On August 1, 2012, the Court of Appeals for the Second Circuit revived a putative securities fraud class action lawsuit against China North East Petroleum Holdings Ltd. (“NEP”), a China-based crude oil production company whose stock was traded on the New York Stock Exchange. Reversing the trial court, which had dismissed the case, the Court of Appeals held that the recovery of NEP’s stock price to a level above the price paid by the plaintiff did not necessarily preclude the plaintiff from proving that it had suffered an economic loss as a result of the alleged fraud.

THE UNDERLYING CASE -

Last October, in the midst of a wave of U.S. securities fraud lawsuits filed against China-based companies that began in 2010, NEP achieved a significant victory when a federal District Court in New York dismissed a complaint alleging that the company had committed fraud. The complaint accused NEP of misleading investors by significantly overstating its reported earnings and oil reserves. The complaint also alleged that, contrary to NEP’s representations, its internal controls were inadequate and permitted the company’s CEO and his mother to improperly transfer money out of company accounts. According to the complaint, the alleged fraud was revealed when NEP withdrew its financial statements for 2008 and 2009, followed by announcements that the company’s internal controls were deficient, that it was facing delisting of its stock from the New York Stock Exchange, and that it had misvalued certain oil and gas properties. NEP’s stock price fell sharply in the days following each of these disclosures. Days after the end of the purported class period, however, NEP’s stock price had somewhat rebounded and was higher than the average purchase price that the lead plaintiff, Acticon AG, had paid for its shares.