When an investment loses value, a common strategy is to buy additional shares of the stock at a lower price than the original purchase, in order to “average down” the blended cost of the stock. If the stock recovers, it need not rise all the way to the initial purchase price for the investor to break even. Courts have routinely recognized this investment technique on class certification motions and have held such purchases do not render an investor atypical or inadequate as a class representative. The investor/class representative is usually allowed to seek recovery for any damages caused by a fraud which led to the initial loss in value.
However, a court in the Southern District of New York has held an investor who “averaged down” was precluded from pursuing the case in court,1 in effect giving investors a choice: pursue an investing strategy which may help mitigate losses or sue to recover losses. Pursuing both options may no longer be possible.
