Second Circuit remands case over alleged securities fraud

Jessica M. Karmasek Aug. 7, 2012, 4:00pm

NEW YORK (Legal Newsline) - A federal appeals court last week remanded a case against a petroleum company over alleged securities fraud.

In its Aug. 1 ruling, the U.S. Court of Appeals for the Second Circuit overturned an October 2011 order by the U.S. District Court for the Southern District of New York.

The district court had granted a motion to dismiss by defendant China North East Petroleum Holdings Limited, or NEP, for failure to plead economic loss.

Plaintiff Acticon AG -- the lead plaintiff in the consolidated putative class action -- alleges that NEP misled investors about its reported earnings, oil reserves and internal controls.

In particular, it alleges that NEP revealed this information through a series of corrective disclosures and that in the trading days after each disclosure was made, NEP's stock price dropped.

In response, NEP argues that the allegations are not sufficient to allege economic loss because its share price rebounded on certain days after the final disclosure to the point that Acticon could have sold its holdings and avoided a loss.

The Second Circuit disagreed, and vacated the district court's ruling.

"We hold that the fact that the price of the stock recovered soon after the price dropped does not negate an inference of economic loss and loss causation at the pleading stage," Judge Chester J. Straub wrote in the court's 12-page opinion.

Straub explained further.

"At this stage in the litigation, we do not know whether the price rebounds represent the market's reactions to the disclosure of the alleged fraud or whether they represent unrelated gains," the judge wrote.

"We thus do not know whether it is proper to offset the price recovery against Acticon's losses in determining Acticon's economic loss."

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