In what is the first coronavirus-related securities class action lawsuit filed in 2021, and in what is also as far as I know the first coronavirus-related securities suit filed following the filing of an SEC enforcement action against the same company, a plaintiff shareholder has filed an action against diagnostic testing company Decision Diagnostics Corp., relating to the company’s claims during the period March to June 2020 that it had developed a finger-prick test that could detect COVID-19 in less than one minute. A copy of the plaintiff’s complaint can be found here.
The Lawsuit
Decision Diagnostics Corp. is a diagnostics and home testing products company based in California. Its shares trade on the OTC Pink market. On January 15, 2021, a plaintiff shareholder filed a securities class action lawsuit complaint against the company and its CEO. The complaint purports to be filed on behalf of a class of investors who purchased the companies shares between March 3, 2020 and December 17, 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.
The complaint alleges that during the period March to June 2020, the company released a series of press releases in which the company claimed that it had developed a finger-prick blood test that could quickly detect the COVID-19. The company also representations regarding its progress in achieving U.S. Food and Drug Administration (FDA) emergency use authorization (EUA) for the purported finger-prick blood test.
The complaint alleges with respect to these company statements that the defendants made false and/or misleading statements or failed to disclose that “(i) Decision Diagnostics had not developed any viable COVID-19 test, much less a test that could detect COVID-19 in less than one minute; (ii) the Company could not meet the FDA’s EUA testing requirements for its purported COVID-19 test; (iii) accordingly, Defendants had misrepresented the timeline within which it realistically could bring its COVID-19 test to market; (iv) all of the foregoing subjected Defendants to an increased risk of regulatory oversight and enforcement; and (v) as a result, Defendants’ public statements were materially false and misleading at all relevant times.”
The complaint alleges further that on December 17, 2020, the SEC filed an enforcement action against the defendants.
As detailed here (in the second item in the post), the complaint, which can be found here, alleges that in Spring 2020, the company’s CEO, Keith Berman, “went on a publicity blitz to portray the company as having created a working, break-through technology that could accurately test for Coronavirus disease 2019 … using just a finger-prick of blood and provide results in less than a minute.” However, the SEC alleges, the company did not have a test, only an idea that had not materialized into a product.”
The SEC alleges in its complaint that Berman’s various statements drove up the price of the company’s shares. On April 23, 2020, the Commission issued an order suspending trading in the company’s stock. Between the time of the company’s first press release about its supposed test on March 3, 2020 and the time the SEC suspended trading in the company’s shares, the company’s share price rose nearly 1,200%. In addition, trading volume in the company’s shares also soared, rising 860% in early April, and 1,700% a few days later.
The SEC’s complaint alleges that Berman and the company violated Section 10(b) of the Exchange Act of 1934. The complaint seeks to enjoin Berman and the company from violating the securities laws; an order requiring the company and Berman to pay civil money penalties; a bar prohibiting Berman serving as a director or officer of any public company; and a bar prohibiting Berman from participating in penny stock transactions.
The recently filed securities class action lawsuit complaint alleges that following the filing of the SEC complaint, the price of the company’s shares fell $0.06 per share, or 60%, to close at $0.04 on December 18, 2020.
Discussion
As I noted at the outset, this lawsuit is the first coronavirus-related securities suit to be filed so far in the New Year, and it is, by my count, the 24th coronavirus-related securities suit to be filed during the period March 2020 to the present. (Please note that, largely as a result of differing classification, my count varies from other publicly available tallies.) As I also noted at the outset, this lawsuit is the first coronavirus-related securities class action lawsuit to be filed following the filing of a coronavirus-related SEC enforcement action.
The lawsuit is similar to many of the previously filed coronavirus-related securities suits, in that it is based on allegations that the defendant company made allegedly false public statements about its ability to profit or benefit from the coronavirus outbreak. Like many of the other lawsuits, this lawsuit is based on alleged company statements made relatively early in the coronavirus outbreak.
The thing that surprises me about this lawsuit is that the plaintiff law firm is bothering with this suit. Though the company’s share price declined 60% on the news of the SEC enforcement action, that decline in the share price represents a fall from ten cents to four cents. The maximum aggregate plaintiffs’ style damages in this case are going to be quite small. Regardless of what else might be said about the allegations in the plaintiff’s complaint, this is not a major lawsuit by any stretch of the imagination.
While this lawsuit is the first coronavirus-related securities lawsuit in 2021, the more interesting question about this lawsuit’s filings is whether we will continue to see further coronavirus-related suits as the year progresses.
As the public health crisis phase extends far beyond what most of us imagined, companies will be making a variety of statements about their ability to weather the crisis, to bounce back or re-open, and to resume normal operations. The companies will also be making statements about the ongoing impact of the pandemic on their operations and financial results. If the companies stumble after making these kinds of statements, they may well attract the unwanted attention of the plaintiffs’ lawyers. And as this lawsuit might be interpreted to suggest, there apparently is no occasion too small for plaintiffs’ lawyers to try to exploit.