Securities Law - Second Circuit Accepts Rule 10b-5 Pleading of Economic Loss after Share-Price Recovery

By Alexander, James M. | Suffolk University Law Review, Fall 2013 | Go to article overview

Securities Law - Second Circuit Accepts Rule 10b-5 Pleading of Economic Loss after Share-Price Recovery


Alexander, James M., Suffolk University Law Review


Securities Law--Second Circuit Accepts Rule 10b-5 Pleading of Economic Loss After Share-Price Recovery--Acticon AG v. China North East Petroleum Holdings Ltd., 692 F.3d 34 (2d Cir. 2012)

Securities and Exchange Commission (SEC) Rule 10b-5 (1) provides the principal remedy for private investors ensnared in fraudulent securities transactions. (2) A successful pleading of a fraud-on-the-market claim under Rule 10b-5 requires a showing of actual economic loss caused by a fraudulently inflated price of a security purchased by the plaintiff. (3) In Acticon AG v. China North East Petroleum Holdings Ltd., (4) the Court of Appeals for the Second Circuit considered whether a defrauded investor's unrealized opportunity to sell securities at a profit precludes the ability to prove economic loss under Rule 10b-5's fraud-on-the-market theory. (5) The Second Circuit held that a recovery in share price after the fraud was disclosed to the purchasers does not automatically defeat an inference of economic loss at the pleading stage. (6)

Between January and May of 2010, Acticon AG (Acticon) acquired a total of 60,000 shares in China North East Petroleum Holdings Limited (NEP) at an average price of $7.25 per share. (7) Acticon alleged in its complaint that after each acquisition of stock, NEP disclosed corrections to financial statements that the company had filed with the SEC prior to Acticon's purchases. (8) NEP issued its first allegedly corrective disclosure on February 23, 2010, when the company announced it was withdrawing its 2008 and 2009 financial statements due to purported accounting errors. (9) According to the complaint, NEP made its final corrective disclosure on September 1, 2010, when it filed restated financial reports that eliminated its entire originally reported profit margin. (10) Although Acticon held its NEP stock for several months after NEP's final disclosure, the company ultimately sold a portion of its 60,000 NEP shares by May 2011 at prices ranging from $3.50 to $6.33 per share. (11) However, on twelve separate occasions during the period between NEP's final corrective disclosure and Acticon's sale of NEP stock, NEP stock traded and closed higher than Acticon's purchase price of $7.25 per share. (12)

Acticon filed suit against NEP in the United State District for the Court Southern District of New York, alleging securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5. (13) In the complaint, Acticon claimed NEP misled investors as to its financial viability and anticipated profits, and caused Acticon significant economic losses by repeatedly issuing corrective disclosures that prompted declines in NEP's share price. (14) On March 22, 2011, NEP filed a motion to dismiss for failure to state a claim, asserting that Acticon repeatedly passed on opportunities to realize a profit and therefore suffered no loss. (15) The district court sided with NEP, dismissing the case on the grounds that Acticon's prolonged holding and subsequent sale of NEP stock at a loss, combined with several foregone opportunities to sell the shares at a profit, resulted in a failure to show the requisite economic-loss element of securities fraud. (16)

The Great Depression and the decade that preceded it--a period of unprecedented growth in securities speculation, issuance, underwriting and investment in the United States--provided the impetus for the federal legislation that is the basis of today's securities laws. (17) The Securities Act of 1933 ('33 Act) requires extensive financial disclosures prior to issuing stock for sale to the public, while the Exchange Act mandates continual periodic disclosures by publicly traded securities issuers after their initial public tender offer. (18) In 1942, after a brief deliberation, the SEC promulgated Rule 10b-5, which would unintentionally become the chief remedy for defrauded investors of private securities. (19) Because Rule 10b-5's private right of action arose from judicial construction, the development and refinement of its elements has taken considerable time and generated voluminous litigation. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Securities Law - Second Circuit Accepts Rule 10b-5 Pleading of Economic Loss after Share-Price Recovery
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.