In a post late last week I noted the filing of the first coronavirus-related securities class action lawsuit, commenting at the time that though the lawsuit was the first, it was unlikely to be the last. I did not suspect that the next coronavirus-related securities suit would come quite so quickly – in fact, it appears that the second coronavirus-related suit might actually already been filed then. On March 12, 2020, an Inovio Pharmaceuticals shareholder filed a securities class action lawsuit against the company and its CEO based upon the CEO’s statements about the company’s development of a COVID-19 vaccine. A copy of the Inovio Pharmaceuticals complaint can be found here.
On March 12, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of Pennsylvania against the company and its CEO, J. Joseph Kim, asserting claims based on Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and on Rule 10b-5. The complaint purports to be filed on behalf of a class of Inovio shareholders who purchased their shares between February 14, 2020 and March 9, 2020.
The complaint alleges that on February 14, 2020 Kim appeared on Fox Business News and stated that Inovio had developed a COVID-19 vaccine “in a matter of about three hours once we had the DNA sequence from the virus, and “our goal is to start phase one human testing in the U.S. early this summer.” The complaint alleges that the price of the company’s shares rose more than 10% in the next few days after this televised statement.
The complaint alleges further that in a “well-publicized” March 2, 2020 meeting with President Trump, Kim stated that Inovio had developed a COVID-19 vaccine, stating “we were able to fully construct our vaccine within three hours … our plan is to start [trials] in April of this year.” The complaint alleges that the based on this statement the price of Inovio’s share “more than quadrupled” in the next few trading days, reaching an intra-day high of $19.36 on March 9, 2020. (Here is a video clip of Kim’s speech at the March 2 meeting.)
However, the complaint alleges, “in truth, Inovio had not developed a COVID-19 vaccine.” The complaint alleges that on March 9, 2020 Citron Research posted a statement on Twitter that according to the complaint “exposed Defendants’ misstatements.” The Citron report called for an SEC investigation into Inovio’s “ludicrous and dangerous claim that they designed a [COVID-19] vaccine in 3 hours.”
The complaint alleges that on the trading day after the Citron Research statement, Inovio’s share price fell from $18.72 per share to $9.83, and the next day fell even further to close at $5.70 per share. According to the complaint, the two day drop represented a 71% decline from the class period high and a $643 million loss of market capitalization.
The complaint alleges that the same day as the Citron report the company issued a statement that “attempted to blunt the Citron revelations but only highlighted its own misstatements,” among other things allegedly “admitting that it had not developed a COVID-19 vaccine but rather had merely ‘designed a vaccine construct’ – i.e., a precursor to a vaccine – and that it believed that it had a ‘viable approach to address the COVID-19 outbreak.”
The complaint alleges that the “Defendants falsely described their product as a fully completed vaccine when it was nothing of the sort.” The defendants “falsely claimed they had developed the vaccine in a matter of hours, which is a scientific impossibility.” The defendants also “falsely state that they would be able to begin human trials in April 2020 when they had no reason to believe that they would have the necessary regulatory approvals to do so.”
The allegations in the complaint are, of course, only that – allegations. The interesting thing about these allegations is that there is nothing here that says that this company might not be the one that could actually develop the vaccine. Indeed, shortly after the events described in the complaint, the company received a grant from the Bill and Melinda Gates Foundation to test a COVID-19 vaccine delivery device.
In an earlier post in which I projected that we might see misrepresentation or mismanagement claims involving the coronavirus outbreak, I was thinking that the claim likely would relate to statements about or actions taken in connection with the companies readiness for or response to the outbreak. I guess in a sense that is what this lawsuit is about, as it does involve at a certain level of generalization the company’s statements about its readiness for and response to the outbreak. I have to say though that I did not foresee the possibility of a claim quite like this one.
This claim does make me think we are going to see all kinds of claims, as businesses of all types deal with the very unusual conditions we are experiencing. This claim certainly does confirm a point I made in an earlier post about the coronavirus outbreak, which is that D&O insurance underwriters are going to want to very carefully review applicant companies’ statements about their readiness for and response to the pandemic.
This claim does make me ponder what other kinds of corona-virus related claims we might see. I am sure there will be claims that right now I can’t even imagine. But one possibility that does occur to me that could lie ahead are claims based on allegations that when companies reported on the outbreak’s impact on the companies’ operating results, that the companies tried to soft-peddle the impact or downplay the seriousness of the outbreak’s disruption on their business. A lot of companies’ first quarter 2020 results are going to take a huge hit from the outbreak, and what the companies say about the impact could affect the companies’ potential involvement in D&O claims.
There could also be further claims like this one as well, where companies allegedly try to portray themselves as positioned to take advantage of the outbreak or as positioned to prosper because of the outbreak.
Even though the current global health crisis is far different from the global financial crisis in the 2008-2009 time frame, the two circumstances do share some common features, at least one of which is that there are likely to be a lot of interesting D&O claims now, just as there were back then.
Special thanks to the several readers who sent me a copy of the Inovio complaint.
I Feel More Certain of This Prediction: Take the next, say, four to six weeks, add nine months, and there are going to be a LOT of babies born. Call it the Corona Baby Boom. Coming to your neighborhood in early 2021.