Livedoor Case
Supreme Court Judgment of September 13, 2011
Toshiba Case
Investors claiming to have acquired Toshiba shares allege:(1) material misstatements regarding improper accounting in securities reports and quarterly reports; (2) false statements in internal control reports to the effect that the internal controls were effective; (3) impairment losses at consolidated subsidiaries.
Olympus Case
Investors who acquired shares in Olympus Corporation sought damages from Olympus, citing false statements including the overstatement of consolidated net assets by approximately ¥50 billion to ¥120 billion in the financial statements submitted by Olympus.
The Seibu Railway Case
This is a leading case in which the Supreme Court, for the first time, ruled on the scope of damages causally related to false statements in securities reports and other documents, based on such false statements.
Summary of the Case
This case concerns claims for approximately JPY 10.8 billion in damages brought by investors who had acquired shares of Livedoor Holdings Co., Ltd. The investors alleged that the company’s annual securities reports contained false statements indicating consolidated ordinary profits of approximately JPY 5 billion, when in fact the company had a consolidated ordinary loss of approximately JPY 300 million.
The false statements in the Livedoor case consisted of (i) improperly recording gains from the sale of Livedoor shares—which were not eligible to be recognized as revenue—as consolidated sales, and (ii) recording fictitious sales to subsidiaries as consolidated sales.
Summary of the Judgment
• This judgment is the first case in which the Supreme Court applied the presumed damages provision of Article 21-2, paragraph 3 of the Financial Instruments and Exchange Act (at the time, paragraph 2).
• The Court held, regarding the meaning of “public disclosure” under Article 21-2, paragraph 3, that although it is clearly insufficient merely to take measures that place the existence of false statements in the securities reports into the public domain, it is not necessary that the true information that should have been stated in the securities reports also be publicly disclosed. It is sufficient that measures are taken with respect to basic facts adequate to reveal the error in the market’s evaluation to the market.
• The Court further held that “damages” under Article 21-2, paragraph 1 include all damages having a reasonable causal relationship with the false statements, just as under general tort principles. Because paragraph 3 is a provision for presuming the amount of damages under paragraph 1, the “damage” referred to in paragraph 3 likewise includes all damages reasonably caused by the false statements and should not be limited to the difference between the actual acquisition price and the hypothetical market price absent the misstatements.
Holdings (Excerpt)
“Public prosecutors possess various investigative powers under the Code of Criminal Procedure with respect to crimes involving false statements in annual securities reports, etc., and by exercising such powers they are able to obtain information correcting the false statements and accurate information that should be stated in the reports. Such information is categorically highly reliable. Accordingly, public prosecutors fall within the category of ‘persons having authority under laws and regulations concerning the business or property of the submitter’ as referred to in Article 21-2, paragraph 3 of the Financial Instruments and Exchange Act.”
“The ‘public disclosure of the fact of false statements, etc.’ under Article 21-2, paragraph 2 (note: now paragraph 3) means that measures have been taken to place the ‘material matters required to be stated concerning the false statements, etc.’ in a state where they can be known by many persons. From the wording, it is clear that it is insufficient merely to publicly disclose the existence of false statements in the securities reports; however, it should not be interpreted as requiring that the true information that ought to have been stated also be disclosed. Otherwise, even where sufficient information revealing the market’s erroneous evaluation has been disclosed and the securities price has fallen sharply, the presumption provision would not apply simply because the full truth was not disclosed, which would inadequately protect investors. Rather, the statute uses ‘public disclosure’ as the benchmark timing for presuming damages because it is ordinarily expected that disclosure by an entity capable of obtaining highly reliable information will reveal the market’s mispricing. Accordingly, it is sufficient that measures are taken with respect to basic facts adequate to reveal the error in the market’s evaluation.”
“Investors who suffer damages due to false statements in securities reports may seek damages under general tort provisions such as Article 709 of the Civil Code. Article 21-2 of the Financial Instruments and Exchange Act is properly understood as a special provision that relaxes the burden of proof from the standpoint of investor protection. Since paragraph 1 places no limitation on the amount recoverable other than the statutory cap calculated pursuant to Article 19, paragraph 1, the ‘damages’ referred to in paragraph 1 should be construed to include all damages having a reasonable causal relationship with the false statements. Because paragraph 2 presumes the amount of damages on the premise of paragraph 1, the ‘damages’ in paragraph 2 likewise include all such causally related damages and should not be limited to acquisition-price differential losses. Furthermore, given that paragraph 5 presupposes paragraph 2, the ‘decline in the value of the securities to be caused by the false statements’ in paragraph 5 should likewise be understood to include all declines reasonably caused by the false statements, not merely the portion corresponding to the acquisition-price differential.”
“Even where an investor conducts multiple transactions in securities issued by a submitter of securities reports containing false statements, it is conceptually possible to regard damages caused by the misstatements as arising with respect to each transaction. Where the correspondence between each acquisition and disposition is specifically identified and the acquisition and disposition prices are concretely alleged and proven, there is no reason to deny calculation by the individual comparison method. However, where such allegations and proof are not made despite multiple acquisitions and dispositions at different prices, it is reasonable to allow the court to calculate the recoverable amount using the aggregate comparison method.”
“Article 21-2 of the Financial Instruments and Exchange Act is a special provision that relaxes the burden of proof for the protection of investors; accordingly, the compensation obligation under that Article has the nature of damages liability based on tort. Therefore, it is appropriate to interpret that the obligation to pay under Article 21-2 of the FIEA becomes due simultaneously with the occurrence of the damages and without requiring any demand for payment.”
