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Acticon Ag v. China North East Petroleum Holdings Limited

August 1, 2012

ACTICON AG, PLAINTIFF-APPELLANT, RICARDO ROSADO, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, STEVEN WEISSMAN, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, TONY MOORE, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED, WANG HONG JUN, ZHANG YANG, JU GUIZHE, ROBERT C. BRUCE, RALPH E. DAVIS ASSOCIATES, INC., DEFENDANTS-APPELLEES, RALPH E. DAVIS, LI JING FU, YU LI GUO, EDWARD M. RULE, DEFENDANTS.



On appeal from an Order dated October 6, 2011 by the United States District Court for the Southern District of New York (Miriam Goldman Cedarbaum, Judge) granting Defendants- Appellees' motion to dismiss this securities fraud action for failure to plead economic loss.

The opinion of the court was delivered by: Straub, Circuit Judge:

11-4544-cv

Acticon AG v. China North East Petroleum, Ltd.

Argued: May 17, 2012

36 Before: WINTER, STRAUB, and LYNCH, Circuit Judges.

The 41 plaintiffs alleged that the stock price was artificially inflated and dropped soon after the fraud 42 became known. We hold that the fact that the price of the stock recovered soon after the price 43 dropped does not negate an inference of economic loss and loss causation at the pleading stage.

1 The judgment of the District Court is therefore VACATED and the case REMANDED for 2 further proceedings not inconsistent with this opinion.

25 This case requires us to consider whether the fact that a stock's share price recovered 26 soon after the fraud became known defeats an inference of economic loss in a securities fraud 27 suit. Plaintiff-Appellant Acticon AG ("Acticon") is the lead plaintiff in a consolidated putative 28 class action suit against China North East Petroleum Holdings Limited ("NEP") brought 29 pursuant to §§ 10(b) & 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) & 30 78t(a), and under SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. Acticon alleges that NEP misled 31 investors about its reported earnings, oil reserves, and internal controls. It further alleges that 32 NEP revealed this information through a series of corrective disclosures and that in the trading 33 days after each disclosure was made, NEP's stock price dropped. NEP argues that these 34 allegations are not sufficient to allege economic loss because its share price rebounded on certain 35 days after the final disclosure to the point that Acticon could have sold its holdings and avoided a 1 loss. We disagree. For the reasons below, we hold this price recovery does not defeat an 2 inference of economic loss. Accordingly, we vacate the judgment of the District Court and 3 remand for further proceedings not inconsistent with this opinion.

4 BACKGROUND

5 Acticon is the lead plaintiff in a putative securities class action against NEP. Acticon 6 alleges that beginning May 15, 2008, NEP misled investors regarding the financial health and 7 prospects of the company. In brief, Acticon alleges that NEP inflated its proven oil reserves and 8 did not account for certain warrants--which entitle the holder to purchase stock for a fixed price 9 until the expiry date--in accordance with Generally Accepted Accounting Principles ("GAAP"). 10 It also alleges that NEP's former CEO and his mother transferred funds from the company's 11 corporate coffers into their own accounts.

12 Acticon alleges that this information gradually became public as NEP was required to 13 withdraw its financial statements and revise its prior earnings downwards. NEP announced that 14 it was withdrawing its 2008 and 2009 financial statements on February 23, 2010. On April 15, 15 2010, NEP announced delays in the filings of its 2009 annual report and Form 10-K. The next 16 day, it announced that it was facing delisting by the New York Stock Exchange ("NYSE") and 17 that there were certain deficiencies in its internal controls concerning accounts payable and 18 business development activities. On April 20, 2010, it announced another downward estimate of 19 its earnings and linked its need to do so to its misvaluation of oil and gas properties. NEP's 20 stock price fell sharply in the days following each of these disclosures. 21 On May 27, 2010, NEP announced that the NYSE had halted trading of its stock as of 22 May 25, 2010. In the same press release, it further announced the resignation of certain 23 members of management for financial improprieties. Over the summer, Defendant Robert C. 1 Bruce, the chairman of the audit committee, announced in a letter to the Board that he was 2 resigning because he had concerns regarding whether NEP's 2009 financial statements were 3 prepared in accordance with GAAP and whether the company had bribed foreign governmental 4 officials. On September 9, 2010, NEP stock again resumed trading, and its share price dropped 5 nearly 20% on very high volume.

6 Acticon filed one of several complaints against NEP, various officers and directors, and 7 an independent oil engineering firm that estimated NEP's reserves, regarding these events. On 8 November 19, 2010, the District Court consolidated these complaints into a single action and 9 appointed Acticon lead plaintiff. Although the complaint contains class allegations, the District 10 Court has not yet considered a motion for class certification. On March 22, 2011, the defendants 11 moved to dismiss the consolidated complaint. At oral argument on May 12, 2011, the District 12 Court expressed concern regarding whether Acticon could show loss causation. It observed that 13 Acticon had foregone several opportunities to sell its shares at a higher price and requested 14 supplemental briefing on the issue.

15 After supplementary briefing, the District Court granted defendants' motion to dismiss. 16 It held as a matter of law that Acticon did not suffer an economic loss, grounding its holding in a 17 line of cases applying Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005). In its words, 18 "Since Dura, courts have held as a matter of law that a purchaser suffers no economic loss if he 19 holds stock whose post-disclosure price has risen above purchase price--even if that price had 20 initially fallen after the corrective disclosure was made." In re China Ne. Petroleum Holdings 21 Ltd. Secs. Litig., 819 F. Supp. 2d 351, 352 (S.D.N.Y. 2011). It observed that Acticon had 22 purchased 60,000 NEP shares with an average purchase price of $7.25 per share. Id. at 353.

23 NEP stock had closed at a price higher than $7.25 on twelve days during October and November 1 2010 after NEP was relisted. Id. The District Court held that because Acticon had foregone 2 multiple opportunities to sell its shares at a profit, it had not suffered an economic ...


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