Almost from the very outset of COVID-19 in early 2020, investors and others have filed pandemic-related securities suits and other claims against companies and their executives. Even though the initial outbreak is now nearly 27 months in the past, claims activity continues. In the latest development, a grand jury has returned an indictment against a health care company’s former CEO concerning statements the CEO made in April 2020 about the company’s ability to profit from sales of COVID-19 rapid tests. The SEC filed a parallel enforcement action against the company and the CEO as well.
The DOJ’s May 31, 2022 press release about the indictment can be found here. A copy of the indictment can be found here. The SEC’s May 31, 2022 press release can be found here. The SEC’s complaint in the enforcement action can be found here.
SCWorx Corp. is a publicly traded health care company. At relevant times, the company’s CEO and Chairman was Marc S. Schessel. According to the indictment and the SEC’s complaint, on April 13, 2020, the company issued a press release stating that the company had a “committed purchase order” from a purported buyer to purchase two million COVID-19 rapid test kits. The press release stated further that the purchase order included provisions for additional weekly purchase order. The company’s share price surged over 425% on this news.
The SEC alleges, and the indictment charges, that the company made these statements despite having neither a legitimate supplier of COVID-19 test kits nor an executed purchase agreement with a buyer. The SEC’s complaint alleges that Schessel and the company repeated the “false and misleading statements” about the COVID-19 test kits over the course of April 2020. On April 21, 2020, the SEC ordered that trading in the company’s shares be suspended between April 21, 2020 and May 5, 2020., because of questions and concerns regarding the adequacy and accuracy of publicly available information in the marketplace concerning the company.
In its May 31, 2022 press release, the DOJ announced that a federal grand jury in New Jersey had returned an indictment against Schessel, charging him with two counts of securities fraud for his alleged participation in an alleged scheme to mislead investors about the company’s procurement of COVID-19 rapid tests. Among other things, the indictment alleges, according to the press release, that “despite learning facts that cast significant doubt on the status of the COVID-19 test kit deals,” Schessel “repeatedly confirmed the status and terms of those arrangements on numerous occasions.” The press release states that if Schessel is convicted of the charges, “he faces a total maximum penalty of up to 45 months in prison.”
The SEC Enforcement Action
On May 31, 2022, the SEC filed an enforcement action in the District of New Jersey against the company and against Schessel. The complaint alleges that the company and Schessel violated the antifraud provisions of the U.S. securities laws. The complaint seeks from both defendants permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties. The complaint also seeks an officer and director bar against Schessel.
Without admitting or denying the allegations, SCWorx has agreed to a settlement, subject to court approval, that includes permanent injunctions, the payment of a $125,000 penalty, and disgorgement of approximately $471,000 plus prejudgment interest. The SEC press release states that the company is expected to satisfy its obligation to pay the disgorgement plus prejudgment interest by contributing stock valued at $600,000 at the time of issuance to harmed investors in a separate private securities class action (as discussed further in the discussion section, below).
These actions related to events that took place almost at the very outset of the pandemic outbreak in the U.S. Indeed the SEC press release alludes to this fact; the press release includes a statement from Gurbir Grewal, the head of the SEC’s Enforcement Division, as saying that the enforcement action filings is “a testament to the resilience and dedication of the SEC staff who during the height of the pandemic uncovered the alleged fraud and expeditiously suspended trading in the securities of SCWorx soon after the first alleged misstatement.”
Both the SEC and the DOJ press releases underscore the fact that the alleged misrepresentations took place in the context of a national health emergency, which the press releases clearly seeks to suggest heightens the significance of the alleged misrepresentations.
The SEC press release quotes a statement from SEC Chair Gary Gensler as saying that the alleged misrepresentations sought to “capitalize opportunistically on the COVID pandemic.” The DOJ press release quotes a statement from the U.S. Attorney for the District of New Jersey as saying that the former CEO “exploited the scarcity of the COVID-19 tests at the outset of the pandemic to defraud investors and artificially increase his company’s stock price.” The DOJ press release also quotes a statement from an assistant U.S. Attorney as saying that “it is unacceptable to fraudulently capitalize on a national health emergency.”
Both press releases also refer to the agency’s respective actions as representative of each agency’s priorities. The DOJ’s press release quotes a statement from a Justice Department official as saying that the indictment “reinforces our commitment to rooting out schemes that have exploited the pandemic and holding accountable those who have prioritized greed during an unprecedented public health emergency.” The SEC’s press release quotes Gensler as saying that “the SEC will continue to root out fraud and prosecute those who attempt to use the surge of uncertainty from the pandemic to defraud the investing public.”
Both of these statements, and similar remarks quoted in the press releases, could be interpreted to suggest that the agency’s are continuing the investigate other alleged pandemic-related misconduct, and to suggest that there could be further enforcement activity coming.
It is worth noting that the circumstances at the center of the agencies’ investigative and enforcement activity previously was the subject of separate private securities class action activity. As discussed here, in late April 2020, a shareholder plaintiff filed a securities class action lawsuit against SCWorx and Schessel in the Southern District of New York. The parties to the securities suit later reached an agreement to settle the action in exchange for the defendants’ agreement to pay $3.3 million, consisting of $2.7 million in cash, and securities worth $600,000 at the time of issues. (The securities component of this settlement is the amount that the SEC referenced as satisfying in the company’s disgorgement component of its separate settlement with the SEC.) There apparently was also a separate shareholder derivative suit filed against the company’s board of directors, as well.
In any event, the recent significant agency enforcement action against SCWorx highlights the fact that the threat of ongoing legal action arising out of the COVID-19 pandemic continues, even though we are now well over two years beyond the initial outbreak. Indeed, given the circumstances involved, it would seem that the possibility of further legal action relating to events from the very early days of the pandemic continue. As the agencies’ statement from their press releases highlight, their investigative activity related to alleged misconduct related to the pandemic continues. All of this is a reminder that even at this late date in the history of the pandemic, the possibility for further pandemic-related claims activity continues.