As I have detailed in a series of post on this blog (most recently here), over the last year plaintiffs’ lawyers have filed nearly 30 COVID-19-related securities class action lawsuits. While the plaintiffs’ lawyers’ have been quick to file these cases, it remains to be seen how the claims will fare. Indeed, in January, in the first case to reach initial pleading hurdles, the Court granted the defendants’ motion to dismiss (as discussed here). However, in a more recent ruling one of the first of the COVID-19-related securities suits to be filed, the Court has denied the defendants’ motion to dismiss in significant part. The February 16, 2021 opinion of Eastern District of Pennsylvania Judge Gerald J. Pappert in the securities lawsuit pending against Inovio Pharmaceuticals can be found here.
Inovio Pharmaceuticals is a vaccine research and development company. As discussed here, the securities class action lawsuit filed against the company and certain of its executives alleges that during 2020 the company and its CEO, J. Joseph Kim, made a series of alleged misrepresentations about the company’s ability to develop and manufacture a COVID-19 vaccine.
As detailed in the plaintiffs’ first amended consolidated complaint (here), the plaintiffs’ allege that the defendants’ made three sets of misrepresentations: first, the plaintiffs allege that in March and April 2020, Kim made statements on national TV and in a press conference at the White House that within three hours or accessing the COVID-19 genetic sequence the company had “constructed” a vaccine; second, during the period March to May 2020, the company and Kim made a series of statements about the company’s increase of its manufacturing capabilities and its manufacturing partnerships, and that the company was on the “right track” to produce one million of doses in 2020; and third, in a June 30, 2020 press release, the company announced that its vaccine had been “selected” to participate in operation the U.S. government’s Operation Warp Speed.
The plaintiffs claimed that these statements were misleading. First, the plaintiff claimed that that the early statements that the company had “constructed” a vaccine were misleading because at most the company had “designed” a vaccine, and publicly claiming to have “constructed” a vaccine was misleading because of the important difference between the two. Second, the plaintiffs claim that the company’s statements about its manufacturing capabilities were misleading because the company was locking in a dispute with its existing manufacturing partner, which refused to share its intellectual and processes, without which other manufacturers could not manufacture the vaccine, and further that the manufacturers the company had approached did not have the capacity to produce one million doses in 2020. Finally, the plaintiffs claim the Operation Warp Speed comments were misleading because the company’s vaccine had been selected for a preliminary study, not as a candidate for government funding.
The plaintiffs also noted that during the class period, the company had raised over $300 million from investors in at-the-market offerings, and that Kim and another executive had sold their personal shares of the company’s stock, in each case for millions of dollars. The plaintiffs allege that the defendants had driven up the company’s share price in order to maximize gains from these transactions.
The defendants filed a motion to dismiss the plaintiffs’ complaint.
The February 16, 2021 Ruling
In his February 16, 2021 ruling, Judge Pappert denied the defendants’ motion to dismiss with respect to the February and March statements that the company had “constructed” a vaccine in three hours; largely denied the motion to dismiss the plaintiffs’ claims about the company’s manufacturing capabilities; but granted the motion with respect to the plaintiffs’ claims based on the company’s statements about its participation in Operation Warp Speed.
With respect to the plaintiffs’ claims based on the company statements that it had constructed a vaccine in three hours, the parties disagreed whether the word “construct” was interchangeable with the word “design.” Judge Pappert said that “whether ‘construct’ and ‘design’ are synonyms in this context … are questions of fact inappropriate for resolution at the motion to dismiss stage.” He noted that “by alleging Defendants clamed to have achieved something they di not achieve and thereby instilling false confidence in investors, Plaintiffs have satisfied their burden of alleging why Kim’s statements were misleading.”
Judge Pappert also concluding that the plaintiffs had sufficiently alleged scienter with respect to the statements that the company had constructed a vaccine in three hours, noting that Kim had extensive background and experience in the pharmaceutical industry, which “strongly suggests he would understand the difference between constructing and designing a vaccine.” Judge Papper also noted that the plaintiffs allegations support the contention that Kim had a motive to mislead as he hoped to personally profit from his sale of shares, noting that neither Kim nor the other executive who sold shares had sold stock in the year-and-a-half leading up to their 2020 sales and that they sold their shares at a time when the share price had risen based on optimism that Inovio could produce a vaccine.
