Say you bought a share of Enron stock before it belly-flopped into chapter 11. You paid too much for it, right? $90 or so. And when the belly-flopping took place, the market price for your share in the Greatest Company Ever fell to, oh, about $1. You lost around $89 bucks, right?

Maybe. In your basic federal securities fraud case, the measure of damages takes "the fair value of what [you] would have received had there been no fraudulent conduct" — the $90 — and subtracts "the fair value of all that [you in fact] received" — which may or may not equal the $1. Affiliated Ute Citizens v. United States, 406 U.S. 128, 155 (1972). See? If the Enron share had a value of more than $1 when you bought it, your loss doesn't equal the difference between the $90 you paid and the $1 market price after the stock tanked.

Timing matters. So the Second Circuit's ruling teaches us this week in Acticon AG v. China North East Petroleum Holdings Ltd., No. 11-4544-cv (2d Cir. Aug. 1, 2012). The district court in Manhattan had kicked the case, on a motion to dismiss. China North, et al., had convinced Her Honor that a rise in the price of China North's stock after the (alleged) fraud came to light negated any loss to the plaintiffs, who claimed they overpaid for their shares.

The Affiliated Ute test for measuring loss, the Second Circuit held, doesn't take account of a post-purchase recovery in the stock's market price. It subtracts from the price you paid the True Value of the security at that moment. 

[Nor, the panel ruled, did a damages cap that Congress created in 1995 preclude a finding that the plaintiffs suffered real loss. But let's keep this simple, shall we?]

The court erred because it seems to have inferred that if the plaintiffs could have sold their shares at a break-even price (or even at a profit-making price) after the fraud outed, the defendants shouldn't have to pay damages for the fraud. Things worked out for the plaintiffs, right?

No, not really, the Second Circuit instructed. The suckers still paid an above-value price when they should have paid less (and maybe a great deal less). They suffered harm as soon as they overpaid, in that nanosecond when the trade cleared. Later events shouldn't affect the recovery. And at least in the Second Circuit after yesterday they won't (except a little because of the damages cap thing).