The COVID-19-related securities litigation wave has now been around long enough that companies that were sued early on in the pandemic are now being sued again based on more recent developments. Co-Diagnostics, a diagnostic testing company that was sued in the early months of the coronavirus outbreak in the U.S. in 2020, has now been sued again in a separate securities class action lawsuit based on the company’s disclosures surrounding its release of its second quarter 2022 financial results. A copy of the new complaint against Co-Diagnostics can be found here.
Co-Diagnostics develops, manufactures, and sells reagents used in diagnostic tests for the detection of infectious diseases. In April 2020, the company received emergency use authorization for its Logix Smart COVID-19 detection test. The emergency use authorization allowed the company to sell the test to laboratories certified under the Clinician Laboratories Improvement Act to accept human supplies for diagnostic testing in the U.S. The company has sold its Logix Smart COVID-19 test to over 500 centralized lab customers.
On August 11, 2022, Co-Diagnostics released its financial results for the quarter ended June 30, 2022. The company disclosed revenue for the quarter of $5 million, down from $27.4 million in the prior year period, representing a decline of almost 82%. The company primarily attributed the decrease to lower demand for the Logix Smart COVID-19 test. According to the subsequently filed securities class action lawsuit, the company’s share price declined over 30% on the news.
On August 16, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Co-Diagnostics and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the company’s securities between May 12, 2022 and August 11, 2022.
The complaint alleges that during the class period, the defendants failed to disclose that “(1) demand for its Logix Smart COVID-19 Test had plummeted throughout the quarter ended June 30, 2022, and (2) as a result, Defendants’ positive statements about the demand for its Logix Smart COVID-19 Test lacked a reasonable basis.”
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 to recover damages on behalf of the plaintiff class.
This lawsuit has only just been filed and it remains to be seen how it will fare. I will say this is one of the thinner complaints that has crossed my desk in a while. It sure reads like a classic stock drop suit. When the time comes, the court will strain to find anything in the complaint that resembles an allegation of scienter.
That said, this lawsuit is the second COVID-19-related lawsuit filed against this company. As discussed here, in June 2020, Co-Diagnostics was previously sued in a securities class action lawsuit in which the plaintiffs alleged that the share prices of the company’s stock had surged on supposed reports that the company’s COVID test was 100% accurate, only to fall when media reports questioned the accuracy of the reports. That prior lawsuit apparently remains pending in the District of Utah, having survived a motion to dismiss.
This latest lawsuit against Co-Diagnostics has some of the characteristics of many of the recently filed COVID-19 related securities suits, in that this lawsuit, like many of the other recently field suits, is based on allegations that the company prospered at the outset of the pandemic, but that its fortunes flagged as the pandemic has worn on. There have been a number of these kinds of pandemic-related suits filed, including, for example, the suit filed against Peloton (discussed here), and more recently, the securities suit filed against Amazon relating to pandemic-induced infrastructure overcapacity (discussed here) and the lawsuit filed just last week against mental health services firm LifeStance (discussed here). As I noted in connection with these prior suits, and as I continue to believe, there are likely to be more of these kinds of suits, as changing conditions affect consumer demand and purchasing patterns.
In any event, by my count this lawsuit is 56th to be filed so far since the initial coronavirus outbreak in the U.S. in March 2020. Even though we are now nearly two and a half years into the pandemic, these COVID-19-related lawsuits continue to be filed. By my count, this lawsuit is the 13th COVID-related securities class action lawsuit to be filed so far this year, and as this filing and the recent lawsuit against LifeStance show, the pandemic-related lawsuits continue to be filed. All signs are that these kinds of lawsuits will continue to be filed for some time to come.