Dismissal Motion Practice After
Acticon A.G. v. China N.E. Petroleum Holdings Ltd.
In Acticon A.G. v. China North East Petroleum Holdings Limited, (“Acticon”)1 the Second Circuit clarified several issues regarding the pleading of loss causation and application of the second investment rule defense in Rule 10b-5 class suits. The precise issue, as framed by the Second Circuit, was “whether the fact that a stock’s share price recovered soon after the fraud became known defeats an inference of economic loss.”2 It ruled that price recovery does not defeat an inference of economic loss:
[A] share of stock that has regained its value after a period of decline is not functionally equivalent to an inflated share that has never lost value. . . . [I]t is improper to offset gains that the plaintiff recovers after the fraud becomes known against losses caused by the revelation of the fraud if the stock recovers for completely unrelated reasons. Such a holding would place the plaintiff in a worse position [sic][than] he would have been absent the fraud.
The Second Circuit concluded an offset rule, such as the one it rejected, would deprive an investor of the benefits of a “second investment decision” to refrain from selling a security, notwithstanding a corrective disclosure of fraud, and the opportunity to make a determination as to whether to continue holding that investment, based on its non-fraudulent, remaining merits:
In the absence of fraud, the plaintiff would have purchased the security at an uninflated price and would have also benefitted from the unrelated gain in stock price. If we credit an unrelated gain against the plaintiff’s recovery for the inflated purchase price, he has not been brought to the same position as a plaintiff who was not defrauded because he does not have the opportunity to profit (or suffer losses) from “a second investment decision unrelated to his initial decision to purchase the stock. Read full article.