Interview with ... Maximilian Weiss

Broadly speaking, how are determined the damages suffered by investors in typical cases of breach of financial services conduct rules (i.e. miss-selling, misinformation and other breaches of MiFID rules, suitability, fairness, disclosure, conflict of interest)?

As a general rule, under the principle of the so-called Naturalrestitution the debtor is under the obligation to restore the position that would exist if the circumstance obliging him to pay damages had not occurred. In case of the purchase of a financial product the investor may rescind the contract (alleging that he may not have purchased it, had he not been misinformed). So, in a typical case the investor will be reimbursed while in exchange for this he will return the investment product. Hence, the investor will be compensated for rescissionary damages (Vertragsabschlussschaden). These damages may also include further positions such as taxes paid which the investor would not have paid, had he not purchased the product. So, the damage is not necessarily limited to the price paid for the product. If the investor has already sold the product, he may claim the balance between the purchase price and the sales proceeds.

Broadly speaking, how are determined the damages suffered by investors in market manipulation cases? And how are determined the damages suffered by investors in insider trading cases?

The general rule described above applies in both market manipulation and insider trading cases. Special statutes apply for breaches of ad hoc disclosure obligations under Art. 17 of the Market Abuse Regulation (MAR). In case of a breach of Art. 17 MAR, sections 97 and 98 of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) provide special bases of liability and under these provisions an investor can choose how the damages shall be determined: On the one hand, the investor can claim rescissionary damages as I have explained above. On the other hand, the investor can claim inflation damages, which are also known under the term “out-of-pocket” damages (Kursdifferenzschaden). The damage is the difference between the actual price paid for the stock and the price that the stock would have had, had the market known about the inside information, i.e., the latter is a hypothetical price and the difference between both prices is the inflation of the stock.

Do Courts in your jurisdiction recognize the “efficient market theory”: is the investor entitled to assume that the market value of the share reflects and incorporates the information issued from time to time by the issuer and/or by other parties operating on the market?

While the Federal Court of Justice (Bundesgerichtshof – BGH) explained in its “IKB” landmark judgment (BGH, Order of 13 December 2011, XI ZR 51/10) that under sections 37b, 37c WpHG (which later on, by 3 January 2018, became sections 97, 98 WpHG) that an investor can choose under which formula damages shall be determined, the court did not answer how the inflation damages can be calculated. Among legal scholars the predominant view seems to be that damages are to be calculated by applying an event study analysis. My expectation is that in the future German courts will adopt event studies and insofar also the Efficient Market Hypothesis (EMH) in its semi-strong form. I assume the industry standards in the USA and Canada will also shape the accepted methodology in Germany. In contrast to the use of event studies, I am of the opinion that a fundamental analysis will not be accepted by German courts as it is based on the evaluation of a single analyst and not on the market as a whole.

In your jurisdiction, is there a presumption of a causal link between the misleading statement in the prospectus or financial statement and the investment decision that caused the loss?

It depends on which damage one claims. When it comes to rescission damages, the investor must prove that his decision to purchase the investment product was based on the misinformation, i.e., that he had not purchased the product, had he known about the facts. Whenever an investor can claim for inflation damages, though, the investor only has to prove loss causation, which means that he only has to establish causation between the harmful event and his economic loss.

Which is the point in time relevant to assess whether there has been an increase or a decrease in the stock price resulting from the market manipulation? Do your courts use the so called “90 days look-back price rule”?

The starting point for the calculation of damages is the point of time when the truth is disclosed. Around such dates event studies are to be conducted. The 90-day-look-back rule is a tool to limit damages under US law, but not suitable to calculate damages in Germany. It does not play a role in Germany and I am convinced that it will not be adopted to limit damages under German law.

Maximillian Weis

TILP Litigation Rechtsanwaltsgesellschaft mbH

c/o TILP Rechtsanwaltsgesellschaft mbH

Fachanwälte für Bank- und Kapitalmarktrecht

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