Legal Aspects of Finance Slide Set 8 Legal Liabilities on Securities Markets Contractual Relationships Liabilities for Losses Matti Rudanko

The Legal Relations in the Trade in Securities Principal (buyer/seller) Counterpart (seller/buyer) Broker (commission agent) Sale of goods? Buying commission /comm. on sales Sale of goods Outside the public trade Legal Aspects of Finance 8

The legal relations of the Trade in Securities: Public Trade Principals A B C D E etc. Sale of goods Brokers Brokers X Y Z etc. Counterparts Legal Aspects of Finance 8

The Structure of Damages Legal Aspects of Finance 8

The organization of damages Legal Aspects of Finance 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 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 Legal Aspects of Finance 8

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) The significance of the legal provisions: Liability covers pure economic loss (typical damage consists of only economic losses) Legal Aspects of Finance 8

Securities Markets Features collectivity automation electronic trade traded objects and the whole environment is electronic: book-entries, book-entry accounts anonymity Legal Aspects of Finance 8

Cf direct sale: KKO -85 II 58 The transaction in securities was considered to be void on the basis of the Finnish Contracts Act (OikTL) 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. Legal Aspects of Finance 8

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 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 Legal Aspects of Finance 8

CISG 74: KKO 1950 II 419: “Adequate” causality “- - 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.” CISG 74: 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 KKO 1950 II 419: Legal Aspects of Finance 8

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 ? Legal Aspects of Finance 8

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 Legal Aspects of Finance 8