Stock price rebound no bar to fraud damages-US court
* NY federal appeals court reverses lower court ruling
* Stock "bounce back" does not void valid fraud claims
* Shareholders sued China North East Petroleum Holdings
* China North East still expects dismissal
By Jonathan Stempel
NEW YORK, Aug 1 (Reuters) - In a victory for investors, a federal appeals court said shareholders may still pursue damages for securities fraud even if they miss a chance to sell shares at a profit after the alleged misconduct is revealed.
The 2nd U.S. Circuit Court of Appeals in New York revived a lawsuit accusing China North East Petroleum Holdings Ltd , a crude oil production company in northern China, of misleading investors about its financial health and prospects.
While not ruling on the merits of the claims, the court said U.S. District Judge Miriam Goldman Cedarbaum in Manhattan erred in dismissing the case last October because the lead plaintiff failed to cash out of the stock when the price rebounded.
Wednesday's decision "is significant for investors because it means temporary inflation in a stock price does not reduce damages," said Jeremy Lieberman, a partner at Pomerantz Haudek Grossman & Gross in New York representing lead plaintiff Acticon AG, a European real estate consulting firm.
Michael Coffino, a partner at Coffino Law Group in San Francisco representing China North East, said he expects the case eventually to be dismissed.
"We obviously believe the ruling is incorrect," he said. "The district court had raised the issue on its own, and all of our defenses and theories remain intact."
Investors sued China North East in 2010 amid revelations of accounting problems, improperly valued oil and gas assets, resignations of top executives, questionable cash transfers and bribery allegations.
Nonetheless, following these disclosures, there were 12 days in October and November 2010 when China North East's share price closed on the NYSE AMEX above $7.25, the average price paid by Acticon for its 60,000 shares. Acticon chose not to sell at that time but later sold some shares at prices from $3.50 to $6.33.
Cedarbaum concluded that losses from these sales could not be attributed to alleged misrepresentations by China North East.
But a three-judge panel of the 2nd Circuit found that ruling inconsistent with the traditional measure for out-of-pocket losses, and with laws designed to ensure that the ability to recover for fraud losses is not tainted by other market factors.
"It 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 value for completely unrelated reasons," Circuit Judge Chester Straub wrote for the panel. "Such a holding would place the plaintiff in a worse position than he would have been absent the fraud."
Straub noted that in a 1995 securities litigation reform law, Congress included a "bounce back" provision capping damages in securities fraud cases when a stock price rebounds.
That provision limits damages to the difference between the price paid, and the average closing price in the 90-day period following a corrective disclosure.
China North East now trades on the Pink Sheets, and its shares were up 0.5 cent at 34.5 cents in afternoon trading.
The case is Acticon AG et al v. China North East Petroleum Holdings Ltd, 2nd U.S. Circuit Court of Appeals, No. 11-4544.
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