When plaintiffs’ lawyers filed a complaint against the company earlier this week, Cellular Biomedicine Group became the latest firm to be hit with a securities class action lawsuit relating to the company’s alleged use of a stock promotion firm. There were a number of companies hit with similar lawsuits last year, as I noted at the time, and there has been at least one other similar suit filed against another company within recent days. The allegations involved in these recent lawsuits are striking, as detailed below. These cases have important D&O insurance underwriting implications.
The most recent of these lawsuit filings involves Cellular Biomedicine Group. On April 21, 2015, a plaintiff filed a securities class action lawsuit in the Northern District of California against the company, its CEO and its CFO. Cellular Biomedicine is in the business of marketing and commercializing stem cell and immune cell therapeutics in the health care market in China. The complaint alleges that in reliance on paid stock promotion, the company achieved “an unsustainable $500 million stock valuation.” A copy of the plaintiff’s complaint can be found hereforcefieldenergycomplaint. The plaintiff’s lawyers’ April 22, 2015 press release about the complaint can be found here.
Specifically, the complaint alleges that on February 2, 2015, LifeTech Capital, a “purported biotechnology and medical technology investment bank” raised their target price on the company’s stock with a “Strong Speculative Buy” rating. Then on April 7, 2015 a report appeared on Seekingalpha.com that among other things said that the company was “another worthless Chinese reverse merger using paid stock promotion.”
The Seeking Alpha article cites a detailed litany of charges against the company, alleging not only that the company’s share price increase had been achieved by paid promotion, but also that the company’s technology had “experienced patient deaths,” that its founders face “dishonesty allegations,” and that the company faces “multiple accounting and financial integrity issues.” The complaint alleges that the company’s stock promotion scheme included “dozens of published articles and news reports” and that the company never disclosed its promotional campaign.
The complaint against Cellular Biomedicine followed just days after a lawsuit was filed ForceField Energy that raises even more sensational allegations. On April 17, 2015, a plaintiff filed a securities class action lawsuit in the Southern District of New York against ForceField and certain of its directors and officers, as well as two stock promotion firms. A copy of the complaint can be found here. A copy of the plaintiff’s lawyers’ April 17, 2015 press release can be found here.
The company designs, licenses and distributes alternative energy products in China and the United States. The complaint alleges that beginning in September 2013, the company retained MissionIR, which is alleged to be a securities advisor and investor relations firm and an affiliate of The DreamTeam Group (DTG). The complaint alleges that under the direction and control of ForceField and the individual defendants, DTG and Mission IR “began to tout” ForceField’s stock, as part of which the two PR firms “conducted a massive promotional campaign, which included publishing articles or news reports and making various statements through social media outlets.” The articles did not disclose that they were “authored by paid promoters under the control of ForceField.”
A March 20, 2014 Fortune article (here) first raised questions about the relationship between the stock promoters and ForceField. On April 15, 2015, Seeking Alpha published an article (here) which detailed the relationship between ForceField and DTG. Among other things the article alleged that DTG publications and statements had caused ForceField’s stock to hit all time highs. The article also alleges that the top three ForceField managers have “extensive ties to past fraudulent companies that have gotten into substantial trouble, including investigations by the SEC, FBI, the U.S. Senate and the Canadian Federal Government.” The article also details ForceFIeld’s CEO’s and Chairman’s involvement with various prior companies that have been accused of fraudulent activity (the details of these prior enterprises are quite something in and of themselves).
The developments after the Seeking Alpha article about ForceField appeared involved more than the filing of a class action lawsuit. In an April 20, 2015 filing on Form 8-K, ForceField disclosed that its Chairman had resigned, and that the cause of this resignation was that he had been arrested on April 17, 2015. As detailed in an April 20, 2015 Bloomberg article (here), the Chairman was “charged by U.S. officials with scheming to boost the company’s share price in part by making secret payments to conspirators through a firm based in Belize.” The April 20, 2015 press release of the Office of the U.S. Attorney for the Eastern District of New York about the Chairman’s arrest can be found here.
It isn’t hard to guess the motives of those company officials that might resort to using paid stock promoters. Just the same, you do have to wonder what they are thinking, because it is pretty clear that when a small stock’s share price starts skyrocketing, it attracts attention. Indeed, the author of Seeking Alpha column about Cellular Biomedicine even explains the stock price screening tool he uses to identify companies whose share price is moving suspiciously. It does seem that companies whose share prices move as a result of the efforts of paid stock promoters are going to attract the attention of market watchers, such as the authors on Seeking Alpha.
It also seems, as these cases demonstrate, that companies relying on stock promoters to try to drive their share price are going to get hit with securities class action lawsuits, a point that is reinforced by my earlier post about companies using stock promoters. Indeed, as I detail in my prior post, there is a growing list of companies that, like ForceField, used the DreamTeam group and that have been hit with securities suits.
The obvious lesson for D&O underwriters is that is that it would be a good idea to find out if a prospective account they are considering has used the services of a stock promotion firm. A more detailed question would specifically ask about the company’s use of The DreamTeam Group and the other stock promoters that have been identified as these various companies have cratered and attracted securities lawsuits. It is pretty clear that using stock promotion firms is not only a very questionable business practice, it is a clear marker for securities class action litigation risk. The fact that both of the companies described above were built around business operations in China seems like yet another factor to consider.
Early Returns on Omnicare: When the U.S. Supreme Court handed down its decision in the Omnicare case a few weeks ago (as discussed here), there was a lot of speculation about the possible impact of the decision on securities class action litigation. In an April 20, 2015 memo entitled “The Supreme Court’s Recent Omnicare Decision Already Netting Big Results For Issuers” (here), the Troutman Sanders law firm reviews the decision and examines the impact that decision has been having so far in the lower courts.
Among other things, the law firm’s memo notes that “although the Omnicare decision is less than a month old, it is already having an impact on pending Section 11 claims.” The memo’s authors also note that “other courts have relied on Omnicare to dismiss claims asserted under Sections 10(b) and 18 of the Securities Exchange Act of 1934.” The memo concludes by noting that the early returns suggest that “Omnicare could have a substantial impact on the overall landscape of securities litigation.”
More About Minimum-Stake-to-Sue Bylaws: As I have noted in numerous prior posts, one of the more significant recent developments in the corporate and securities litigation arena has been the rise of litigation reform bylaws, particularly forum selection bylaws and fee-shifting bylaws. Along with these more frequently discussed types of bylaws has been another type of litigation reform bylaw, the minimum stake-to-sue bylaw.
In an earlier post (here), I discussed the litigation that has arise in Florida in connection with Imperial Holding Group’s newly adopted bylaw that require shareholders to deliver written consents representing at least three percent of the company’s outstanding shares in order to bring a class action or derivative suit.
The litigation about the company’s bylaw has apparently just taken a substantial notch upward. As Alison Frankel details in an April 21, 2015 post in her On the Case blog (here), the plaintiff in the dispute has filed a new lawsuit in federal court, in which the plaintiff alleges, among other things, that the company’s disclosures in its latest proxy statement violate the federal securities laws. The complaint seeks an injunction barring the use of the bylaw. A copy of the federal court complaint can be found here.
As Frankel details in her blog post, there is a lot of bad blood between the sides in this dispute, but the case at least does hold out the possibility of a determination of the validity of yet another variety of litigation reform bylaw. At stake is the question of whether smaller shareholders of companies that adopt this bylaw will still be able to file traditional corporate and securities lawsuits against company officials. Stay tuned, this case potentially could be worth watching.