In the latest sign that coronavirus-related securities lawsuits are continuing to be filed, a plaintiff shareholder has filed a securities suit against a biotechnology company and two if its executives, alleging that the company drove up its share price by promoting its HIV-focused drug candidate as a treatment for COVID-19. Although the new complaint is similar in many respects to prior COVID-19-related securities lawsuits, it has several distinct features as well. A copy of the plaintiff’s complaint can be found here.
CytoDyn is a biotechnology which as been focused on the development of a drug named “Leronlimab” as a therapy for HIV patients. On March 17, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Western District of Washington against CytoDyn; Nader Pourhassan, its CEO; and Michael Mulholland, its CFO. The complaint purports to be filed on behalf of a class of investors who purchased CytoDyn stock between March 27, 2020 and March 9, 2021.
The complaint alleges that after the outbreak of the global pandemic, CytoDyn “made an about-face” and began “to aggressively tout Leronlimab as a treatment for COVID-19.” After the “pivot to hyping Leronlimab as a treatment for COVID-19,” the complaint alleges, the company’s stock price rose “exponentially,” moving from below $1.00 per share in 2019 to over $10 per share at its peak on June 30, 2020. The complaint further alleges that the company used press releases, interviews, and aggressive use of third-party investor relations and stock newsletter services to “tout Leronlimab as a potential treatment for COVID-19” and to “pump up” the company’s stock price.
The complaint further alleges that while the company’s share price was “sufficiently pumped” with COVID-19 “cure hype,” long-term shareholders, including Pourhassen and Mulholland, “dumped millions of shares.” On April 30, 2020, Pourhassan allegedly exercised options and then sold over 4.8 million shares, representing 85% of his holdings in the company’s stock, for over $15.7 million. In two separate late December stock sales, Mulholland sold over 1.8 million shares for approximately $10.2 million. The company also allegedly enabled its lender, Iliad Research, to exercise its right to convert a convertible promissory note into newly issued company shares and to sell those shares in the public market at a profit, “in violation of the dealer registration requirements of federal securities laws.”
The complaint alleges that “following the Individual Defendants’ cash-out of CytoDyn shares at artificially inflated prices,” the price of CytoDyn shares “dropped precipitously” to the detriment of the plaintiff class, after the market “learned that CytoDyn’s development and marketing of Leronimab as treatment for COVID-19 was not commercially viable.”
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 the recovery of damages on behalf of the plaintiff class.
By my count, the new CytoDyn complaint represents the 29th COVD-19-related securities class action lawsuit to have been filed since the beginning of the U.S. outbreak last March. (Please note that my count may differ slightly from other publicly available tallies; for example, the Stanford Law School Securities Class Action Clearinghouse has a slightly different count (here), primarily due to definitional issues – that is, what is it that makes a lawsuit “coronavirus-related”?)
The CytoDyn lawsuit is also the first coronavirus securities lawsuit to be filed in over a month and the sixth to be filed so far in 2021.
The intervening month lag since the last pandemic-related securities suit filing might have been interpreted to suggest that the coronavirus-related securities litigation phenomenon might have played out; as discussed below, the arrival of this lawsuit does suggest that it may have further to run yet.
As I have noted in prior posts about the coronavirus-related securities suits, the filings generally have fallen in one of three categories: suits involving companies that experienced virus outbreaks in the their facilities; suits involving companies that promoted themselves as positioned to profit from the outbreak; and companies that reporting downturn in the operations or financial results as a result of the outbreak.
This new lawsuit against CytoDyn clearly falls in the second of these three categories, as it is based on the company’s alleged effort to promote its drug therapy as a treatment for COVID-19. Many of the other life sciences companies that have been hit with coronavirus-related securities suits also are similarly alleged to have tried to promote themselves as able to profit from the outbreak.
While the new CytoDyn lawsuit has several features in common with at least some of the prior coronavirus-relate securities lawsuits, there are also some notable differences. For starters, the class period proposed is much longer than the period proposed in many of the prior suits. Whereas many of the prior suits, particularly those filed shortly after the U.S.-outbreak of the pandemic, proposed only very short class periods, the CytoDyn complaint proposes a nearly year-long period running from March 27, 2020 to March 9, 2020.
The brevity of the proposed class periods in the prior lawsuits is hardly surprising given the proximity of their filing to the beginning of the outbreak. The fact that this later-filed securities suit proposes a longer class period suggests that the other later-filed suits could similarly try to extend the length of the class period, and potentially to increase the number of shareholder plaintiffs (and of course to try to increase the damages alleged as well). The fact that the proposed class period cutoff is as late as March 9, 2021 suggests that current and ongoing conduct could contribute to possible future claims. The fact is that the public health emergency phase of the pandemic is Bocontinuing, creating the risk that ongoing company conduct could be the source of future claims.
This new lawsuit has only just been filed and it remains to be seen how it will fare. It is noteworthy that this lawsuit, arguably by contrast to many of the prior COVID-19-related suits, contains allegations of supposedly profitable insider trading. These kinds of allegations at least potentially could affect the way that the claims in the complaint are perceived.
The fact that this pandemic-related lawsuit is now being filed now over a year into the public health crisis reinforces my view that we still have not seen the last of these COVID-19-related securities lawsuit filings. The likelihood is that we will continue to see further of these lawsuits filed.