With respect to the allegations about the company’s statements concerning its progress toward producing one million doses in 2020, Judge Pappert rejected the defendants’ claims that these were protected forward-looking statements, as they related to present manufacturing capabilities. Judge Pappert also concluded that the plaintiffs had “plausible alleged” that the defendant had misled investors by suggesting that its available manufacturing options could produce vaccines in volume given the company’s dispute with its current manufacturing partner and that partner’s refusal to release intellectual property. Judge Pappert concluded that the plaintiffs had sufficiently alleged facts to establish the falsity of Kim’s statement that the company was on track to meet its goal of producing one million doses in 2020.
However, Judge Pappert found that the plaintiffs had failed to establish falsity of the defendants’ April 30, 2020 statements about its deal with manufacturer Richter-Helm, as the plaintiffs had failed to establish why the statement that the deal would “significantly expand” manufacturing of the vaccine was misleading.
Judge Pappert also concluded that the plaintiffs had sufficiently alleged scienter with respect to the alleged misrepresentations about the company’s vaccine manufacturing capabilities, noting that the plaintiffs had alleged that the company’s manufacturing alternative partners could not produce the vaccine without a technology transfer from the company’s prior manufacturing partner, a transfer to which the prior partner would not agree, which also supported an inference of scienter as to the statement that the company was “on track” to manufacture one million doses in 2020.
Finally, Judge Pappert concluded that the plaintiffs’ claims concerning the company’s statements about Operation Warp Speed were not sufficient. Judge Pappert found that the pertinent press release had not claimed that the company would be receiving government funding and that the press release disclosed only that it had been chosen to participate in a government-backed study.
In reporting on the COVID-19-related securities suits as they have been filed, I have noted that the lawsuits seem to fall into one of three categories: cases involving companies that experienced outbreaks in their facilities; companies that allegedly made statements about their ability to profit or prosper from the pandemic; and companies that reported disruption of operations and financial results due to the pandemic.
This case falls into the second category, as it involves alleged statements about the prospects and opportunities the company believed it would have due to the pandemic. The COVID-19-related securities lawsuit involving Velocity Financial that, as reported here, was the first to reach a dismissal motion ruling, involved allegations falling in the third category – that is, that the company had failed to disclose the impact of the pandemic on the company’s business and operations.
Although how individual case will fare at the motion to dismiss stage will very much depend on the merits of the allegations in the complaint, the lawsuits in the second category, like this one, may prove to be the toughest for the defendants to get dismissed. The second category claims, that is, those involving allegations that the company claimed an ability to profit or prosper from the pandemic, seem to lend themselves more easily to a theory that the defendants sought to actively mislead investors. The first category – involving companies that experienced an outbreak in their facilities – and the third category – that is, companies that experienced a downturn in operations or finances from the pandemic – may involve circumstances where the defendants can try to argue that they were blindsided by an unanticipated public health crisis. In other words, the second category claims – claims like this one against Inovio – may prove to be the most difficult to get dismissed. In that regard, it is worth nothing that almost all of the pandemic-related enforcement actions that the SEC has filed, most of them involve second category-type claims, relating to companies that made statements claiming that their enterprise could profit from the pandemic.
Many of the pending COVID-19-related securities lawsuits were filed in the Spring last year, so a number of them could be nearing the dismissal motion stage. There could be several dismissal motion rulings in the next few months. In the meantime, as I have noted (most recently here), the plaintiffs’ lawyers continue to file pandemic-related securities lawsuits. Indeed, by my count, of the 28 COVID-19-related securities suits that have been filed since last March, five have been filed so far in 2021. Indications are that plaintiffs’ lawyers will continue to file these claims. As I noted at the outset, it remains to seen how they ultimately will fare.