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China North East Petroleum Must Face Shareholder Lawsuit

China North East Petroleum Holdings Ltd. must face a shareholder lawsuit accusing the company of inflating proven oil reserve numbers, a U.S. appeals court ruled.

The U.S. Court of Appeals in Manhattan today reversed a lower court’s dismissal of the case, finding that shareholders’ losses weren’t necessarily remedied by a recovery in the stock price.

“A share of a stock that has regained its value after a period of decline is not functionally equivalent to an inflated share that has never lost value,” U.S. Circuit Judge Chester Straub wrote for the three-judge panel.

Investors had alleged that New York-based China North East Petroleum’s stock price fell sharply in 2009 and 2010 following disclosures about a misevaluation of oil reserves and a failure to account for certain warrants.

In May 2010, the company said that the New York Stock Exchange had halted trading in its shares and that members of management would be resigning, Straub wrote. Trading resumed in September 2010, according to the opinion.

The company argued that rebounds in the stock price could have erased shareholder losses, the opinion said.

“The decision will have zero impact on the case,” Michael Coffino, a lawyer for China North East Petroleum, said in a phone interview today. “All the theories and arguments remain intact and we’re looking forward to a dismissal on other grounds in the near future.”

The case is Acticon AG v. China North East Petroleum Ltd., 11-cv-4544, U.S. Court of Appeals for the Second Circuit.

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