The changes and disruptions caused by the COVID-19 pandemic continue to roil companies’ business operations and financial results. The pandemic’s effects, and the ensuing shifts in business operations and strategic decision-making, are also in some instances continuing to result in securities class action litigation. In the latest example of these phenomena, a plaintiff shareholder has filed a securities suit against the mental health care service provider LifeStance Health Group, Inc. and certain of its executives. The complaint alleges that the Registration Statement prepared in connection with the company’s June 2021 IPO did not adequately disclose the impact on the company’s operations and finances from the lifting of the government stay-at-home orders and did not disclose the pandemic’s impact on the company’s physician workforce. A copy of the August 8, 2022 complaint against the company can be found here.
LifeStance is one of the country’s largest providers of virtual and in-person outpatient mental health services. The company completed an initial public offering on June 10, 2021, in which it raised gross proceeds of $828 million. According to the subsequently filed complaint, LIfeStance benefitted from the government lockdown orders, as its total patient visits increased at the outset of the pandemic. Providing services virtually was far less costly for the company. However, as the government shutdown orders were lifted, and patient visits shifted to in-person sessions, the company’s costs increased; in addition, the workload on physician service providers increased, many of whom, the complaint alleged, “were getting burned out and resigning, requiring that new physicians be hired and trained.”
The registration statement, prepared in connection with the IPO, emphasized the company’s “track record of growth,” including increases in the number of total patient visits, total patient centers in service, and number of employed clinicians. The registration also stated that “we believe that the COVID-19 pandemic did not have a material impact on our results of operations, cash flows, and financial position as of or for the three months ended March 31, 2021.”
On August 11, 2021, less than two months after the IPO, the company announced its financial results for the quarter ended June 20, 2021 (that is, for the period ending just days after the IPO). Among other things, the company reported an increased net loss for the period. Among the reasons for the increased loss is that the company’s operating expenses more than tripled during the period. The company also lowered its full year 2021 guidance. At the same time, the company announced lower physician retention rates, as well as anticipated lower clinician productivity as new physicians were brought on board and brought up to speed. In subsequent reporting periods, the company continued to report its challenges maintaining its clinician retention rates and productivity levels. The complaint alleges that as of the lawsuit filing date, the company’s share prices had fallen to more than 73% from the IPO price of $18 per share.
On August 10, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against LifeStance; certain of its directors and officers; and its offering underwriters. The complaint purports to be filed on behalf of all investors who purchased the company’s shares in or traceable to the company’s June 2021 IPO.
The complaint alleges that the company’s registration statement was materially misleading because it failed to disclose: “(a) that the number of virtual visits clients were undertaking utilizing LifeStance was decreasing as the COVID-19 lockdowns were being lifted, thereby flatlining the Company’s outpatient/virtual revenue growth; (b) that the percentage of in-person visits clients were undertaking utilizing LifeStance was increasing as the COVID-19 lockdowns were being lifted, thereby causing the Company’s operating expenses to increase substantially; (c) that LifeStance had lost a large number of physicans due to burn-out and, as a result, its physician retention rate had fallen significantly below the 87% highlighted in the Registration Statement and the Company had been expending additional costs to onboard new physicians who were less productive than the outgoing physicians they were replacing; and (d) as a result of the foregoing, LIfeStance’s business metrics and financial prospects were not as strong as the Registration Statement represented.”
The complaint alleges that the defendants violated Sections 11 and 12(a)(2) of the Securities Act of 1933. The complaint seeks to recover damages on behalf of the plaintiff class.
By my count, there have now been a total of 55 COVID-19 related securities class action lawsuits filed since March 2020, including 12 so far in calendar year 2022. All signs are that, when all is said and done at the end of the year, that the pandemic-related litigation will prove once again to be an important factor in the number of securities suits filed during the year.
This lawsuit is interesting in that it is yet another example of a company whose prospects brightened as a result of the initial disruption at the outbreak of the pandemic but that experienced challenges as the pandemic evolved and the circumstances changed. 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). As I noted in connection with the recent Amazon lawsuit, 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.
I think it is particularly interesting that one important aspect of the new LifeStance lawsuit is the allegations concerning the disruption in the company’s labor supply. As a general matter, the disruption of the labor supply is one of the more significant macro effects from the pandemic. Certainly media sources and other commentators have noted the “great resignation” as one of the labor force manifestations of the pandemic. It is interesting and noteworthy that labor force disruption is one of the factors that contributed to this lawsuit’s filing.
It does reinforce the view that there are a host of macro factors affecting businesses these days – not just the pandemic itself, but also inflation, interest rate increases, supply chain disruption, the war in Ukraine, as well as labor force disruption. All of these factors, individually or collectively, are certainly affecting businesses these days and could in fact lead to securities litigation or other D&O claims. Indeed, it is increasingly likely that future pandemic-related litigation will also involve these various factors and perhaps others, rather than just COVID-19 itself.