On August 1, 2012, in Acticon AG v. China North East Petroleum Holdings Ltd., the Second Circuit issued an important decision affecting the pleading and proof of damages under Section 10(b) of the Securities Exchange Act of 1934. As for pleading, the Circuit rejected several district court cases that held loss causation was not adequately alleged simply because the securities had, after the corrective disclosures, rebounded to the pre-disclosure prices and the plaintiff therefore had the opportunity to sell them for a gain. But once a case progressed beyond the pleadings stage, a rebound in the stock price after the corrective disclosures could be used to offset and reduce (or even eliminate) damages, unless the subsequent stock price was “completely unrelated” to the corrective disclosures. Thus, plaintiffs whose purchase price included “fraud inflation” would have their recoverable damages reduced by gains resulting from the revelation of that fraud.
