In what is as far as I know the first outright dismissal motion grant in the wave of cases filed against U.S.-Listed Chinese companies that began last year, on October 6, 2011, Southern District of New York Judge Miriam Goldman Cedarbaum granted the defendants’ motion to dismiss in the securities class action lawsuit filed against China North East Petroleum Holdings Ltd. and certain of its directors and officers. A copy of Judge Cedarbaum’s opinion can be found here.


As detailed here, the plaintiffs first filed their action in June 2010. According to their amended complaint, during the class period, the defendants inflated the amount of the company’s proven oil reserves, overstated reported earnings inflated profits and misrepresented the company’s internal controls. An allegedly “bizarre series of events” followed the company’s February 23, 2010 announcement that it would be restating prior financials, including “revelation of illicit bank transfers” made to company officials and “a dizzying number of resignations and replacements” of top executives. Over the next few months additional details were revealed regarding the transfers, ultimately resulting in the resignation of the CEO and several members of the board. The NYSE had halted trading on the company’s shares on May 25, 2010, but when trading resumed on September 9, 2010, the company’s share price “plunged.”


The defendants moved to dismiss the plaintiff’s complaint on loss causation grounds, arguing that the plaintiff had several opportunities to sell its shares at a profit following the allegedly corrective disclosure at the end of the class period, and contending that had the plaintiff “chosen to sell at those post-disclosure dates, it would have turned a profit.”


Judge Cedarbaum agreed. Even though the plaintiff ultimately sold its shares at a loss, she concluded that “that loss cannot be imputed to any of NEP’s alleged misrepresentations,” adding that “a plaintiff who forgoes a chance to sell at a profit following a corrective disclosure cannot logically ascribe a later loss to devaluation caused by the disclosure.” Because she found that the plaintiff “has not suffered any loss attributable to the misrepresentations alleged in the complaint,” she granted the defendants’ motion to dismiss.


The dismissal of the China North East Petroleum Holdings case may simply reflect the unusual movement of the company’s share price.. For whatever reason, the company’s share price quickly rebounded following the September 9, 2010 “plunge” – although the share price has steadily declined following that sharp, short rebound. The share prices of other U.S.-listed Chinese companies have not reflected this pattern. Particularly as the various accounting scandals have mounted, companies caught up in the scandals have seen their share prices drop down and stay down. (Indeed, the share prices of all U.S.-listed Chinese companies have been depressed as the scandals have spread.)


So the outcome of this particular lawsuit may be nothing more than a reflection of the rather atypical stock price movements that surrounded its various disclosures. Judge Cedarbaum’s ruling may have little bearing on other cases involving companies whose share price movements would not support the type of loss causation arguments that were successful in this case.


Nevertheless, Judge Cedarbaum’s ruling is a reminder that merely because a raft of lawsuits has been filed against U.S.-listed Chinese companies does not mean that the cases are meritorious or that the plaintiffs will be successful. The China North East Petroleum case was one of the first of these cases to be filed, as it was filed in June 2010, before the filings against U.S.-listed Chinese companies really began to pick up momentum in the second half of 2010. Because it was one of the first of these cases to be filed, it is among the first to reach the motion to dismiss stage. It remains to be seen how the other cases will fare .But the dismissal of this case shows that the plaintiffs in this cases face numerous obstacles in attempting to pursue these suits. (As I noted in an earlier post, here, there has also been at least one dismissal motion denial in a securities suit involving a U.S.-listed Chinese company.)


Special thanks to a loyal reader for providing me with a copy of Judge Cedarbaum’s ruling.


FDIC Files Suit Against Former Directors and Officers of Alpha Bank: On October 7, 2011, the FDIC filed a civil action in the Northern District of Georgia against 11 former directors and officers of the failed Alpha Bank & Trust of Alpharetta, Georgia. Scott Trubey’s October 7, 2011 Atlanta Journal Constitution article about the lawsuit can be found here. A copy of the FDIC’s complaint can be found here.


Alpha Bank failed on October 24, 2008, only about 30 months after it opened. The FDIC’s suit seeks damages of $23.9 million in connection with 13 specific loans that the suit contends were approved “despite plainly inadequate, incomplete, or outdated financials of the borrower and/or the guarantors” in the loans, resulting in loans to borrowers “with no apparent ability to repay or otherwise service the loans.”


The Alpha Bank lawsuit is the fifteenth lawsuit that the FDIC has filed as part of the current wave of bank failures, which began only shortly before the Alpha Bank failed. The Alpha Bank lawsuit is the fourth failed bank lawsuit that the FDIC has filed so far in Georgia, that state that has had more bank failures during the current bank failure wave than any other state. Many more lawsuits are likely to come, including many more lawsuits in Georgia.


This lawsuit is actually the first the FDIC has filed for several weeks. After the FDIC filed a total of five lawsuits in very quick succession in August, there was some speculation that the logjam in anticipated FDIC failed bank lawsuit filings had broken and that we were about to see a quick accumulation of additional suits. But after that flurry of August activity, new filing activity had dropped off until the filing of this Alpha Bank lawsuit on Friday. It will be interesting to see if the Alpha Bank filing is followed by another flurry of filing activity, as was the case in August.


