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What is rescission of a trade?

It is a remedy that can be awarded by a court or arbitration panel instead of damages. Generally speaking, the plaintiff suing for rescission must be able to give back to the defendant everything he or she received in the transaction. In exchange, the plaintiff will receive back all money or other property he or she gave to the defendant. The goal of rescission is to put both parties back into the positions each was in prior to the transaction. In other words, the purpose is to restore the status quo ante (Latin for “the way things were before”).

While there are no hard and fast rules as to when rescission is available (it largely depends on the law of a particular state), rescission is often granted when a transaction was induced by fraud or misrepresentation. Historically, rescission was considered an “equitable” remedy, such that a plaintiff had to show that he or she had no adequate remedy at law in order to have a transaction rescinded. In layman’s terms, this means that if an award of damages will fully compensate a plaintiff, rescission may not be available.

In the securities context, rescission may be available to a defrauded investor pursuant to a statute. For instance, Florida’s Securities and Investor Protection Act bars misrepresentations in the sale of securities and other investments. Any investor who purchases a security or investment in violation of the statute has a right to rescind the transaction. The purchaser may recover the amount paid for the investment, plus interest, while the seller receives the investment back, plus interest. Sometimes, this money is called “rescissionary damages,” though it is not the same as more typical “compensatory damages. “Compensatory damages are not available under this kind of statute, unless the purchaser sells the security or investment prior to filing the lawsuit. The sole point is to put the investor back in the same position that he or she would have been, had the investment never been made.

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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