An Overview of COVID-Related Securities Actions Filed to Date

In the early months of the pandemic, as the stock market substantially declined, securities lawyers and commentators predicted an onslaught of securities fraud class action suits. The anticipated tidal wave is perhaps still to arrive, but as we approach the end of the second quarter, there is at least a critical mass of shareholder class actions that have been filed and that target a range of companies and conduct. We provide here a short overview of the kinds of complaints and the nature of the claims that have been filed to date. Although none has yet reached decision on a motion to dismiss, we also offer some preliminary thoughts on defenses that may apply.

In guidance issued during March and April, the SEC advised issuers to be as specific as possible in disclosing the risks that COVID-19 has posed, and may pose going forward, to their business, and the SEC provided a nonexhaustive list of specific questions that issuers should consider addressing.^[1] Adherence to the SEC’s guidance may enable issuers to avoid, or defend against, investor suits. On the other hand, shareholders will likely invoke this guidance as added ammunition against companies whose disclosures could be perceived as falling short.

As of the date of this release, several dozen securities class action lawsuits have been filed arising, directly or indirectly, out of the pandemic. The cases fall generally into the following categories: (i) suits against cruise ship operators for allegedly failing to disclose the known impact of the virus; (ii) suits against biotech and medical companies for allegedly making false claims about vaccines, tests, cures, PPE and related supply contracts; (iii) suits in the more garden-variety vein against companies that purportedly failed to disclose the impact of COVID-19 on their business; (iv) a lawsuit against Zoom for allegedly failing to disclose cybersecurity risks that the pandemic exposed; and (v) more recently, a suit against a Paycheck Protection Program (PPP) lender for supposedly failing to disclose misconduct in the distribution of loan funds that subjected it to regulatory action.

The Cruise Ship Cases

Cruise ship operators were among the initial targets of shareholder complaints. In mid-March, shareholders filed suit against Norwegian Cruise Lines after its stock price dropped following a whistleblower report of aggressive sales tactics. The alleged sales tactics came to light when internal company emails instructing the sales force to downplay the impact of the virus were leaked to the press. Plaintiffs allege that Norwegian affirmatively misrepresented the strength of its revenues and the extent to which it was prepared to weather the pandemic. In February, Norwegian allegedly maintained that its booked position “remained ahead of prior year and at higher prices” and that it was poised to “deliver strong financial performance over the long term.”^[2] Plaintiffs contend that these statements were false because Norwegian failed to disclose that, at the time, the salesforce had been instructed to mislead customers about the impact of the pandemic. The multiple suits since filed against Norwegian have been consolidated and on June 12, lead counsel was appointed. Shareholders also filed a similar suit against Carnival Cruise Lines in late May, alleging that it simultaneously touted its health and safety record while failing to disclose that COVID-19 was spreading on its ships.^[3]

Cases Against Companies Touting COVID-19 Vaccines, Tests, Cures, PPE and Related Supply Contracts

Several securities fraud suits have been filed against companies that allegedly made false promises concerning the development of COVID-19 vaccines, tests, cures or medical protective gear, and/or the existence of related supply contracts. For example, on March 12, investors sued Inovio Pharmaceuticals after its CEO claimed to be on the verge of developing a COVID-19 vaccine and predicted “human testing in the U.S. early this summer.” Market commentators later called this a “ludicrous and dangerous” claim.^[4] On April 29, investors sued SCWorx Corp., alleging that the company falsely claimed to have secured a commitment for the sale of 2 million COVID-19 rapid testing kits to a health care provider.^[5] On May 26, investors sued Sorrento Therapeutics Inc. based on the company’s public announcement that it had discovered a COVID-19 antibody “cure,” a claim that was later undermined by researchers.^[6] And on June 15, investors sued Co-Diagnostics Inc. for touting that its COVID-19 tests, already in use by a number of states, were “100% accurate,” despite knowing that they are not and that a testing rate even fractionally lower than 100 percent would be of little value to public health officials.^[7] In these and other similar cases, the company’s stock dropped significantly following corrective disclosures.

Claims of medical testing, PPE supplies and the like have also been an early focus of SEC enforcement activity. To date, the SEC has filed enforcement actions against a biotech company that claimed to have developed a COVID-19 home testing kit^[8]; a health care company that claimed to have secured N-95 masks^[9]; and a digital marketing company that claimed to have entered into a partnership to distribute thermal scanning equipment to detect fever.^[10]

Claims Arising From Statements Regarding the Business Impact of COVID-19

A third and more typical category, although still pandemic-related, consists of suits against companies that allegedly omitted material information concerning the impact of COVID-19 on their business. For example, on April 20, investors sued iAnthus Capital Holdings, Inc., a Canadian cannabis operator, following the company’s default on interest payments due, which it blamed on liquidity constraints arising from a “decline in the overall public equity cannabis markets, coupled with the extraordinary market conditions that began in Q1 2020 due to the novel coronavirus known as COVID-19.”^[11] The investors allege the company failed to disclose why escrowed funds, which should have been used to satisfy the obligation, were not used. On April 24, investors in Phoenix Tree Holdings Limited alleged that the company failed to disclose in its initial public offering documents the extent to which its real estate business in China would be disrupted by COVID-19.^[12] On May 20, investors in Elanco Animal Health alleged that the company made misstatements concerning the consolidation of its distributors and resulting increase in its inventory, while failing to disclose that COVID-19 had adversely impacted the consolidation.^[13]

