Second Circuit Holds that Stock Price Rebound after Disclosure of Fraud Does Not Negate Inference of Economic Loss at Pleading Stage of Securities Fraud Suit

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Introduction

In a case of first impression, the Second Circuit reinstated a putative securities fraud class action that had been dismissed for failure to plead economic loss where the defendant’s stock price rebounded soon after the fraud became known. The court held that price recovery does not negate an inference of economic loss at the pleading stage. Acticon AG v. China N.East Petroleum Holdings Ltd., No. 11-4544-CV, 2012 WL 3104589 (2d Cir. Aug. 1, 2012). The decision is also noteworthy as it comes in one of the numerous “reverse-merger” securities fraud lawsuits that have been brought against U.S.-listed Chinese companies in the past 18 months. Indeed, the district court’s dismissal of plaintiff Acticon’s suit against China North East Petroleum Holdings Limited (“NEP”) was the first dismissal of such claims made against a Chinese company.

Factual Background -

The plaintiffs in Acticon alleged that over a two-year period, NEP misled investors about its reported earnings, the extent of its oil reserves, and its internal controls, and that in the trading days after each of the corrective disclosures NEP issued on those subjects, its stock price dropped. NEP filed a motion to dismiss the complaint, arguing that the plaintiffs had not pled economic loss because NEP’s share price actually rebounded on certain days following the initial price drops to a point where the plaintiffs could have sold their holdings and avoided a loss. Citing Acticon’s failure to sell its NEP shares at a higher price, the district court granted NEP’s motion to dismiss, holding as a matter of law that Acticon did not suffer an economic loss.

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