Legal and economic analysis of civil liability for violation of legal disclosure requirements in the securities market

Non-compliance with the disclosure requirements in the securities market incurs losses to investors such as the denial of informed decision making and stock trading at artificial (inflationary) prices. In different legal systems, for compensating these losses civil liability is anticipated for issuers and their directors. Legally, it is questionable that with regard to the specific features of securities markets, basically, how can civil liability rules be applied for compensating the losses derived from non-compliance with these requirements? Economically, considering that for economic justifying civil liability there must be a specific function for civil liability, it is questionable that what is the main function of civil liability? In short, it seems that the application of civil liability rules in these cases is faced with serious legal barriers, which requires a special mechanism (such as causation presumption) for compensating these losses. Also the main purpose of civil liability in these cases is compensating the damages that have been reached to investors unduly.

the specific characteristics of the securities markets given (where there is a risk and probability with a significant role, and always a degree of uncertainty), and the particular conditions for realization Civil liability (such as the need for a certain loss and the need to establish a certain causal link between the harmful act and the harm), the possibility of applying civil liability rules for compensating the damages caused by the violation of disclosure requirements is Doubtful. In this article we want to examine the legal possibility and economic efficiency of civil liability in these actions.  
 

The research methodology of this paper is an analytical method and the subject will be studied comparatively (both in French and US law) in order to discover a logical relationship between securities law and tort law and how we can recover investors’ losses derived from non-compliance with these requirements. We will use simultaneously economic and legal analysis in order to investigate this matter.
 

The application of civil liability rules in these cases is faced with legal barriers, mainly due to the difficulty of proving certainty of losses, the collectivity of the securities market and privac of contract in secondary market transactions. In fact, what is related to civil liability is that failure to comply with information disclosure requirements has led to a loss to the investor, and in cases where the investor has suffered losses from adverse market conditions, this loss will not be recoverable. So, the main problem with civil liability is that it can’t be determined how much the damage inflicted on the investor results from a breach of the disclosure requirements and how much of this loss derives from the venture risk. This will be a serious obstacle to obtaining a causal relationship as well as the certainty of a compensable loss in these cases. The other problem is primary market, the issuer himself is a contract party, in the secondary market he is not a party of the contract. Being issuer a third party in the secondary market transactions may effect on civil liability arising from Non-compliance with the disclosure requirements.Also, from economic perspective the efficiency of compensatory and dissuasive function of civil liability in these cases is frequently questioned. It is said that issuer’s liability in these cases will result in circularity, because of the relative overlap between the wrongdoer and the victim. But the circularity is partial and relative, and regarding the independence of the legal personality of the company from shareholders, there is no logical objection to this case. Another objection raised in order to undermine the compensatory and dissuasive function in function of civil liability in these cases is that the imposition of a final liability on a shareholder who has committed no breach of the disclosure requirements is not fair. While there is no reason to impose liability on investors that are as innocent as plaintiff. However Shareholders who have the power of electing and changing managers should not considered as innocent.

For resolving legal problems against civil liability derived from violation of legal disclosure requirements in the securities market, it is necessary to anticipate certain mechanisms such as establishing the presumption of a causal relationship, to facilitate compensation of these losses. So, concerning the establishment of a causal relationship and a certain loss I will propose a presumption upon which in the event of a breach of the legal requirements of the disclosure of information, all price changes that occur on the date of disclosure of incorrect information are caused by false information.The objections raised by the advocates of economic analysis of law about the compensatory function of civil liability in the cases are not admissible, and the main purpose of civil liability in these cases can be to compensate the investors.