Establishing Causation in civil liability lawsuits derived from violation of the securities market disclosure requirements (with a comparative study of US and French law)

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.  Causation between the harmful act and the loss is one of the main elements of civil liability, and compensation of investors’ losses is subject to causal relationship between the breach of the securities disclosure requirements and the loss suffered. However, there are numerous factors affecting investor decision making and the price of securities and it is not possible to determine what part of the price change is due to the violation of these requirements. This is the main reason that in Iranian Law Article 43 of the Securities Market Act (in relation to the primary market) has not been enforced until now, and in practice, despite widespread violations of disclosure requirements in recent years, the losses derived from violating of these requirements has not been compensated. Therefore, this article will examine the comparative approach to the question of what strategies are available to facilitate establishment of causation in civil liability cases for violation of the legal requirements regarding information disclosure. In summary, it seems likely to be helpful in these lawsuits providing a judicial or legal presumption about the causation between securities price differences over a specific period of time and violation of the disclosure requirements.

Theoretical framework:

given the specific characteristics of the securities markets (where there is a risk and probability with a significant role, and always a degree of uncertainty), and the particular conditions for 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 ways for establishing a causal connection between violation of the disclosure requirements and the loss of investors.

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 the legal ways for establishing a causal connection between violation of the disclosure requirements and the loss of investors.

The application of civil liability rules in these cases is faced with legal barriers, mainly due to the difficulty of proving the causation between violation of the disclosure requirements and the loss of investors. 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 in these cases.

Conclusions & Suggestions:

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. 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.In contrast, in Iranian law despite French law, it does not seem possible to apply the theory of loss of opportunity in these cases. This is because the theory of loss of opportunity in Iranian law is a nascent theory and has not yet been accepted by the legislature or the judiciary. So the acceptance of a particular interpretation of this theory in civil liability claims for breaches of information disclosure requirements based on the loss of an abstract opportunity seems far-fetched in Iranian law. In particular, the application of this theory to the disputed claims in French law itself has been severely criticized in various respects, such as its inconsistency with the principle of full compensation.