Damages Awarded To Trader Following Fraudulent Broker Representations

Given the financial pressures of the economic downturn and the

uncovering of Ponzi schemes such as Madoff, investors and traders

have increasingly sought to claim for unexpected levels of losses

to investment funds. A recent case has shown that, in cases where

investors and traders have been induced to invest as a result of

fraudulent representations, the courts may be prepared to award

wide-ranging damages for losses that they suffer. In this case, the

court held that a trader could recover the value of the original

fund, the loss of profits on the fund and the investment arising

from this profit (i.e. profits on profits).

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A recent case has shown that, in cases where investors and

traders have been induced to invest as a result of fraudulent

representations, the courts may be prepared to award wide-ranging

damages for losses that they suffer.

Through a special purpose vehicle company, a trader invested in

funds relying on statements made by a senior futures broker about

the profitability of the fund that were knowingly false. Between

the initial investments in June 2000 until the discovery of the

fraud in March 2002, the funds lost almost all their value. The

trader claimed damages not only for the capital loss of the amount

by which the trading fund was depleted but also the loss of the

profits:

which he would have made on investments in alternative trades

during the period in which the fraud was being carried out;

and

for the period after the fraud until the trial on the basis

that, as a consequence, he had a smaller trading fund than he would

have had had the fraud not occurred.

The court held that the trader could recover the value of the

original fund, the loss of profits on the fund and the investment

arising from this profit ("profits on profits").

Loss of profits during the fraud

The court held that it is not necessary to identify a specific

alternative transaction in order to recover loss of profits.

Moreover, there is no requirement to demonstrate that alternative

transactions would necessarily be profitable. Each case depends on

its own facts but generally profits will be recoverable where on a

balance of probabilities any alternative transaction or business

would have been profitable. The court relied heavily on the

evidence of the trader's previous and subsequent success and

that he continued to trade profitably despite the fraud. Had the

trader not been so...