Legal analysis of recoverable damages resulting from market manipulation and their calculation methods with a comparative study of the American and Iranian legal systems
Quarterly Journal of Securities Exchange

Quarterly Journal of Securities Exchange

Legal analysis of recoverable damages resulting from market manipulation and their calculation methods with a comparative study of the American and Iranian legal systems

Document Type : Original Article

Authors
1 PhD Student, Department of Private Law, Faculty of Law, Tarbiat Modares University
2 Professor, Faculty of Law,Tarbiat Modares University
3 Associated Professor in Private Law, Faculty of Law, Tarbiat Modares University
Abstract
Although compensation for losses resulting from securities fraud, including market manipulation, has received the attention of legislators and courts in the US and Iranian legal systems, it has always faced challenges. The difficulty of establishing a causal relationship between the harmful act and the damage suffered and determining the appropriate method of calculating the amount of recoverable damages has led the American legislator and courts to take the initiative and establish specific rules for this area. In this article, the challenges of civil liability resulting from capital market manipulation have been examined through a comparative study and an analytical-descriptive method and it has been concluded that it is possible to adopt the American legal system in the field of separating transaction causation from loss causation in establishing the causal relationship between market manipulation and the loss incurred and to choose the "Out of Pocket" method in calculating the amount of recoverable damage, taking into account the standards of the Iranian legal system. However, the assumption of a causal relationship based on the "Fraud on the Market" theory, especially considering "Market Efficiency" as the basis of the aforementioned theory, is not consistent with the legal system governing the Iranian capital market and cannot be applied in claims for damages resulting from market manipulation.
Keywords
Subjects

Ahmadzadeh, A; Yavari, K; Isaee Tafreshi, M; Salehabadi, A. (2014). An Analysis on Methods of Market Efficiency Evaluation in Iran . jemr, 5 (17), 1-28. (in Persian) (doi: 20.1001.1.22286454.1393.5.17.6.0)
Alkhamees, A. (2012). Private action as a remedy against market manipulation in the USA. Journal of Financial Regulation and Compliance, 20(1), 41-55. (https://doi.org/10.1108/13581981211199416)
Amini, M; IssaeiTafreshi, M. and Shahbazinia, M. (2015). Securities Market Manipulation, Concepts, Basics and Methods (A Comparative Study in Iranian and U.S. Law). Comparative Law Researches, 19(1), 1-26. (in Persian)
Azzutti, A; Ringe, W. G; & Stiehl, H. S. (2021). Machine learning, market manipulation, and collusion on capital markets: Why the" black box" matters. U. Pa. J. Int'l L; 43, 79-135. (https://scholarship.law.upenn.edu/jil/vol43/iss1/2)
Banerjee, A; & Roy, P. (2023). High-frequency traders’ evolving role as market makers. Pacific-Basin Finance Journal, 82, 102184. (https://doi.org/10.1016/j.pacfin.2023.102184)
Booth, R. A. (2020). OOPs! The Inherent Ambiguity of Out-of-Pocket Damages in Securities Fraud Class Actions. J. Corp. L; 46, 319-343. (http://dx.doi.org/10.2139/ssrn.3558216)
Booth, R. A. (2021). Deconstructing Scienter. Va. L. & Bus. Rev; 16, 1. (http://dx.doi.org/10.2139/ssrn.3826619)
Bridegan, T; & Moussa, D. (2016). US v. Sarao: The flash crash and a new effort to prosecute market manipulation and deceptive trading practices. Geo. L. Tech. Rev; 1, 396-400.
(https://georgetownlawtechreview.org/wp-content/uploads/2017/04/Bridegan-Moussa-1-GEO.-L.-TECH.-REV.-396.pdf)
Bromberg, A.R. and Lowenfels, L.D; (2010). Bromberg and Lowenfels on Securities Fraud and Commodities Fraud, Second edition, West Pub. Co.
