When Can I Be Awarded Punitive Damages for My Broker Dealer’s Misdeeds?

In the securities arbitration world, as well as throughout legal history, damages are meant to be compensatory in nature, and when awarded are supposed to “make whole” the aggrieved party. Many lawyers in different practices, including Malecki Law’s, have grappled with whether an award of punitive damages would be granted in any given case. That is because punitive damages go beyond the traditional scope of compensatory relief and thus, they have been a subject of controversy for many years.

Punitive damages typically serve a dual purpose: 1. Deterrence and 2. Retribution. Although punitive damages are generally uncommon in FINRA arbitration proceedings, they are not unheard of and at Malecki Law, our New York securities fraud lawyers will assess whether we think your case warrants punitive damages and what you should reasonably expect.

The Securities Act of 1934, which is the primary statute upon which securities arbitrators rely, actually forbids punitive damages. Nonetheless, forty-one states, allow for punitive damages to be awarded in arbitration proceedings. A number of those awards have been to clients of the securities fraud lawyers in New York at Malecki Law. 

The Federal Arbitration Act (FAA) specifies that arbitration agreements are “valid, enforceable and irrevocable.” The courts have interpreted this as a general policy in favor of arbitration agreements “notwithstanding any state substantive or procedural policies to the contrary.” Notably, both the Securities Industry Conference of Arbitration (SICA) as well as the Uniform Code of Arbitration and the American Arbitration Association all allow for an award of punitive damages. Even in states where punitive damages in arbitration are generally prohibited, the parties can agree to include punitive damages if they so choose. Conversely, parties may also explicitly agree to preclude an award of punitive damages.

In states that statutorily disallow punitive damages in arbitration proceedings, as is the case in New York, the courts of these states will sometimes apply the FAA rather than the law of the applicable state when the parties have agreed for that state’s applicable law to govern but have not expressly prohibited the arbitrator to award punitive damages. Malecki Law’s securities fraud law firm in New York helped create the law around getting attorneys’ fees in New York, Ferrucci v. McLoughlin Piven & Vogel. As articulated in the FINRA arbitration guide, punitive damages may be awarded for certain causes of action; however, the claimant must both request them and explain why an award of punitive damages would be appropriate under the circumstances. 

So, what causes of action in securities arbitration warrant punitive damages?

Punitive damages may be awarded in certain cases where a broker’s conduct is particularly egregious. While certain jurisdictions impose a maliciousness requirement for an arbitrator to award punitive damages, others only require that a broker dealer or firms conduct be extremely reckless.

In 2014, a customer was awarded $900,000, $300,000 of which were punitive damages in a case against John Thomas financial, and several executives of the firm for churning and failure to supervise. Also, in 2014, a Maryland court upheld a FINRA arbitration panel’s award of punitive damages in a case when a financial adviser deliberately did not disclose material information about a risky investment to her clients, reasoning that her clients were unsophisticated investors, and she was their fiduciary. More recently, in 2018, a FINRA panel awarded $1,000,000 in punitive damages where the respondents failed to warn claimant of all the risks following the sale of a Reg D private placement, which was unsuitable. In March of 2020, a customer who filed a complaint alleging unsuitability, failure to supervise, breach of fiduciary duty, negligent misrepresentations among other causes, was awarded $5,663 in compensatory damages and $30,000 in punitive damages. This case is particularly interesting considering that the punitive damages were almost 6x the amount of the compensatory damages awarded. Furthermore, in the case of Alford v. National Planning Corporation, a stock broker severely mishandled the accounts of an elderly widow and abused his discretion, and the widow was awarded punitive damages in the amount of $1,000,000. Similarly, punitive damages, were awarded in favor of an investor against Huntleigh Securities Corporation where the firm engaged in breach of fiduciary duty, fraud, negligence, and misrepresentation.

Although punitive damages are far less common than that of compensatory damages, they are still awarded in certain, specific instances. Securities fraud attorneys in New York at Malecki Law understand what arbitrations are looking for and try to plead your case in the best light to maximize damages, in every case.

The research shows that they are most commonly awarded in instances where a broker or firm has engaged in willful or wanton misconduct and abuses their discretion in an egregious way. In these situations, compensatory damages are simply not enough for a misdeed on behalf of a broker or firm. Typically, punitive damages will not be awarded in cases where the only cause of action is breach of contract. Nonetheless, if the broker or firm has committed fraud, churning, misrepresentation, or some other act of willful abuse of their discretion, public investors may be entitled to punitive damages. Malecki Law is available to explore these damages and your claim in a free consultation.