Interview with ... William Schonewille
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)? Rules on financial service conduct (duty of care) in the Netherlands are codified in a separate law (Wet op het financieel toezicht (Wft)) and are to some extend also contained within the principle of reasonableness and fairness. A breach of financial services conduct rules results in an obligation to pay damages. The legal basis of such an obligation can be tort and/or a breach of contract. It is up to the parties to assert and substantiate the amount of damages incurred. The court has the discretion to determine the damage within the range of what parties have asserted. The damages suffered are, in principle, determined by looking at a hypothetical situation in which the conduct leading to liability has not occurred and, subsequently, establishing the harm that the investor suffered (for which a causal link is required). The court can determine the client's actual position on the basis of periodic asset statements. To determine the hypothetical position in which the client would have been without the violation, the court can look at the results of a model portfolio or a hypothetical frame of reference. If it is impossible for the judge to determine the true damage, he has the discretion to make an estimation. The financial service provider can subsequently claim that, if indeed he was found liable, the damage suffered was (partially) the result of a fault of the claimant (the ‘own fault defense’). A judge can subsequently determine that a certain percentage of the damage cannot be claimed by the investor due to his own fault. This could for instance happen in cases where the investor is reasonably professional yet did not do sufficient research himself. The financial service provider can also ask to lower the amount of damages awarded on grounds of reasonableness and fairness. In addition to claiming damages, it is common for investors in the Netherlands to claim that the breach of financial services conduct rules (such as miss-selling and providing misinformation) also resulted in a defect in the investor’s consent to purchase the legal service or product. The investor subsequently can attempt to void the underlying agreement and claim full reimbursement of the service/product fee, as well as compensation for any harm caused by the execution of (what turned out to be a void) agreement.
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? Dutch law does not provide for specific codified rules on the determination of damages suffered by investors due to market manipulation or insider trading. Here too, the following general rule applies. It is up to the parties to assert and substantiate the amount of damages incurred. The court has discretion to determine the damage within the range of what parties have asserted. The damages suffered are, in principle, determined by looking at a hypothetical situation in which the manipulation has not occurred and, subsequently, establishing the harm that the investor suffered as a result of the manipulation (for which a causal link is required). In case of market deception and manipulation, the facts put forward by an investor to demonstrate that the price was affected (an ‘event study’) also serve to substantiate the magnitude of the impurity in the stock price. In abstract cases such as this (where a hypothetical price line has to be reconstructed) many uncertainties may arise. The court would most likely make good use of its discretion to estimate the damages (i.e. the impurity in the stock price).
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? Efficient market theory, while discussed in Dutch academia, is not recognized as a principle (with a fixed meaning) within Dutch case law. In practice however, the efficient market theory is often being used as a presumption, as a result whereof the burden of prove of the existence (or non-existence) of such a market under the circumstances of that individual case is eased or even shifting from the investor to the defendant.
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? Yes. In principle, the investor bears the the burden of proof with regard to this causal link. The Supreme Court has considered in its World Online decision that evidence to be problematic, however, because an investor will generally be guided by a multitude of factors when making an investment decision, while it is often not possible to demonstrate that he has actually taken note of the misleading statement, let alone that he has actually been misleading communication has been affected. The Supreme Court considered that influence may also have taken place indirectly, because the investor relied on advice or prevailing opinions in the market, which in turn were created by the misleading statement. The evidence problems regarding the causal link as a result of these factors mean that the protection of investors may become illusory in practice. In view of effective legal protection and in view of the protection of (potential) investors against misleading statements in the prospectus as intended by the prospectus regulations, the Supreme Court has taken the view the starting point should be that a causal link exists between the misleading statement and the investment decision. This therefore means that, in principle, according to the Supreme Court, it would have to be assumed that, if there had been no deception, the investor would not - or in case of purchase on the secondary market: either or not under the same conditions - purchase the securities. However, the judge may, in response to the arguments put forward reciprocally (whereby the truthfulness of the facts alleged, if necessary, be substantiated by the most diligent party), and also taking into account the nature of the misleading statement(s) in question and the further information available concludes that the aforementioned starting point does not hold in the specific case. This will be the case, for example, if it is plausible that the investment decision was taken before the relevant misleading statement was made public. In general, a professional investor may, in view of his knowledge of and experience with (analyzing) the available information and the relevant market, be more likely than a private investor to conclude that, despite the misleading information in the prospectus, as a result of which it was not actually influenced in his investment decision.
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? In determining the price deviation caused by market manipulation, the Dutch courts consider on a case-by- case basis the period within which the stock price - after the date on which the actual situation of the company became known – has corrected itself from the overreaction caused by the manipulation.
Do your courts use the so called “90 days look-back price rule”? No. In Dutch literature the 90 days look-back price rule is considered to be a rather rigorous provision, which does (too) little justice to the fact that the course can also recover for reasons not related to deception.The Dutch court, informed by the parties and, if necessary, by an expert, will therefore probably consider on a case- by-case basis the extent to which the price development after the date on which the actual situation of the company became known should be regarded as a correction of an overreaction.
William (W.M.) Schonewille LL.M. MiF