Category: Securities

Second Circuit Holds That a Post-Disclosure Stock Price Rebound Does Not Per Se Preclude Damages for Alleged Federal Securities Fraud

Recently, the Second Circuit vacated a District Court’s dismissal of a securities fraud action brought by Acticon AG, shareholder of China North East Petroleum Holdings Ltd. (“NEP”), for failure to plead economic loss—a necessary element to maintain a private damages action under § 10(b) of the Securities Exchange Act of 1934 (“§10(b)”). Acticon had multiple opportunities to, but did not, sell its NEP shares at a profit after NEP’s disclosure of the alleged fraud. The Court held that economic loss is not conclusively negated at the pleadings stage where the price of a security recovers shortly after a disclosure of alleged fraud. Significantly, in drawing all reasonable inferences in favor of the plaintiff under NEP’s 12(b)(6) motion, the Court explained that a rise in the price of a stock following a corrective disclosure requires an inquiry into whether the security rose for “reasons unrelated to [the] initial drop,” and thus introduces factual questions and competing theories of causation that would be inappropriate to resolve on a motion to dismiss.

The SDNY’s Recent Application of Janus

In the few months since the Supreme Court announced the bright line rule of Janus Capital Group, a number of courts have applied the rule, giving us a better picture Rule 10b-5 liability post-Janus. The Supreme Court held in Janus that, for purposes of Rule 10b-5, the maker of a statement is “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” The Court analogized to the relationship between a speechwriter and a speaker: a speechwriter may draft a speech, but the content is within the control of the speaker who delivers it. Thus, the Court found that the investment adviser to a mutual fund was not liable for alleged misrepresentations in the fund’s prospectuses under Rule 10b-5, because the fund, and not the manager, was the maker of the statements.