LEB Slide Set 12 Legal Liabilities on Securities

LEB Slide Set 12 Legal Liabilities on Securities Markets 1) Contractual Relationships 2) Liabilities for Losses Matti Rudanko

The Legal Relations in the Trade in Securities Outside the public trade Principal (buyer/seller) Buying commission /comm. on sales Sale of goods? Counterpart (seller/buyer) Broker (commission agent) Sale of goods LEB Slide Set 12 2

The legal relations of the Trade in Securities: Public Trade Principals A B C D E etc. Sale of goods Brokers X Y Z etc. Counterparts LEB Slide Set 12 3 Brokers

Securities Markets Features • collectivity • automation – electronic trade – traded objects and the whole environment is electronic: book-entries, book-entry accounts • anonymity LEB Slide Set 12 4

Direct sale - public trade • Direct selling • contract law based duties of disclosure (the seller) and of making inquiries (the buyer) • a breach of a duty is both a necessary and a sufficient precondition of damage LEB Slide Set 12 5 • Public trade • market law based and market-oriented disclosure duties • they do not primarily relate to a concrete transaction and a counter-party • cf. the truthfulness obligation and standard of good practice in marketing

Cf direct sale: KKO -85 II 58 • The transaction in securities was considered to be void on the basis of the Finnish Contracts Act (Oik. TL) sect. 33 because when transacting the seller did not know about circumstances with material influence on the value of the securities but the buyer knew about them and supposedly realized their importance for the other party’s decision to sell. LEB Slide Set 12 6

The Structure of Damages LEB Slide Set 12 7

The organization of damages LEB Slide Set 12 8

The Significance of the Basic Distinction • Contract Liability • (pure) economic loss • burden of proof of negligence reversed on the tortfeasor • covers both employees and employed independent contractors LEB Slide Set 12 9 • Tort Liability • general rule: only physical injuries and damages to property • burden of proof of negligence too lies on the injured person • covers only employees

SMA ch. 16 sect. 1 and 2, AIS ch. 16 sect. 1 (and other acts) Anyone who deliberately or negligently causes damage through procedure that is against this Act or against provisions issued thereunder shall be liable to compensate the damage he has caused. The damage is deemed to be caused by negligence unless the person responsible for the procedure shows that he or she has acted carefully (burden of proof) LEB Slide Set 12 10 The significance of the legal provisions: • Liability covers pure economic loss (typical damage consists of only economic losses)

“Adequate” causality CISG 74: • “- - damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of the contract. ” KKO 1950 II 419: • the value of a package deposited in a hotel was not perceivable; liability of the hotel was reduced • KKO 1977 II 74: • a specialized undertaking ought to have known about the possible contract penalty liability of the counterpart due to the breach of contract; full liability imposed because not obviously unreasonable LEB Slide Set 12 11

Causality on the Markets 1 • Market risk - recoverable damage ? • reducing the factors of e. g. price fluctuations is difficult – cf. Market psychology • Portfolio theory • Increased risk and causality ? LEB Slide Set 12 12

Causality on the Markets (2) Breaches of disclosure duties: • is proven reliance on the information a part of the required causation chain? • cf the “would have purchased anyway” argument this kind of reliance may not be required • cf difficulties to bring evidence • norms aim at reliable functioning of the market LEB Slide Set 12 13