Brown, N. D. (2011). The rise of high frequency trading: the role algorithms, and the lack of regulations, play in today's stock market. Appalachian JL, 11, 209. (https://heinonline.org/HOL/LandingPage?handle=hein.journals/appalwj11&div=13&id=&page=)
Burch, E. C. (2006). Reassessing damages in securities fraud class actions. Md. L. Rev; 66, 348. (https://digitalcommons.law.uga.edu/fac_artchop/753)
Chaffee, E. C. (2008). Standing under Section 10 (b) and Rule 10b-5: The Continued Validity of the Focused Seller Exception to the Purchaser-Seller Requirement. U. Pa. J. Bus. L; 11, 843. (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1397566)
De Villiers, M. (2021). Rule 10b-5 Meets Wagon Mound: A New Perspective on Loss Causation. Minn. JL Sci. & Tech; 23, 447.
(https://scholarship.law.umn.edu/mjlst/vol23/iss2/2)
De Villiers, M. (2023). Loss Causation Decoded. S. Cal. Interdisc. LJ, 33, 99. (http://dx.doi.org/10.2139/ssrn.4565413)
Donelson, D. C; & Prentice, R. A. (2012). Scienter pleading and rule 10b-5: Empirical analysis and behavioral implications. Case W. Res. L. Rev; 63, 441. (https://scholarlycommons.law.case.edu/caselrev/vol63/iss2/8)
Dunbar, F. C; & Mayer, M. K. (2006). Dura and the New Vocabulary of Litigation Under Rule 10b-5. Working paper, NERA.
Erdlen, A. M. (2011). Timing is everything: Markets, loss, and proof of causation in fraud on the market actions. Fordham L. Rev; 80, 877. (https://ir.lawnet.fordham.edu/flr/vol80/iss2/15)
Fama, E. F. (1970). Efficient capital markets. Journal of finance, 25(2), 383-417. (https://doi.org/10.1111/j.1540-6261.1970.tb00518.x)
Ferrell, A. (2022). Hidden History of Securities Damages. The University of Chicago Business Law Review, 1(1), 4.
(https://chicagounbound.uchicago.edu/ucblr/vol1/iss1/4)
Fletcher, G. G. S. (2020). Macroeconomic consequences of market manipulation. Law & Contemp. Probs; 83, 123.
(https://scholarship.law.duke.edu/lcp/vol83/iss1/8)
Fox, M. B. (2005). Demystifying causation in fraud-on-the-market actions. The Business Lawyer, 507-532.
(https://scholarship.law.columbia.edu/faculty_scholarship/4186)
Fox, M. B; Glosten, L. R; & Rauterberg, G. V. (2018). Stock market manipulation and its regulation. Yale J. on Reg; 35, 67.
      (https://scholarship.law.columbia.edu/faculty_scholarship/4464)
Ghafari Farsani, B. (2019), Competition Law and Its Civil remedies, Tehran, Mizan Publishing. (in Persian)
Gillis, R. (2022). The Extraterritorial Reach of Section 10 (b): A Wolf Hunt off Wall Street. Emory LJ, 72, 437.
(https://scholarlycommons.law.emory.edu/elj/vol72/iss2/4)
Grundfest, J. A. (2013). Damages and Reliance under Section 10 (b) of the Exchange Act. Bus. Law; 69, 307.
