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Liability of the offering bank for an incorrect prospectus

A bank acting as an agent in a public offering of securities may be liable to investors under the Austrian Capital Market Act for damages caused by an incorrect or inaccurate statement contained in a prospectus, if the bank has grossly negligently not examined the contents of the prospectus. On the other hand, the investor has a statutory duty under general Austrian tort law to use all reasonable means to mitigate the damages incurred.

In a recent decision the Austrian Supreme Court (OGH) held that a bank is grossly negligent if it does not at least spot check the economic data provided by the issuer and it has reason to believe that the information provided might be incorrect. The liability of the bank is based on the reliance of the investor on the incorrect contents of the prospectus when making the investment decision. In that particular case the issue, (whether the data provided in the prospectus, which was misrepresented, had caused the insolvency of the issuer) was considered irrelevant by the Court.

The defendant, an Austrian bank, offered shares to the public on behalf of an Austrian issuer. Although the bank had access to the minutes of a board meeting, during which the unstable economic situation of the company was discussed, it did not even spot check the information received when publishing the prospectus.

The plaintiff, a non-institutional investor, purchased shares of the company relying on the contents of the prospectus, which indicated high growth. Within two years the company went bankrupt and the plaintiff claimed damages against the offering bank.

The Austrian Supreme Court also held that a non-institutional investor does not have to sell shares, once the share price starts to fall, especially if the rate has not fallen below the nominal value in order to meet its statutory obligation to minimize damages. According to the OGH the share price is influenced by a number of factors, which are not based on the performance of the company, such as rumours and the overall market sentiment. It is therefore generally not possible for a non-institutional investor to predict the insolvency of a company on the basis of share price movements, even if the media has reported losses.

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