A California-based vaccine development company has been hit with a coronavirus outbreak-related securities class action lawsuit, based on the company’s statements about its COVID-19 vaccine development efforts and about the company’s participation in a federal government vaccine development program. In addition, in a separate development, a different company has been hit with a coronavirus outbreak-related shareholder derivative lawsuit, based on the company’s statements concerning its ability to provide COVID-19 testing kits.
Vaxart Securities Class Action Lawsuit
According to the complaint in the securities class action lawsuit filed against the company on August 24, 2020, at the beginning of 2020, Vaxart, a vaccine development company, had only 14 full-time employees and a market capitalization of $17 million. Its largest shareholder, Armistice Capital LLC, owned shares and warrants representing about a 30% ownership stake in the company.
In early 2020, the company’s share price began to climb, from just 0.35 per share to $2.92 per share on June 2, 2020, following several statements by the company about its efforts to develop an oral COVID-19 vaccine.
On June, 8, 2020, the securities complaint alleges, the company amended Armistice’s warrant agreements, allowing Armistice to exercise its warrants immediately. The company also issued millions of dollars of stock options to Vaxart’s most senior executives.
On June 25, 2020, the company issued a press release announcing that it had entered an agreement to enable production of one billion or more COVID-19 vaccine doses annually. The company’s share price doubled on the announcement, from $3.61 per share to $6.26 per share.
On June 26, 2020, the company issued another press release stating that Vaxart’s vaccine had been selected for the U.S. government’s “Operation Warp Speed” (a government initiative to encourage development of a COVID-19 vaccine). This announcement caused the company’s share price to rise to a high of $14.30.
Between June 26 and June 29, 2020, the complaint alleges, Armistice exercised all of its warrants and then sold over 27.6 million Vaxart shares, reaping profits of approximately $200 million.
On July 25, 2020, the complaint alleges, “details emerged revealing Defendants’ deception” concerning “their pump and dump scheme.” On July 25, the New York Times published an article entitled “Corporate Insiders Pocket $1 Billion in Rush for Coronavirus Vaccine” (here), reporting, among other things, on Vaxart’s executives and major shareholders significant profits in trading in the company’s shares following the company’s announcement of its participation in Operation Warp Speed. The Times article reported that Vaxart “is not among the companies selected to receive significant financial support from Warp Speed.” The complaint alleges that the company’s share price declined on this news.
On August 24, 2020, a plaintiff shareholder filed a securities class action lawsuit against the company, its current CEO, its former CEO (and director), Armistice, and two Armistice executives who served on the Vaxart board. The complaint states that the action arises from “Defendants’ fraudulent scheme to profit from artificially inflating the Company’s stock price by announcing false and misleading information concerning Vaxart’s oral COVID-19 vaccine candidate, including its purported involvement in ‘Operation Warp Speed’ (OWS), a program which commits federal government to massive funding for the development of COVID-19 vaccines.”
The plaintiff shareholder purports to represent a class of investors who purchased Vaxart securities during the period June 25, 2020 to July 25, 2020. 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, and seeks damages on behalf of the class.
SCWorx Derivative Suit
In a separate development, on August 21, 2020, a plaintiff shareholder filed a derivative lawsuit in the Southern District of New York against the board of directors of SCWorx Corp., as well as against the company itself as a nominal defendant. A copy of the derivative lawsuit complaint can be found here.
SCWorx is a healthcare information software services company. The derivative 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. As discussed here, the company and certain of its directors and officers previously had been hit with a securities class action lawsuit based on essentially the same allegations.
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 seeks to recover damages from the defendant directors for breaches of their fiduciary duties as directors and/or officers of SCWorx, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and for contribution under Sections 10(b) and 21D of the Securities Exchange Act of 1934.
According to my tally, the securities suit filed against Vaxart represents the 20th corornavirus outbreak-related securities class action lawsuit that has been filed so far. (As I have noted in prior posts about coronavirus-related securities litigation, my tally differs from other published tallies, as I have included in my tally a number of securities suits that others have not.)
The securities suits generally fall into three categories: (1) companies that have been sued because the companies experienced a COVID-19 outbreak in company facilities (for example, cruise lines and a private prison system); (2) companies, like Vaxart, that are alleged to have made misleading statements about the company’s ability to profit from the pandemic; (3) companies who share prices declined due to business interruption or revenue downturn as a result of the pandemic or government stay-at-home orders. We probably will continue to see more lawsuits in the second category, but going forward I think we will see more lawsuits falling in the third category.
Though there have now been (at least according to my count), at least 20 coronavirus-related securities class action lawsuits filed, that is a relatively modest number of cases, at least in the context of securities class action lawsuit filing patters over the last three years, in which the total number of securities suits exceeded 400 per year. To be sure, a total of 20 suits does represent a significant phenomenon, worth following and monitoring, even it is not the same type of wave of litigation that, for example, following in the wake of the global financial crisis.
According to my count, the shareholder derivative lawsuit filed against SCWorx is the third coronavirus related derivative lawsuit filed so far. All three of the derivative lawsuit have involved companies that previously had been sued in securities class action lawsuits based on substantially the same allegations. (The other two derivative suits involved Inovio and Zoom). So far at least, coronavirus-related derivative litigation has not been a significant separate phenomenon.