As I have been monitoring coronavirus-related D&O claims activity in recent weeks, one area I have been watching in particular is the filing of SEC enforcement actions based on pandemic-related allegations. As I noted at the time it was filed, there has already been one coronavirus-related SEC action filed. Now, on May 14, 2020, the SEC has filed two more coronavirus-related enforcement actions, and its press release accompanying the filings the agency stated that it is “actively monitoring the markets to detect potential fraudsters” who are trying to exploit the current health emergency in order to reap gains by misleading investors. The SEC’s May 14, 2020 press release about its filing of the two actions can be found here.
Applied Biosciences, Corp.
The first of the two new enforcement actions is filed against Applied Biosciences Corp., a Nevada corporation with its principal place of business in New York. Applied is in the business of developing cannabinoid therapeutics and pharmaceuticals. Its shares trade on the pink sheets.
According to the SEC’s May 14, 2020 complaint filed in the Southern District of New York against Applied (here), in late March 2020, and “seeking to exploit the COVID-19 pandemic for profit,” Applied “dramatically shifted its focus” to pandemic-related products. In two press releases dated March 25, 2020 and March 31, 2020, the company announced that it had pivoted its manufacturing resources to build products that would help battle COVID-19, including hand sanitizer. In the second of the two press releases, the company announced it would be offering and shipping a COVID-19 home test kit to the general public for private use.
In fact, the complaint alleges, Applied did not offer or intend to sell the test kits for home use by the general public, and it had not begun shipping any test kits. The company’s press releases did not disclose that the tests were not authorized by the U.S. Food and Drug administration.
The SEC’s complaint alleges that after the March 31 press release, the trading volume and price of Applied’s securities increased significantly. The company’s share price increased almost 80 percent and the volume increased by a factor of 85. On April 13, 2020 the SEC suspended trading in the company’s securities.
The SEC”s complaint alleges that the company’s alleged misrepresentations violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The complaint seeks to enjoin the company from violating the securities laws and seeks civil money penalties.
Turbo Global Partners, Inc.
The second of the new enforcement actions is filed against Turbo Global Partners, Inc. and its CEO, Robert Singerman. A copy of the agency’s May 14, 2020 complaint filed in the Middle District of Florida against Turbo can be found here.
Turbo is a Nevada corporation with its principal place of business in Florida. Turbo’s shares trade on the Pink Sheets. Turbo is a digital marketing company that places digital displays inside business locations. Singerman, according to the complaint is a “recidivist securities violator” whom in 1999 the SEC had charged with fraud base on his fraudulent sale of securities through a “boiler room” operation. The prior enforcement action has resulted in the entry of a permanent injunction enjoining him from further fraudulent sales.
The SEC’s complaint against Turbo relates to two press releases the company issued, dated March 30 and April 3, 2020. The press releases related to a purported “strategic alliance” the company has with BeMotion, Inc. The press releases represented that Turbo and BeMotion were actively selling equipment that could scan large crowds of people to detect and identify individuals with elevated temperatures. The press releases claimed this “unique technology” could “break the chain of virus transmission.” The press releases further represented that Turbo was an “intermediary” in a public/private partnership, that the product was available to be deployed immediately, and that Turbo could ship the product within five days of receiving an order.
All of these claims were “false,” according to the SEC’s complaint. In fact, the complaint allges, Turbo had no agreement to sell the product, there was no partnership involving any governmental entities, and BeMotion’s CEO did not make the statements attributed to him in the press releases.
The SEC alleges that the press releases “materially impacted both the trading volume and the share price” of Turbo’s securities, causing volume to double and the price to increase by 15%. The SEC suspended trading in the company’s shares.
The complaint alleges that the company and Singerman violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks injunctive relief against the defendants; an officer bar against Singerman; and civil penalties.
The SEC’s press release announcing the filing of these two complaints includes a statement by Stephanie Avakian, the co-director of the SEC”s enforcement division saying that “We are actively monitoring the markets to detect potential fraudsters who seek to use the COVID-19 crisis as a basis for investment scams,” noting that “As alleged in these complaints, Applied BIoSciences and Turbo Global sought to take advantage of the COVID-19 crisis by misleading investors about their ability to provide solutions.”
The press release also quotes Steven Peikin, the other Enforcement Division co-director, as saying that “These frauds demonstrate the SEC’s vigilance over public companies that make materially misleading claims in press releases,” adding further that “We will continue to act swiftly when necessary to protect investors.”
Pretty clearly the SEC is watching out for companies that are making statements about their ability to cash in on the pandemic, and is going to come down hard on companies that misrepresent their ability to provide pandemic-related products or services. The SEC is also clearly making an example of these companies (and the company against which it previously filed a coronavirus outbreak-related enforcement actions) as a means to try to deter other actions that might mislead investors.
It is interesting that the time frames involved in each of these cases is relatively short, only a matter of days. This has also been the case with several of the coronavirus-related securities class action lawsuits that have been filed; the class periods on those cases have also been short – in one case, the class period is only four days long. Though there have been securities suits filed with short class periods, the brevity of the period of the alleged fraud, along with the thin volume and small share prices involved, may provide little incentives to file securities class action lawsuits against some of these companies involved in this alleged misconduct.
Nevertheless, it is significant that the SEC is expressly focused on companies that are making alleged misrepresentations with respect to the COVID-19 outbreak. The agency’s focus suggests that there will be further pandemic-related enforcement actions to come. In at least some instances, the agency’s actions may result in follow-on private securities litigation as well.
Only time will tell, but it will also be interesting to see if the SEC continues to focus on these issues as companies shift from re-open, assess their financial condition, and attempt to re-establish business operations.