would have been received from the 60/40 portfolio to the actual losses suffered to increase the spread. In many cases, this makes the damages recovery larger than just the actual losses incurred.

All damages theories, however, must be examined on a case-by-case basis as to what is most beneficial to the customer.

Please Note: Rabin Kammerer Johnson provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.

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