4.7.3.2 Fraud on the market causation

In cases where the investor claims that he acquired the securities on the basis of an incorrect price induced by the misinformation, the claimant has to prove not only that the information was false or misleading, but also that the information had an influence on the price development of the securities.1 The question arises whether it is sufficient for the claimant to claim and, upon challenge, prove that he paid an incorrect price2 because on the basis of the efficient market hypothesis, it can be assumed that the securities price was influenced by the false or misleading information. The fraud on the market theory answers this question in the affirrnative.3 I will now analyse how French courts have dealt with the issue.

The French Supreme Court's judgment in the Société Générale de Fonderiecase is one of the first4 and important judgments in which this court rules which kinds of losses in misinformation cases have a causal relationship to the publication and distribution of misinformation. In this judgment, the French Supreme Court5 upheld the judgment by the Paris Court of Appeal.6 The Paris Court of Appeal introduced in this case a distinction between two categories of losses caused by the publication of false or misleading information.7 This distinction is a necessary consequence of the required certainty in regard to recoverable losses.

On the one hand, there are losses resulting from the acquisition or sale of securities around the time of publication of the false or misleading information. These losses are directly and with certainty related to the tort committed because the investors were induced to buy the securities by an artificial increase in the share price as a result of the misinformation. On the other hand, there are Tosses related to the conservation of securities acquired before the publication of the false or misleading information and subsequently sold at a Toss due to the fall in the securities price when the misleading nature of the information is revealed. The Paris Court of Appeal ruled that the Jatter category of losses cannot be compensated, because the investor cannot provide the unconditional proof that his decision to keep the securities acquired before the publication of misinformation was directly and with certainty related to the high share price. For these reasons, the necessary causation between the tort committed and the Tosses incurred, cannot be established when the securities are already acquired before the publication of misinformation.8

Furthermore, the Paris Court of Appeal ruled that the losses incurred by the investor as a result of the publication of false or misleading information are the fact that he acquired his securities at a price that is higher than the true value. Consequently, the losses directly caused by the publication of false information are the difference between the share price before and after the publication of false information.9

The claimant, Mr Foulonneau, did not have to give evidence for the fact that he based his investment decision on the misinformation provided. The Paris Court of Appeal rejected the defendants' appeal that there is no direct causation between the dissemination of information by the defendants and the acquisition of the shares by the private parties with the following motivation:

The French Supreme Court rejected the defendants' third and fourth ground for appeal in cassation on the basis of insufficient motivation by reference to the sovereign and discretionary power to appreciate the facts and circumstances of the case when fixing the amount of compensation.

French legal scholars were critical with respect to the distinction made by the Paris Court of Appeal and endorsed by the French Supreme Court in the Société Générale de Fonderie case because it deprives shareholders who, given the favourable development of the company's stock market price, decided to keep their investment while they would have disinvested if they had been provided with correct information by the company.10

In the Landauer case, the Paris District Court accepted as evidence for causation the mere proof that the information was false and misleading and that the publication of the information influenced the price of the securities.11

Furthermore, the Paris Court of Appeal12 affirmed in Landauer that also losses caused by the acquisition of securities in the secondary market, i.e. trading of securities after their issue or initial offer, on the basis of misinformation can be compensated. These losses are also directly and causally related to the publication of false or misleading information. As an example of the abovementioned not so elegant computation of damages, it awarded a lump sum without taking into account the development of the share price.13

Contrary to the French Supreme Court's rule on the distinction between the decision to acquire and the decision to retain the securities after misinformation is revealed, the Paris Court of Appeal in the Sedri case awarded damages for losses incurred as a result of misinformation to investors acquiring securities as well as investors retaining their securities acquired before the publication of the misleading information.14

Concluding, French case-law has not adopted the fraud on the market theory expressly, but the Société Générale de Fonderie case show that the courts are willing to confirm causation between the losses incurred by the investor and the publication of false or misleading information on the basis of mere proof that the share price was influenced by the misinformation.