Claims Against Zoom Concerning Allegedly Undisclosed Cybersecurity Risks

On April 7, investors sued Zoom Video Communications, Inc., alleging that it made false and misleading statements concerning its data privacy and security measures.^[14] Although the claims against Zoom do not arise directly out of, and may even pre-date, the pandemic, plaintiff alleges that only as a result of “the COVID-19 pandemic in March and April of 2020, with businesses and other organizations increasingly relying on Zoom’s video communication software to facilitate remote work activity as governments increasingly implemented shelter-in-place orders, [was] the truth [ ] more fully laid bare in a series of corrective disclosures.” Plaintiff alleges that this revelation resulted in a drop in Zoom’s stock price. With much of the country still living and working remotely, cybersecurity risks and the alleged failure to disclose them could lead to additional cases like this one against other companies.

Securities Fraud Claims Against a PPP Lender

A more recent filing may point to a potential fifth category that intersects with the distribution of PPP loan funds — another area in which public companies have been subject to heightened regulatory scrutiny. On June 4, investors filed suit against Wells Fargo, alleging that the bank misled them with respect to its administration of PPP loans by failing to disclose that it prioritized loans to large businesses that would yield larger processing fees and pushed small businesses to the back of the line, contrary to its public statements.^[15] Plaintiff alleges that this undisclosed practice exposed the bank to litigation and regulatory scrutiny, the disclosure of which, in turn, caused a significant drop in the stock price. The anticipated increase in regulatory action against PPP lenders and borrowers could result in other cases like this one, on the similar theory that companies failed to disclose having engaged in conduct that exposed them to regulatory action, where the announcement of such action results in a stock price drop.

Potential Defenses

As different as they are, many of these cases will be vulnerable at the pleading stage to some of the same defenses. To the extent these cases allege — or can be characterized as alleging — omissions as opposed to misstatements, the defendants may argue that they had no duty to disclose. As to any alleged affirmative misstatements, the defendants may try to characterize them as forward-looking and therefore protected by the safe harbor, as statements of opinion rather than fact, or as inactionable puffery.

In at least some of these cases, the defendants will almost surely argue that the complaint does not adequately allege scienter. This may be particularly true when plaintiffs have not pointed to insider transactions or equity-based compensation that could show “motive and opportunity” to commit a fraud.

And as with all stock price drops, plaintiffs will have to establish loss causation. In those cases where the company’s stock price dropped at a time when the stock market as a whole was in steep decline, as was the case toward the beginning of the pandemic, defendants will likely invoke lack of loss causation as a defense.

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Filings for the current quarter are not due until August. We will soon find out whether those filings or related earnings releases trigger any significant increase in shareholder suits, and/or in SEC enforcement actions that, in turn, prompt piggyback private actions. In the meantime, issuers should of course carefully review all of the COVID-related guidance put forth by the SEC over the past few months and tailor their risk disclosures and public statements accordingly.

^[1] _{S.E.C. Division of Corporate Finance, Coronavirus (COVID-19) (Mar. 25, 2020), available at https://www.sec.gov/corpfin/coronavirus-covid-19; S.E.C. Public Statement, The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19 (Apr. 8, 2020), available at https://www.sec.gov/news/public-statement/statement-clayton-hinman.}

^[2] _{Douglas v. Norwegian Cruise Lines, 20-cv-21107 (S.D. Fla.).}

^[3] _{Service Lamp Corp. Profit Sharing Plan v. Carnival Corp., 20-cv-22202 (S.D. Fla.).}

^[4] _{McDermind v. Inovio Pharms., Inc., 20-cv-1402 (E.D. Pa.).}

^[5] _{Yannes v. SCWorx Corp., 20-cv-3349 (S.D.N.Y.); Leeburn v. SCWorx Corp., 20-cv-4072 (S.D.N.Y.).}

^[6] _{Wasa Medical Holdings v. Sorrento Therapeutics, Inc., 20-cv-966 (S.D. Cal.).}

^[7] _{Gelt Trading, Ltd. v. Co-Diagnostics, Inc. et al., 20-cv-368 (D. Utah).}

^[8] _{S.E.C. v. Applied BioSciences Corp., 20-cv-3729 (S.D.N.Y.).}

^[9] _{S.E.C. v. Praxsyn Corporation and Frank J. Brady, 20-cv-80706 (S.D. Fla.).}

^[10] _{S.E.C. v. Turbo Global Partners, et al., 20-cv-1120 (M.D. Fla.).}

^[11] _{Finch v. iAnthus Capital Holdings, Inc., et al., 20-cv-3135 (S.D.N.Y); Cedeno v. iAnthus Capital Holdings, Inc., et al., 20-cv-3513 (S.D.N.Y.).}

^[12] _{Wandel v. Gao, 20-cv-3259 (S.D.N.Y.).}

^[13] _{Hunter v. Elanco Animal Health, 20-cv-1460 (S.D. Ind.).}

^[14] _{Drieu v. Zoom Video Communications, Inc., 20-cv-2353 (N.D. Cal.).}

^[15] _{Ma v. Wells Fargo & Co., et al., 20-cv-3697 (N.D. Cal.).}