A common argument made in securities arbitration cases is that an investor may only recover losses after giving credit for any dividends or interest received. This is called the Net Out of Pocket ("NOP") argument. This seductive argument is made by the securities industry in every case where an investor received a dividend or interest payment as a last ditch effort to reduce the investor's claim for damages.
NOP is one of many ways to measure damages, and is frequently the most advantageous measure for brokerage firms and Registered Investment Advisors. It requires skilled, experienced counsel to understand investment losses and argue for damages using legal theories which bust the NOP myth when seeking justice for deceived investors.
NOP is the myth that interest and dividends may be used to offset principal losses. The type and amount of damages vary by claim, legal theory, and equity.
Typical Example Involving Nop
Imagine you went to the bank and opened a CD for $10,000, for 10 years paying 10% interest per year ($1000/year). The CD pays interest and at the end of year 10 you go to the bank to claim your principal and the bank manager tells you it lost your CD. You tell the manager that is sad, but you still want your money or you will have to sue for damages. Instead, the manager takes the position you have no damages since you received $10,000 in interest payments. You know that while you received $10,000 you are entitled to the return of the principal regardless of the bank's negligence.
In the securities industry, the NOP argument is frequently employed in cases where investors purchased income generating securities such as high yield mutual funds, preferred stocks, bonds, reverse convertible securities, Real Estate Investment Trusts, or promissory notes. Just like the example above, over time the money received from the dividends or interest paid from securities becomes a significant percentage of the invested principal. If the fraud, misrepresentation, unsuitable recommendation, or other misconduct is discovered long after the investment was made, the NOP argument makes it appear the damages are far less than what they actually are.
If you have been told any stockbroker, investment advisor, expert witness or attorney that all you can recover is your NOP, we encourage you to seek legal counsel from an attorney at our firm.
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We have helped public investors who have fallen victim to fraud and illegal practices for over 35 years. We have built our reputation on our insistence upon integrity and our legal skill. The laws and regulations regarding investments, financial management and brokerage firms are extensive and quite complex. You can trust that we have the thorough understanding necessary to help you fight for justice for any wrongs that have been committed. Jonathan W. Evans, the founding partner, is an experienced securities litigator and arbitrator. We have serviced clients across the nation and worldwide.
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