It is worth noting that the FDIC has only now, nearly three years after Alpha Bank failed, gotten around to fling this lawsuit. This consistent in general with the lag time between the bank failure date and the initial lawsuit filing date that has characterized the lawsuits that the FDIC has filed so far. In view of this apparent timing pattern and the fact that the bank failure wave peaked during late 2009 and early 2010, the likelihood is that we may be in for increased numbers of new FDIC failed bank lawsuits in coming months and possibly for at least the next couple of years.


In addition to the FDIC lawsuit, the former directors and officers of Alpha Bank previously were the target of a lawsuit brought by shareholders of the bank, as I discussed in an earlier post, here.


Special thanks to a loyal reader for sending a copy of the FDIC’s complaint.


Unauthorized Reincarnations Will Be Punished to the Maximum Extent of the Law: According to an October 6, 2011 New York Times article (here), the Dalai Lama’s recent announcement that his successor “may be an emanation and not a reincarnation” has upset the Chinese government, which apparently contends that its authority extends even to matters involving reincarnation.


The article quotes a statement about the affair from the People’s Daily, described as the Communist Party’s “mouthpiece,” as having warned that: 


All reincarnation applications must be submitted to the religious affairs department of the provincial-level government, the provincial-level government, the State Administration for Religious Affairs and the State Council, respectively, for approval.


Hannah Arendt had something like this in mind when she coined the expression “the banality of evil.”


Travel Journal: The Köln Concert: The D&O Diary’s European sojourn continued in Cologne this week, after a three-hour train ride from Amsterdam. Fortunately for me, the glorious weather I enjoyed in Amsterdam followed me to Cologne. After arrival at the Hauptbonhof (central train station) in Cologne and dropping my bags at the hotel, I emerged into a city swathed in October sunshine (quite a contrast to my prior visits to the city, which were uniformly water-logged).


For a visitor to the city, the three most distinctive things about Cologne are a river, a church and a beer. The river is the Rhine, which surges through the city on its way toward the North Sea. The church is the city’s great cathedral, or “Dom” as it is known locally, which looms large from its strategic perch along the river.  And the beer is kölsch, a light beer that according to convention and regulation can only be brewed in the Cologne region.


My visit to Cologne (or Köln as it is known in German) was quite a bit different than my trip to Amsterdam, owing to the fact that unlike my visit to Amsterdam, my trip to Cologne was business related. Due to meetings and other commitments, I had less opportunity for frolics and detours, alas..


Nevertheless, I did still manage to find ways  to enjoy some of Cologne’s distinctive features, including the city’s famous local brew, kölsch. It is a light and refreshing beer that is traditionally served in tall, thin cylindrical 0.2 liter glasses. The waiters in the brew pubs carry around trays full of the glasses, and in a smooth single motion they remove your empty glass at the same time as they provide a fresh one. They mark the number of glasses consumed with pencil marks on a coaster. First timers learn the hard way that the waiters will continue to bring fresh glasses unless you take your coaster and put it over top of your glass.


As special as the warm afternoon sunshine was on the day of my arrival in Cologne, my best opportunity to enjoy the city’s riverine location came later in the week, when I took a lunch break bike ride along the river. I pedaled my rental bike across the river to the east side and headed south along the paved bike path. (I was heading upstream, as the Rhine flows generally northward.)


Within minutes, I was away from the city center, and shortly thereafter, it was just me and the crickets and the birds. The riverside is flat and the bike path smooth, and the kilometers just rolled away. The serene countryside, softened in soothing autumnal tones of brown and gold, drew my on and on. I had intended to ride for only a short while,  but at each curve of the river, a church steeple ahead or a flock of birds in the river lured me to keep going. I am quite sure I traveled at least 30 miles roundtrip before I was done.


To be able to escape from a city into the countryside in less than 15 minutes on a bicycle is a very fine thing. It is a privilege we lack in most of the U.S., with our sprawling urban areas and our autocentric culture. In Europe, the urban density and the accessibility to the countryside are interrelated, and provide both a more vibrant city life and greater ease of access to rural areas. In the U.S., urban sprawl means many cities that are empty at night, and are surrounded by endless suburbs that blur into the countryside even far from city centers.


During my European trip, I had some very pleasant experiences, including my lunchtime bike ride on the Rhine. These kinds of experiences are available at home, too, but they occur less frequently. I think that when you are in a new place, you are more open to the possibilities, particularly in a foreign country. How frequently do any of us in our day to day lives at home drive further down the road just to see what is around the next bend? But in my all too brief European visit, every time I yielded to curiosity, I was rewarded with something novel, something interesting, something worth seeing.


If I bring anything home with me from my European visit, it is a renewed appreciation for the possibilities of the moment, where just ahead there are always new things to discover.