(https://law.stanford.edu/wp-content/uploads/2015/06/Damages-and-Reliance-under-Section-10b-of-the-Exchange-Act.pdf)
Hosseini Ameli, S. M. J; (1419 AH), Miftah al-Karama fi Sharh Qawiad al-‘alamah, Volume 14, Qom: Islamic Publications Office. (In Arabic)
Jourdain, P; (2006), Les principes de la responsabilité civile, Translator: Majid Adib, Tehran: Mizan Publications. (In Persian)
Jovanovic, F; Andreadakis, S; & Schinckus, C. (2016). Efficient market hypothesis and fraud on the market theory a new perspective for class actions. Research in International Business and Finance, 38, 177-190. (https://doi.org/10.1016/j.ribaf.2016.04.003)
Karki, Sh. (mohagheghe sani), (1408 AH), Jami al-Maqasid fi Sharh al-Qasas, Volume 4, Qom, Al-Bayt Institute. (in arabic)
Katouzian, N. (1400), General Rules of Contracts, Volume 5, Tehran, Ganj Danesh. (in Persian)
Katouzian, N. (2019), Non-contractual obligations; Civil liability, Volume 1, Tehran, Ganj Danesh Publications. (in Persian)
Kitson, M. A. (2012). Controversial Orthodoxy: The Efficient Capital Markets Hypothesis and Loss Causation. Fordham J. Corp. & Fin. L; 18, 191. (https://ir.lawnet.fordham.edu/jcfl/vol18/iss1/7)
Korsmo, C. R. (2010). Mismatch: The Misuse of Market Efficiency in Market Manipulation Class Actions. Wm. & Mary L. Rev; 52, 1111.
(https://scholarship.law.wm.edu/wmlr/vol52/iss4/3)
Korsmo, C. R. (2014). Market Efficiency and Fraud on the Market: The Danger of Halliburton. Lewis & Clark L. Rev; 18, 827.
(https://scholarlycommons.law.case.edu/faculty_publications/1685)
Langevoort, D. C. (2009). Basic at twenty: rethinking fraud on the market. Wis. L. Rev; 151. (http://dx.doi.org/10.2139/ssrn.1026316)
Leder, M. (2023). Gaming The System: Why Courts Should Apply the Intent-Based Approach to Open-Market Manipulation Claims Under Rule 10b–5. (https://kb.osu.edu/server/api/core/bitstreams/58494dc7-8b81-4546-9f69-079d005ebf22/content)
Lee hazeN, T. (2020). The Law of Securities Regulation, 8th ed; West publishing Company.
Lightbourne, J. (2017). Algorithms & fiduciaries: existing and proposed regulatory approaches to artificially intelligent financial planners. Duke LJ, 67, 651. (https://scholarship.law.duke.edu/dlj/vol67/iss3/4)
Madigan, J. (2023). Reconsidering Scienter with Social Media: Adapting Rule 10b-5 in the Age of Elon Musk Tweets. Brook. J. Corp. Fin. & Com. L; 18, 787. (https://brooklynworks.brooklaw.edu/bjcfcl/vol18/iss2/10)
Min-woo, K. (2022). Theories of Causal Nexus in Rule 10b-5 Claims: A Critical Reassessment. Law and Business, 2(1), 5-19. (DOI:10.2478/law-2022-0002)
Mobayen, H. (2016), Civil liability of Market Manipulation In the Stock Exchange, Journal of Securities and Exchange, 9 (37), 107-134. (in Persian) (doi: 10.22034/jse.2016.11084)
Moos, D. (2004). Pleading Around the Private Securities Litigation Reform Act: Reevaluating the Pleading Requirements for Market Manipulation Claims. S. Cal. L. Rev; 78, 763. (https://southerncalifornialawreview.com/wp-content/uploads/2018/01/78_763.pdf)
Najafi, Sh; (1983), Javaher al-Kalam fi Sharh Shar'e al-Islam, Volume 23, Beirut: Dar al-Hayya Tarath al-Arabi. (in arabic)
Nielsen, P; Prowse, S. (2008). SECURITIES LITIGATION; Dura’s Impact on Damages, The Corporate and Securities Law Advisor, 22.
(https://www.wsgr.com/PDFSearch/nielsen0708.pdf)
Pappavaselio, C. (2023). Back to Basics in Securities Fraud Class Actions: The Case for Rewinding the Basic Presumption. Berkeley Bus. LJ, 20, 316.
