5.8 Burden of proof

When the investor makes a claim against the issuer and/or lead manager and/or the other sponsoring banks for damages on the basis of section 44 of the Stock Exchange Act, the defendant can rebut by claiming and, upon challenge, proving that the claimant did not acquire the securities on the basis of the prospectus because he did not read the prospectus.1 In fact, section 45(2)(1) of the Stock Exchange Act creates a presumption of liability constituting causation to the benefit of the investor claiming damages.2 Section 44 contains a presumption that the investor who acquired the securities within six months after the publication of the prospectus, made his investment decision on the basis of an investment market sentiment.3 As a result, he does not have to prove that he actually read the prospectus in order to establish causation.

Prior to the adoption of the Third Financial Market Advancement Act,4 the burden of proof for causation between the prospectus and the acquisition of the securities was imposed on the investor who claimed damages. The investor had to prove that he actually read the prospectus and then decided on the basis of this information to acquire the securities on offer. In order to alleviate the claimant's burden of proof, the German courts developed the concept of investment market sentiment. The basis of this concept is the assumption that experienced investors and analysts read the prospectus carefully, and on the basis of this reading and analysis make public statements recommending the investing public to acquire the securities on offer. The German courts established a presumption that the individual non-professional investor made his decision to invest in the securities due to the positive investment market sentiment, irrespective of whether the individual investor actually read the prospectus.5

In the Securenta case, the German Federal Court of Justice ruled in regard to a general private law prospectus liability claim. Despite the fact that the investor had no knowledge of the contents of the prospectus, the court held that it is sufficient to establish liability constituting causation, if the prospectus is the basis (Arbeitsgrundlage) for the issuer 's agent when marketing the securities. The German Federal Court of Justice ruled that: 'a misleading prospectus is also a cause for the investment decision, if the prospectus is used in accordance with the marketing strategy of the investment adviser (or the investment firm) to base his advice on the prospectus contents. In this situation, it is not of any importance whether the prospectus has been handed over to the client'.6 Whereas in the notion of investment market sentiment the professional investors, who based their investment decision on the prospectus, serve as interlink to establish constituting causation, in the Securenta case, it seems that the experienced agent of the issuer may serve this purpose as well.

However, it is noteworthy that the concept of investment market sentiment is not applied in all cases of corporate misinformation. In the Infomatec cases, the Federal Court of Justice's ruled that, in principle, the claimant bears the burden to prove reliance on the misinformation in the ad hoc announcement. The lower courts had established that the claimants acquiring Infomatec shares many months after the announcement failed to present evidence for reliance. Furthermore, the Federal Court of Justice ruled that in case of ad hoc announcements, claimants do not benefit from a presumption of reliance based on prima facie evidence (Anscheinsbeweis);7 the claimants have to prove actual reliance. The reason for the court to reject such a presumption is the fact that investment decisions in cases of ad hoc announcements are barely predictable and based on a variety of factors such that life experience does not indicate the likelihood of a typical causal connection as required for prima facie evidence.8 However, the Supreme Court did not entirely deny the possibility that investors can rely on the notion of investment market sentiment to prove causation in cases of false ad hoc announcements. However, it indicated that an important difference between prospectus liability cases where the notion of investment market sentiment is applied to construct a presumption of reliance, and the present liability cases is that ad hoc announcements are not intended to give information about all the facts relevant to making an investment decision.

The concept of investment market sentiment has to be distinguished from the fraud on the market doctrine adopted by the US courts with respect to federal securities law.9 Both doctrines have in common the acceptance that the investor does not need to have actual knowledge of the incorrect information in the prospectus. The difference is that the acceptance of investment market sentiment is based on the fact that experienced professionals actually did read the misleading prospectus, whereas the fraud on the market doctrine is based on the theoretical assumption that market prices are always efficient. In an efficient market, all publicly available information with respect to the issuer and its securities is absorbed by, and reflected in, the securities price at any moment in time. The investor may therefore rely on the effectiveness of the capital market. Since there is no efficient market market at an IPO, because the securities price has never been established by market forces, the fraud on the market doctrine cannot be applied to alleviate the investor's burden of proof in prospectus liability cases in regard to securities which were not listed until the IPO.10 The concept of investment market sentiment does not presuppose an efficient market, and therefore it can be used to help the investor 'prove' his claim that he sustained losses as a result of the misleading information in the prospectus used at the IPO.11

The exact scope of the presumption laid down in section 45(2)(1) of the Stock Exchange Act has not yet been clarified by the German courts. In German legal literature, there is a debate whether the presumption to be regarded as a statutory presumption within the meaning of section 292 of the German Civil Procedure Code. Hopt adheres to the view that section 45(2)(1) of the Stock Exchange Act is such a statutory presumption.12 As a consequence, the issuer has to prove that the claimant did not acquire the securities on the basis of the prospectus, i.e. that he had no knowledge of the prospectus contents. It would be almost impossible to provide evidence for that claim. However, the majority of German scholars hold the opinion that section 45(2) (1) of the Stock Exchange Act should be interpreted differently.13 In their view, the purpose of this provision is to give a statutory basis for the concept of investment market sentiment. Therefore, the presumption can be rebutted by the defendant if he can give factual evidence that the investment market sentiment ceased to exist before the acquisition of the securities by the investor. Investors can claim damages on the basis of section 44 of the Stock Exchange Act, if they acquired the securities within a period of six months after publication of the prospectus. The time limitation of six months is not to be interpreted that during that timeframe investment market sentiment is always present, but rather as a statutory maximum with respect to the presence of investment market sentiment.14 The investment market sentiment can cease to exist in the meantime.15 According to the German Federal Court of Justice, the investment market sentiment ceases as soon as other factors to assess the securities become determinant.16

The following factors have been accepted by German courts as breaking the chain of investment market sentiment:

It is irrelevant to consider whether the investor had actual knowledge of the facts that caused the cessation of the investment market sentiment, because the investment market sentiment is an objective phenomenon.20 The investor benefits from the objective assumption of investment market sentiment, and he should also bear its consequences when it objectively ceases to exist. There is no minimum requirement concerning the length of the period of investment market sentiment. The German Federal Court of Justice considered the possibility that the investment market sentiment induced by a prospectus published in November of a given year could have ceased already on 15 December of that same year, the moment at which the claimant acquired the securities.21

With respect to liability completing causation, section 45(2) of the Stock Exchange Act provides a second presumption to the benefit of the claimant. Subparagraph 2 establishes the presumption that the facts that were falsely or incompletely mentioned in the prospectus contribute to the reduction in the securities price. It is sufficient that the false or incomplete information was one of a range of factors that caused the fall in the securities price. However, the defendant can rebut by claiming and, upon challenge, proving that only circumstances other than the public knowledge of the incorrectness or incompleteness of the information provided in the prospectus caused the fall in the securities price.22It is almost impossible for the defendant to provide such evidence.

The German legislator provide in the Explanatory Note to the Third Financial Market Advancement Act, the extraordinary example of an investor acquiring shares at a significantly reduced stock price after the insolvency of the issuer has become publicly known.23 Furthermore, German legal scholars provide the examples of a general fall in the stock market prices (allgemeine Marktentwicklung) or circumstances specific to this particular issuer, for example, a down rating.24 The difficulty is that in a market as volatile as the securities market, there is almost no situation where information does not have an effect on the securities price at all.25