In what is the fifth coronavirus outbreak-related securities class action lawsuit to date, a plaintiff shareholder has filed a securities class action lawsuit against a healthcare information software services company. The lawsuit is based on alleged misrepresentations the company allegedly made with respect to a contract the company had entered for the sale of COVID-19 test kits. The company’s share price rose on news of the agreement, but later fell following an online report raising questions about the agreement. The plaintiff’s April 29, 2020 complaint can be found here.


The Lawsuit

On April 29, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against SCWorx Corp. and its CEO Marc Schessel. The complaint purports to be filed on behalf of a class of SCWorx investors who purchased the company’s securities during the period April 13, 2020 and April 17, 2020.


The complaint alleges that in an April 13, 2020 press release (here) referring to a “first installment purchase order,” the company announced that it had “received a committed purchase order” for two million COVID-19 Rapid Testing Units, with provision for additional weekly orders of 2 million units for 23 weeks, valued at $35 million per week. According to the press release, the purchase order came from Rethink My Healthcare.


On April 17, 2020, the company issued a second press release (here), in which the company said that it “confirms previously disclosed plans to distribute COVID-19 Rapid Testing Units.” The press release again referenced the committed purchase order from Rethink My Healthcare. The press release also said that SCWorx “continues to anticipate receiving the first 2 million rapid detection kits within approximately two weeks and looks forward to providing incremental updates as they become available.”


According to the complaint, in a separate development on April 17, 2020, online research firm Hindenburg Research published a report (here) captioned with a title reading in part “Evidence Points to its Massive COVID-19 Test Deal Being Completely Bogus.”


According to the Hindenberg report, the CEO of the supplier from which SCWorx reportedly was buying the test kits, Promedical, “formerly ran another business accused of defrauding investors” and was “alleged to have falsified his medical credentials.” Promedical supposedly was sourcing the test kits with a Chinese company called Wandfo, but, the analyst report claims, “Wandfo put out a press release days ago stating that Promedical ‘fraudulently misrepresented themselves’ as sellers of its Covid-19 tests and disavowed any relationship.” The analyst report further said that the buyer that SCWorx claimed to have lined up does not appear to be “capable of handling hundreds of millions of dollars of orders.”


According to the complaint, the company’s share price fell 17% over three consecutive trading sessions following the publication of the analyst’s report.


On April 21, 2020, the SEC halted trading of the Company’s stock, effective April 22, 2020.


The complaint alleges that during the class period the defendants failed to disclose to investors: “(1) that SC Worx’s supplier for COVID-19 test had previously misrepresented its operations; (2) that SCWorx’s buyer was a small company that was unlikely to adequately support the purported volume of orders for COVID-19 tests; (3) that, as a result, the Company’s purchase order for COVID-19 tests had been overstated or entirely fabricated; and (4) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis.”


The complaint alleges that the defendants’ omissions violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and seeks to recover damages on behalf of the plaintiff class.



As noted at the outset, this complaint represents the fifth coronavirus outbreak-related securities class action lawsuit to be filed, joining those previously filed against Norwegian Cruise Lines (here), Inovio (here), Zoom (here), and Phoenix Tree Holdings Ltd. (here).


The new lawsuit against SCWorx is one of several from among these five suits based on alleged company statements about operating capabilities and opportunities to profit from the coronavirus outbreak. The Inovio lawsuit, for instance, involved allegations based on alleged statement about the company’s virus vaccine capabilities. The separate SEC enforcement action filed earlier this week against Praxsyn Corporation (which I noted in a prior blog post, here) was also based on allegations about the company’s statements about its plans to provide high-rated health care face masks.


SCWorx is also one of several companies whose stock the SEC has halted trading in recent days relating to coronavirus-related capabilities. For example, the SEC had also previously halted trading in Praxsyn’s shares. As discussed in an April 20, 2020 Law360 article (here), during the period February to April 2020, the agency had halted trading in the stocks of twenty stocks over COVID-19 concerns.


We are now well into the coronavirus outbreak and already well into the period in which the economic fallout has started to accumulate. Securities class action lawsuits related to the pandemic and its economic fallout had been slow to amass, but over the course of the past week, the pace of pandemic-related securities suit filings seems to have picked up. As the economic consequences of the outbreak continue to develop and spread, we are likely to see more lawsuits arrive. Over time, I expect many more will be filed.