Park, J. J. (2010). Rule 10B-5 and the rise of the unjust enrichment principle. Duke LJ, 60, 345. (https://scholarship.law.duke.edu/dlj/vol60/iss2/2)
Paul, K. J. (2021). Playing the Game: Hedge Funds, Brokerage Firms, and Social Media Influencers in the Context of SEC Rule 10B-5 Market Manipulation. Ohio St. Bus. LJ, 16, 37.
(https://heinonline.org/HOL/LandingPage?handle=hein.journals/eblwj16&div=6&id=&page=)
Piri, F. (2021). Law of exchange and securities. Tehran: Jangal publicatios. (in Persian)
Rapp, R. N. (2023). Plausible Cause: Exploring the Limits of Loss Causation In Pleading and Proving Market Fraud Claims Under Securities Exchange Act § 10 (b) and SEC Rule 10b-5. Ohio Northern University Law Review, 41(2), 4. (https://digitalcommons.onu.edu/onu_law_review/vol41/iss2/4)
Safaei, S. H; Rahimi, H. (2014), Civil Liability (Non-Contractual Obligations), Tehran: Samt Publications. (in Persian)
Scopino, G. (2015). Do automated trading systems dream of manipulating the price of futures contracts-policing markets for improper trading practices by algorithmic robots. Fla. L. Rev; 67, 221.
(https://scholarship.law.ufl.edu/flr/vol67/iss1/5)
Sergakis, K. (2018). The law of capital markets in the EU: disclosure and enforcement. Bloomsbury Publishing.
Shabani, M. S. (2024), The Basics of Civil Liability of Insider Trading in Capital Market, Journal of Securities and Exchange, 67, 1-24. (in Persian)
Shamsollahi, M. (2019), law of securities, Tehran: Mizan Publications. (in Persian)
Shamsollahi, M. (2021). Establishing Causation in civil liability lawsuits derived from violation of the securities market disclosure requirements (with a comparative study of US and French law). Encyclopedia of Economic Law Journal, 27(18), 165-202. (in Persian) (doi: 10.22067/lowecon.2021.48042.0)
Silverman, M. (2010). Fraud created the market: presuming reliance in Rule 10b-5 primary securities market fraud litigation. Fordham L. Rev; 79, 1787. (https://ir.lawnet.fordham.edu/flr/vol79/iss4/10)
Söderström, R. (2011). Regulating Market Manipulation: An Approach to designing Regulatory Principles. Juridiska fakulteten, Uppsala universitet.
Steckman, L. A; Conner, R. E; & Taylor, K. S. (2014). Loss Causation, Economic Loss Rules and Offset Defenses-Dismissal Motion Practice after Acticon AG v. China North East Petroleum Holdings Ltd. Touro L. Rev; 31, 501. (https://digitalcommons.tourolaw.edu/lawreview/vol31/iss3/14)
Steinberg, M. I; (2018). Understanding securities law, 7th ed; Carolina Academic Press
Thompson, R. B. (1984). Measure of Recovery under Rule 10b-5: A Restitution Alternative to Tort Damages, The. Vand. L. Rev; 37, 349.
(https://scholarship.law.vanderbilt.edu/vlr/vol37/iss2/4)
Wang, W. K. (2009). Measuring Insider Trading Damages for a Private Plaintiff. UC Davis Bus. LJ, 10.
(https://blj.ucdavis.edu/archives/10/1/measuring-insider-trading-damages-private-plaintiff)
Willey, D. P. (2015). Misplaced Reliance: Rethinking Rule 10B-5 and the Casual Connection. BUL Rev; 95, 651.
(https://www.bu.edu/bulawreview/files/2015/03/WILLEY.pdf)
Yadav, Y. (2016). The failure of liability in modern markets. Va. L. Rev; 102, 1031.
(https://www.virginialawreview.org/wp-content/uploads/2020/12/Yadav_Online.pdf).