LEB Slide Set 13
Legal Liabilities on Securities Markets
1) Calculating Adequately Causal Losses
Matti Rudanko
Market Fraud Theory
• (1) insufficient or false information was
published by the defendant
• (2) the inadequacy of the information was
material
• (3) the securities were quoted on an efficient
market
• (4) the inadequacy makes an average investor
to misjudge the price of the actual security, and
• (5) the plaintiff transacted during the period
between the publishing of the inadequate
information and its correction
Prerequisites
of a
compensation
claim:
LEB Slide Set 13
2
Background: market efficiency
E
F
F
IC
IE
N
C
YC
O
N
C
E
P
T
SO
FT
H
EM
A
R
K
E
T
S
E
fficiencyof the
securities
m
arkets
Inform
ational
efficiency
A
llocative
efficiency
(allocationof
capital)
LEB Slide Set 13
O
perational
efficiency
3
Efficient Capital Markets Hypothesis
ECMH (Fama Journal of Finance 1970)
"Weak"
form
"Semi"Strong"
strong" form form
You cannot
base an
estimate of
future development of a
security price
on its price
formation
history
Market prices
reflect all
information
generally
available to
investor
LEB Slide Set 13
4
Market prices
reflect also
non-public
information
Market Model for Investment Behavior
Price
development
gives all the
information
relevant to an
investor
• appraisal of a share
is not a matter of
economic valuation
of the enterprise or
its assets
LEB Slide Set 13
5
Cf. Information
Theory of
investment
behavior
• investors seek as
much information as
possible and analyze
it as a basis for
investment decisions
-
CAPM, Black – Scholes (1973 Journal of
Political Economy)
Theoretical models with mathematical method
based applications
• Capital-asset pricing model (CAPM)
• See next slide
• Black – Scholes options pricing model
• Right price: not possible to get risk free profits
(arbitrage) by creating investment portfolios
from short / long positions of an option and
corresponding asset (share)
LEB Slide Set 13
6
Capital Asset Pricing Model (CAPM)
,
jossa
= arvopaperin tai sijoituskohteen odotettu tuotto tai tuottovaatimus
= riskitön korkokanta, kuten esimerkiksi Saksan valtionvelkakirjojen korkotuotto
β = beta kerroin, joka kuvaa arvopaperin arvon muutoksen herkkyyttä suhteessa
markkinaportfolioon arvonmuutoksiin
= markkinaportfolion odotettu tuotto tai tuottovaade
LEB Slide Set 13
7
Portfolio theory and damages
•Systematic risk (market risk)
100
90
80
70
60
50
40
30
20
10
0
•portfolio diversification
•entitles to no compensation
•non-systematic risk
• ß -coefficient: relation
between the volatility of a
share and that of the market
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
LEB Slide Set 13
•helps to correct the price
development of the share for
assessing the loss due to info
failures
8
Event Study Based Method of
Calculating Damage
• Based on material from TJ Group Case (KKO
2009:1)
• Market correlations after the the event (rectificaton
of the false information, e.g. profit warning) are
used to calculate backwards from the event.
• Statistical confidence levels are assumed
• Question to solve: how markets would have
behaved if the information had been published
earlier
• More accurate mathematical tools available
Dannenberg –
Turtiainen 2013
European Journal of
Law and Economics
LEB Slide Set 13
9
More Accurate Mathematical Tools vs.
Supreme Court Reasoning
KKO 2009:1: Defining the utility
pursued and produced by
misuse of inside information
often based on such estimations
that the random factors affecting
them cannot be known in
advance and that their influence
on the rate of securities cannot
exactly be known afterwards.
Dannenberg and Turtiainen
(2013): wanton court practices
while damages are estimated
subjectively without
mathematical tools resulting in
too mild verdicts
LEB Slide Set 13
10
A question of
legal safety
and due
process
Damage due to information failure
Damage due to information failure should usually be compensated only
to investors who have traded in securities affected by the information
failure during the duration of the effect of the information failure.
Decision not to invest should in general not be deemed to be a
compensabe loss, nor the effect of the information failure on the price of
other securities of the issuer unless the information failure is a case of
market abuse.
The duration of the effect of an information failure shall in general be
deemed to end when the wrong informaton has been corrected.
LEB Slide Set 13
11
Compensation of Price Difference
According to international practice, compensation of price difference is the way of
defining the loss due to information failures. Other methods of loss definition may
be appropriate when price formation on the market has not been efficient.
Price difference based compensation consists of the difference between the
materialized purchase or selling price of the security and the price of the security
at the trading moment under correct information
It prevents compensation of market risk and uncontrollably large damages
liabilities that would also be speculative with respect to their contents.
The compensation shall be decreased by the amount of the profit that the
information failure has yielded to the injured person in reverse trades
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12
Assessing the amount of a loss
• The “maturity time” (becoming
compensable) of loss
– e.g. breach of redemption
duties (SMA 11:23): the
current price of redemption
time subtracted with actual
current price (possible later
profits have no effect)
LEB Slide Set 13
13
Trial on Securities Markets Loss Cases
The Act on Class
Actions (444/2007) Act
does not apply to a civil
case concerning the
conduct of an issuer of
securities or the offeror
in a takeover bid or
mandatory bid.
LEB Slide Set 13
14
In a criminal case, e.g.
abuse of insider
information, there is no
injured party but the
object of legal protection
is confidence in
securities markets. An
investor has no plaintiff
position in these cases.
(the Finnish Supreme
Court KKO 2000:82, socalled Kansallisanti
[National Issue] case).