A plaintiff shareholder has filed a securities class action lawsuit against a diagnostic testing company alleging that the company misrepresented the accuracy of its COVID-19 antibody test. The company’s share price, which had risen on the news of the FDA’s authorization of the company’s test, declined after the FDA announced it was revoking the authorization due to performance concerns with the accuracy of the test. As detailed further below, this new lawsuit is the latest in a series of securities suits that have been filed since the coronavirus outbreak began against companies that are alleged to have made misrepresentations concerning their ability to provide coronavirus-related therapies, testing, or equipment.
Chembio Diagnostics provides technology for detecting and diagnosing infectious diseases. At the onset of the coronavirus outbreak, the company focused on developing a COVID-19 antibody test. Chembio’s antibody test was one of the first antibody tests authorized by the FDA during the COVID-19 public health emergency.
According the subsequently filed securities class action complaint, the company represented that its test for detecting COVID-19 antibodies aided in determining current or past exposure to the COVID-19 virus, that its test provides high sensitivity and specificity, and was 100% accurate. The complaint also alleges that the company’s share price climbed from $5.12 per share on March 31, 2020 to $15.54 on April 24, 2020.
On May 11, 2020, the company closed on a public offering of approximately 2.6 million shares of Chembio stock at $11.75 per share for gross proceeds of $30.8 million.
On June 16, 2020, after the market had closed for the day, the FDA issued a press release (here) in which the agency announced that it had “revoked” Chembio’s Emergency Use Authorization for the company’s antibody tests. The press release stated that it had revoked the authorization “due to performance concerns with the accuracy of the test.” The press release further stated that “data submitted by Chembio as well as an independent evaluation of the Chembio test … showed that this test generates a higher than expected rate of false results and higher than that reflected in the authorized labeling for the device.” The press release also said that under the circumstances “it is not reasonable to believe that the test may be effective in detecting antibodies against SARS-CoV-2 or that the known and potential benefits of the test outweigh the known and potential risks of the test, including the high rate of false results.”
On June 17, 2020, the company filed a report with the SEC on Form 8-K in which the company disclosed that the FDA had revoked the authorization.
On June 18, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against Chembio; its CEO; and its board chair. A copy of the complaint can be found here. The complaint purports to be filed on behalf of a class of investors who purchased Chembio’s shares between April 1, 2020 and June 16, 2020. The complaint alleges that the defendants “misrepresented and failed to disclose that the Company’s DPP COVID-19 test did not provide high-quality results and there were material performance concerns with the accuracy of the Company’s DPP COVID-19 test.”
The complaint alleges that on June 17, 2020, the first trading day after the FDA released its letter announcing the revocation of authorization of Chembio’s test, the company’s share price fell from $9.93 per share (at the close of trading on June 16, 2020) to $3.89 per share (at the close of trading on June 17, 2020), a decline of over 60%.
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
As I noted above, this lawsuit is the latest in a series of post-coronavirus outbreak securities suit filings in which the plaintiff shareholders have alleged that the defendant companies allegedly misrepresented their ability to provide COVID-19-related therapies, testing, or equipment.
The prior lawsuits include the securities suit filed against Inovio (described here), in which allegations were based on the company’s claims of its readiness to develop a COVID-19 vaccine; the lawsuit filed against Sorrento Therapeutics (discussed here), based on the company’s claims to have developed an antibody providing COVID-19 immunity; the lawsuit filed against SCWorx (described here) based on the company’s public statements that it had received confirmed orders for millions of COVID-19 rapid testing kits; and the lawsuit filed against Co-Diagnostics (discussed here), based on the company’s statements that its coronavirus test was “100% accurate.”
The common thread among these lawsuits is that in each case the company allegedly misled investors by making statements about the company’s ability to respond to (and perhaps profit from) the COVID-19 health emergency.
The lawsuit is in any event the 13th coronavirus-outbreak related securities class action lawsuit that has been filed between March 12, 2020 and now. Of the 13 coronavirus-related lawsuits, five involve life sciences or health care services companies. Four of the 13 have been filed so far in June.
As I have conjectured in my prior posts discussing these various coronavirus-related securities lawsuits, there are likely to be more coronavirus-related lawsuits to come. Even though the filing pace of the coronavirus-related lawsuits has been relatively modest and the list of lawsuits has grown relatively gradually, the cumulative number of lawsuits is starting accumulate. As seemed has always seemed likely to be the case, the growing likelihood is that coronavirus-related lawsuits are going to represent a significant D&O claims phenomenon.