Statutory damages under the Florida Securities and Investor Protection Act: how to calculate and apply rescission damages.

• Author: McCabe, Ryon M.
• Position: Business Law

This article explores a topic of frequent confusion for lawyers, judges, and arbitrators practicing securities litigation in Florida, namely, the proper calculation of damages under the Florida Securities and Investor Protection Act, commonly referred to as Ch. 517. Because the vast majority of securities claims are litigated in arbitration, (1) very little case law has developed in the area of proper damage calculations, and, at times, it seems every practitioner has a personal view of how to calculate 517 damages. This article describes the statutory formula, sets forth examples of proper damage calculations, and explores the special issues related to the "netting" of trades and the calculation of interest in multiple-transaction cases.

The Statutory Scheme

The Florida Legislature first enacted the Uniform Sale of Securities Act in 1931 in the wake of the great stock market crash of 1929. (2) Its purpose, from the outset, was to "protect investors." (3) The current version of the statute prohibits two broad categories of wrongdoing, which can be classified as "registration violations" and "antifraud violations." The registration provisions prohibit the sale of unregistered securities, the sale of securities by unregistered persons or firms, and the rendering of investment advice by unregistered investment advisors. (4)

These provisions protect investors by ensuring that investment products sold in Florida are properly registered and that all investment professionals doing business here are properly licenced and subject to ongoing regulation and potential discipline. If an unregistered product is sold in Florida, or an unregistered person or firm does business here, liability for the sale is automatic. (5)

The antifraud provisions prohibit deceptive conduct in connection with the purchase or sale of securities or the rendering of investment advice. The statute uses broad terminology to include deceptive misrepresentations, omissions, transactions, practices, and courses of conduct. (6) Although titled the "antifraud" provision, this section does not in fact require a showing of fraud, as liability can be found on proof of mere negligence. (7) Also, because the statute prohibits deceptive practices and patterns, Florida courts have interpreted it to prohibit traditional sales practice violations, such as churning and the recommendation of unsuitable investments. (8)

The result is a powerful tool for investors. An investor who proves that his or her broker made an unlawful recommendation, intentionally or negligently, can seek relief under Ch. 517 and gain the benefit of its powerful damage formula.

The Formula

The civil remedy for both registration and antifraud violations is set forth in F.S. [section] 517.211. If the investor still owns the security, the statute allows him or her to tender the security and rescind the transaction. (9) Rescission is an equitable remedy that aims to undo a transaction. Once the investor tenders the wrongfully sold security, the seller must accept it and return to the investor the purchase price, plus statutory interest on the purchase price from the date of purchase to the present. (10)

If the investor no longer owns the security (which is more often the case), the statute sets forth a precise formula for calculating damages. These are not traditional compensatory or out-of-pocket damages, but a unique measure of statutory rescission damages. The statute provides as follows:

(4) In an action for damages brought by a purchaser of a security or investment, the plaintiff shall recover an amount equal to the difference between:

(a) The consideration paid for the security or investment, plus interest thereon at the legal rate from the date of purchase; and

(b) The value of the security or investment at the time it was disposed of by the plaintiff, plus the amount of any income received on the security or investment by the plaintiff. (11)

In mathematical terms, the formula can be expressed as follows: Damages = (consideration paid + interest) - (value of security when sold + income received).

To demonstrate the formula, assume that on January 1, 2007, an unregistered broker recommends that his client invest $100,000 in an unsuitable stock, XYZ, Inc. Over the next year, XYZ pays a dividend of...