After I published a post last week suggesting that there could be D&O claims arising out of the COVID-19 coronavirus outbreak, several people suggested to me that I was being alarmist and expressed deep skepticism about the possibility of coronavirus-related claims. After all, they said, there were no D&O claims filed in connection with the SARS, MERS or Ebola outbreaks. Well, there may well have been no D&O claims related to those prior outbreaks. However, it looks like in this context as in many others, the COVID-19 outbreak is going to be different. On March 12, 2020, a plaintiff shareholder filed a securities class action lawsuit against Norwegian Cruise Line Holdings, Ltd. alleging that the company was employing misleading sales tactics related to the outbreak. A copy of the plaintiff shareholder’s complaint can be found here.
On March 12, 2020, a shareholder of Norwegian Cruise Lines filed a securities class action lawsuit in the Southern District of Florida against the company, its CEO, and its CFO. The complaint purports to be filed on behalf of a class of shareholders who purchased the company’s shares between February 20, 2020 and March 12, 2020.
The class period begins on February 20, 2020, when the company filed an 8-K with the SEC, in which the company published its fourth quarter 2019 and year-end 2019 financial results. The company’s February 20, 2020 press release accompanied the 8-K. In the press release, the company said that “despite the current known impact” from the coronavirus outbreak, as of the week ending February 14, 2020, “the Company’s booked position remained ahead of prior year and at higher prices on a comparable basis.” The press release also stated that the company “has an exemplary track record of demonstrating its resilience in challenging environments” and that he company has “proactively implemented several preventive measures to reduce potential exposure and transmission of COVID-19.”
The complaint also quotes from company’s February 27, 2020 10-K (here), in which the company, among other things, noted that “we must meet the U.S. Public Health Service’s requirements,” noting that “we rate at the top of the range of CDC and FDA scores achieved by the major cruise lines.” The complaint also quotes from the company’s 10-K risk factors, in which the company noted that “The spread of the COVID-19 coronavirus, particularly in North America, could exacerbate its effect on us. Any future wide-ranging health scares would also likely adversely affect our business, financial condition and results of operations.”
The complaint alleges that these and other statements in the company’s SEC filings were false and misleading. Specifically, the complaint alleges that the defendants made false and misleading statements or failed to disclose that: “(1) the Company was employing sales tactics of providing customers with unproven and/or blatantly false statements about COVID-19 to entice customers to purchase cruises, thus endangering the lives of both their customers and crew members; and (2) as a result, Defendants’ statements regarding the Company’s business and operations were materially false and misleading and/or lacked a reasonable basis at all relevant times.”
In support of these misrepresentation allegations, the complaint quotes extensively from a March 11, 2020 Miami New Times article entitled “Leaked Emails: Norwegian Pressures Sales Team to Mislead Potential Customers About Coronavirus” (here). The news article quotes from a supposed script for the company’s sales team to use to respond to concerns about cruise cancellations and also to suggest that the virus could not survive in various cruise conditions (such as, for example, warmer weather). Among other things, the article says “managers have asked sales staff to lie to customers about COVID-19 to protect the company’s bookings.” Some of the recommended responses to customers, the article states, “are blatantly false,” such as instructions for sales reps to tell customers that coronavirus is not a concern in warm Caribbean climates.
Company sources quoted in the article suggest that the news of the coronavirus outbreak was dramatically reducing cruise bookings, while at the same time sales representatives were under harsh pressure to hit sales quotas, noting that management was “trying to downplay the disruption in sales at all costs.”
The complaint alleges that the company’s share price dropped 26.7% on these disclosures.
The complaint also quotes a March 12, 2020 Washington Post article entitled “Norwegian Cruise Line Managers Urged Salespeople to Spread Falsehoods About Coronavirus”, which, the Complaint alleges, “revealed even more about Norwegian’s sales tactics from leaked internal memoranda,” including such statements as “The coronavirus will not affect you” and “Fact: Coronavirus in humans is an “overhyped pandemic scare.” The article quotes unnamed company officials as being upset about the leaks, apparently saying of the leaks, “One of our own ratted.”
The complaint alleges that the company’s share price fell a further 35.8% on these further disclosures.
The Norwegian Cruise Lines complaint has only just been filed. It remains to be seen whether or not the complaint will prove successful. I will say that on first reading it seems like the only specific misrepresentations alleged are misrepresentations allegedly made to the company’s customers. The complaint as filed does not connect the alleged misrepresentations to customers to any specific misrepresentations made to investors. More generally, the complaint really doesn’t supply any connection between the company’s SEC filings from which the complaint quotes extensively and the alleged customer misrepresentations described in the press reports.
In any event, the fact is that the Norwegian Cruise Lines suit is undeniably a COVID-19-related securities class action lawsuit.
To be sure, a single example does not establish a trend. And the allegations presented in the complaint are very company-specific. But though the allegations are company specific, the allegations do show that the way that companies respond to the coronavirus outbreak could determine whether or not the company will experience related D&O claims. Specifically, the allegations in the Norwegian Cruise Lines complaint show that companies that allegedly try to soft-pedal the impact of the outbreak or minimize the risks to its business operations could be susceptible to management liability claims.
It remains to be seen whether there will be other coronavirus disclosure-related lawsuits filed. However, I don’t think I am going too far out on the limb to suggest that there probably will be other coronavirus-related D&O lawsuits. Among other things, I think before all is said and done there will be a number of bankruptcies that follow in the wake of the outbreak. (The U.K.-based airline Flybe has already filed for administration – the U.K. equivalent of bankruptcy — as a result of the impact of the outbreak on its operations.) Within the bankruptcy context, there could well creditor claims and other claims against company officials alleging mismanagement and other substantive violations.
The one thing that is for sure is that we have a very long way to go before the full story is told on the current coronavirus outbreak. This could prove to be a very rough ride.