Even though the worst of the pandemic crisis in the U.S. appears, at least for now, to be past, the threat of COVID-19-related claims continues. In the latest example of the continuing COVID-19-related claim threat, the SEC has initiated a COVID-19-related enforcement action against a California-based digital health care company that had made claims early in the coronavirus outbreak about the company’s ability to profit from the outbreak. The SEC’s new action is a reminder that the threat of new COVID-19-related claims is ongoing. A copy of the SEC’s July 7, 2021 complaint against Parallax Health Sciences, Inc. can be found here. The SEC’s July 7, 2021 press release about the enforcement action can be found here.
According to the SEC’s complaint, between March 11, 2020 and April 9, 2020, Parallax issued a series of seven press releases “about the company’s ability to capitalize on the COVID-19 pandemic.” The SEC alleges that in the press releases the company made several false representations, including that a COVID-19 screening test the company was developing would be “available soon” and that the company had personal protective equipment for “immediate sale.” In fact, at the time the company made the statements, it was insolvent and lacked the capital to develop the test (which the company’s own internal projection estimated would, in any event, take more than a year to develop). The company also did not possess the PPE it offered for sale, and lacked the money to purchase the equipment as well as the FDA registrations necessary to import and distribute the equipment.
The complaint also names as defendants, in addition to the company itself, the company’s CEO, Paul Arena, and the company’s Chief Technology Officer, Nathaniel Bradley. The complaint alleges that Arena knew the company did not have the money to develop the test or to purchase the equipment, but nevertheless drafted the seven press releases misrepresenting the company’s capabilities and prospects. The complaint alleges that Bradley helped draft two of the press releases and posted content on the company’s website claiming that the company had PPE and medical equipment for immediate sale, without verifying that the company had the necessary capital to buy the equipment or the FDA registrations needed to acquire and distribute the equipment.
The complaint alleges, with respect to the company’s press releases, that the “plan was successful” in that during the four week period beginning March 11, 2020, the daily closing price of Parallax’s stock was 20% higher than during the period between the beginning of the year and March 10, 2020. The complaint notes that by order dated April 10, 2020, the SEC temporarily suspended trading in the company’s securities from April 13, 2020 to April 24, 2020.
The complaint alleges that Parallax and Arena violated Sections 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and that Bradley violated Section 17(a)(3) of the ’33 Act.
The SEC’s press release about the enforcement action reports that without admitting or denying the SEC’s allegations, Parallax, Arena, and Bradley “consented to judgments permanently enjoining them from future violations of the charged provisions and requiring them to pay penalties of $100,000, $45,000, and $40,000, respectively.” Arena agreed further to be prohibited for give years from acting as a public company officer or director and from participating in an offering of penny stock. Bradley agreed to be prohibited for three years from participating in an offering of penny stock.
The press release quotes an SEC spokesperson as saying with respect to the defendants’ allegedly misleading statements that Parallax “misled investors that the company was positioned to capitalize on opportunities created by the COVID pandemic,” stating further that the “misinformation jeopardized investors at precisely the moment when investors were attempting to respond to the financial implications of a public health emergency.”
By my count, this settled action represents the ninth pandemic-related enforcement action that the SEC has launched since the initial coronavirus outbreak in the U.S last year. By and large, the other pandemic-related enforcement actions that the agency filed are similar to the one filed earlier this week against Parallax. That is, in each case, the defendant companies involved were smaller companies seeking to drive their share price by public statements about the companies’ ability to profit from the coronavirus outbreak. In each case, the defendant companies are alleged to have misled investors about the companies’ capabilities or prospects.
The fact that the SEC is continue to pursue these kinds of claims even now more than a year after the outset of the pandemic underscores how serious the agency takes attempts to misled investors in order to try to manipulate the stock price of a public company.
The fact that the SEC is filing this action only now also underscores the fact that even though the worst of the pandemic, at least in the U.S., appears to be over (at least for now), the threat of pandemic-related D&O claims continues.
As I noted at the end of last month in connection with the filing at that time of a new pandemic-related securities class action lawsuit (here), even though we are now well into the pandemic’s second year, pandemic-related business activity goes on and the pandemic continues to affect companies’ business operations, performance, and even strategic decision-making. Companies are continuing to make statements about how changed circumstances or business decisions or strategies affect the companies’ operations, performance, or plans. Plaintiffs’ lawyers will continue to target companies that experience setbacks or whose plans go awry. The likelihood is that we will continue to see further pandemic-related D&O claims, both in the form of SEC enforcement actions and in the form of private litigation.