In the latest securities class action lawsuit alleging that the defendant company tried to position itself to investors as able to profit from the coronavirus outbreak, a plaintiff shareholder has filed a securities suit against a company that claimed to have developed COVID-19 tests that were 100% accurate. The plaintiff alleges company’s share price soared based on the company’s statements, but later fell when news reports and regulator statements began to circulate casting doubt on the company’s claimed testing accuracy. A copy of the June 15, 2020 complaint filed against Co-Diagnostics, Inc. can be found here.
Co-Diagnostics is a medical diagnostic testing company. In early 2020, as the coronavirus outbreak began to unfold in the United States, the company developed a COVID-19 test using its own existing testing technology. In February 2020, the company received approval to sell its test in Europe and in April 2020, the company received approval to sell its test in the United States.
On June 15, 2020, a plaintiff shareholder filed a securities class action lawsuit in the District of Utah against the company and certain of its directors and officers. The complaint alleges that throughout the class period of February 25, 2020 through May 15, 2020, various company officials “made unequivocal statements to the market that its Covid-19 tests were 100% accurate – a staggering claim that appeared to set Co-Diagnostics apart from other competitors developing Covid-19 tests.” However, “as was later revealed,” the company’s COVID-19 tests are “materially less than 100% accurate – a discrepancy that can have momentous adverse consequences if Co-Diagnostics’ tests are used on a widespread basis.”
The complaint asserts that the company’s accuracy claims allowed the company “to sign lucrative contracts with state governments in the U.S. and governments around the world.” The company’s stock price soared, from below $1 per share at the end of 2019 to a share price in May 2020 of over $29 per share – “until it crashed.” The crash came “when Co-Diagnostics began acting evasively about its Covid-19 tests’ true accuracy and regulatory authorities contradicted claims made by Co-Diagnostics about the accuracy of diagnostic tests.”
On May 14, 2020, after public reports began circulating questioned Co-Diagnostics’ claims of 100% accuracy began to circulate, the company’s share price, according to the complaint, declined so rapidly that the stock stopped trading “at one or two periods during the day.” After the market closed, the complaint alleges, the company held its quarterly earnings call, in which company officials touted the number of tests the company had sold. The company did not address the questions about testing accuracy. That same evening, “in response to other drug companies’ widely reported test accuracy struggles,” media reports circulated quoting statements from the FDA to the effect that “no Covid-19 test is 100% accurate.” When the markets opened on May 15, 2020, the stock “slid to $15.80 per share.”
The complaint alleges that “during this time, and with a cloud of doubt hanging over the company’s claims of accuracy, Co-Diagnostics’ directors and officers have been rapidly stock options for pennies per share and immediately selling their shares into the market reaping millions of dollars from the fraud-inflated price of the stock.” On the other hand, “investors who believed Co-Diagnostics’ claim of 100% accuracy have lost hundreds of millions of dollars as a result of Co-Diagnostics’ blatantly fraudulent statements to the investing public.”
The plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiff seeks damages for the plaintiff class.
Over the last several weeks, there have been a number of securities class action lawsuits filed alleging that the defendant companies had tried to portray themselves to investors as positioned to profit from the COVID-19 pandemic. 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; and the lawsuits 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.
In addition to these securities suit, the SEC has also filed four civil enforcement actions in which the agency has alleged that the defendant misleadingly tried to convince investors that the company involved was positioned in some way to be able to profit from the pandemic. These four enforcement actions include the following: Praxsyn Corporation (here); Applied Biosciences Corp. (here); Turbo Global Partners (here); Nielsen/Arrayit Corporation (here).
There is no doubt that some companies will in fact be able to profit from the coronavirus outbreak; indeed, Co-Diagnostics apparently is in fact selling millions of its testing kits. The various complaints that have been filed have questioned the various defendant companies’ statements about the extent of their ability to profit, particularly where the statements have had the effect of driving up the companies’ share prices.
According to my count, this latest complaint against Co-Diagnostics represents the 12th securities class action lawsuit overall to be filed based on allegations relating to the coronavirus outbreak, and the third filed so far in June. As I noted in my recent interim update on COVID-19 and D&O exposure, I observed that the number of coronavirus lawsuits so far is relatively modest, but also that the lawsuits have arrived steadily over the last few months. I also expressed my view that we will continue to see these kinds of lawsuits for some time to come.
In the interim, market observers and D&O insurance underwriters will continue to watch for companies making outsized claims about their products, services, or ability to profit during the current pandemic. Companies making these kinds of statements and that later stumble could attract the unwanted attention of the plaintiffs’ securities attorneys, or even of the SEC.