Loss Causation, Economic Loss Rules and Offset Defenses:

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. 

Market-Based Prediction Models as an Aid to Litigation Strategy and Settlement Negotiations

In his recent book, “Litigation is War,” Frederick L. Whitmer suggests effective advocacy in litigation mirrors many tactics common in strategic military preparation. On a battlefield or in a courtroom, quantifying the likelihood of uncertainties that may hinder or facilitate a particular line of attack will provide an advantage to the party holding such information. Consider this scenario: you are a plaintiff bringing suit against a corporation for ten million dollars, your trial starts in two weeks, the corporation has offered to settle for one million dollars, but you believe that you deserve more; do you accept? There is no easy answer, but there is a question that any lawyer or client in that situation should reflect upon: How can I acquire the most accurate, cost-effective data about the viability and value of a particular case or cause of action? This article suggests a market designed to translate investments in various outcomes into predictions about the likelihood of various outcomes of a given situation.

This article will identify some of the major unmet needs of litigants today. It will explain how prediction markets, a new method of collecting research used for predicting outcomes in a wide variety of areas, can be crafted to assist clients in their litigation strategy and settlement negotiations. Finally, it will provide a sample market based on the uncertainties of an actual case. Read full article.