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

2. 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
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3. 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
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4. The Structure of Damages
Legal Aspects of Finance 8

5. The organization of damages
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6. 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
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7. 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)
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8. Securities Markets Features
collectivity
automation
electronic trade
traded objects and the whole environment is electronic: book-entries, book-entry accounts
anonymity
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9. 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.
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10. 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
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11. 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:
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12. 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 ?
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13. 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
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