Here we are, well into the fifth year since the initial outbreak of COVID-19 in the U.S., and yet coronavirus-related securities lawsuits are still being filed. In the latest example, earlier this week plaintiffs’ lawyers filed a securities class action lawsuit against the electronics manufacturing firm Methode Electronics based in part on allegations concerning problems allegedly caused by the company’s loss of key personnel during the pandemic. A copy of the August 26, 2024, complaint can be found here.

Background

Methode designs and manufactures custom-made electronic components for Original Equipment Manufacturers (OEMs). The company’s automotive segment generates the majority of the company’s revenues. Since 2010, the company realized a significant part of its automotive segment revenues from its participation in the General Motors center console program.

By 2020, the company had begun transitioning away from its reliance on traditional integrated central stack units, towards the production of more specialized components for a wider variety of vehicle manufacturers, particularly electronic vehicle manufacturers. Company executives touted this shift, as it supposedly involved a higher-margin product mix, which, it was hoped, would offset any revenue decline from the shift away from the company’s legacy products.

The complaint alleges that during the class period, the defendants continued to represent to investors and to the market that its transition to the new business opportunities was going well, including the retooling of its Monterrey facility to support the new product transition.

However, the complaint alleges, contrary to the company’s representations that the transition was going well, in fact the company’s transition from the GM center console business and toward a more specialized components business was “plagued with operational, logistical, and personnel challenges that were negatively impacting the Company’s business revenue.” Among these challenges was high personnel turnover in the wake of COVID-19, as well as “poor operational decisions, vendor issues, and supplier changes.”

As a result of the challenges, the company failed to meet is projected growth targets. Yet due to the alleged misrepresentations, the complaint alleges, the company’s share price traded during the class period at inflated prices. Following corrective disclosures, the company’s share price allegedly declined more than 80%.

The Complaint

On August 26, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of Illinois against Methode and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the company’s securities between June 23, 2022, and March 6, 2024.

The complaint alleges that during the class period, the defendants misrepresented or failed to disclose:

(a) that the Company had lost highly skilled and experienced employees during the COVID-19 pandemic necessary to successfully complete the Company’s transition from its historic low mix, high volume production model to a high mix, low production model at its Monterrey facility;

(b) that the Company’s attempts to replace its GM center console production with more diversified, specialized products for a wider array of vehicle manufacturers and OEMs, in particular in the EV space, had been plagued by production planning deficiencies, inventory shortages, vendor and supplier problems, and, ultimately, botched execution of the Company’s strategic plans;

(c) that the Company’s manufacturing systems at its critical Monterrey facility suffered from a variety of logistical defects, such as improper system coding, shipping errors, erroneous delivery times, deficient quality control systems, and failure to timely and efficiently procure necessary raw materials;

(d) that the Company had fallen substantially behind on the launch of the new EV programs out of its Monterrey facility, preventing the Company from timely receiving revenue from the new EV program awards; and

(e) that as a result of (a)-(d) above, the Company was not on track to achieve the 2023 diluted EPS guidance or the 3-year 6% organic sales CAGR represented to investors and such estimates lacked a reasonable factual 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.

Discussion

There is no doubt that this lawsuit is based at least in part on allegations relating to the impact of the pandemic on its work force and on the company. The complaint specifically alleges that one of the causes of the problems in the company’s product transition efforts was the company’s loss of key personnel during the pandemic. Yet at the same time it is also true that the problems in the company’s product transition efforts involved numerous other alleged issues. The fact is that if this case is COVID-related, it is not solely or exclusively COVID-related. Which does raise the question of how significant COVID allegations have to be in order to classify a particular complaint as COVID-related.

There clearly is a point at which a particular complaint’s COVID allegations are sufficiently tangential that the lawsuit cannot fairly be called COVID-related.  As time goes by, it seems probably that allegations relating to the pandemic will become less and less central to any given lawsuit’s basis. This likely progression will, among other things, make it increasingly challenging and arguably even speculative to try to classify lawsuits as COVID-related. All of that said, however, even though this complaint has numerous other allegations, the complaint also does contain pandemic-related allegations, and so I have little difficulty classifying this case as COVID-related.

It is remarkable that, as I noted at the outset, here we are more than four years after the initial coronavirus outbreak in the U.S. and lawsuits are still being filed with allegations about the disruptive impact the pandemic had on companies’ operations and financial results. The continued persistence of these kinds of allegations just underscores how disruptive the pandemic was for many businesses. The fact is that the impact of the pandemic continues to resonate across the economy.

In any event, it is also noteworthy that this new lawsuit is, according to data on the Stanford Law School Securities Class Action Clearinghouse website (here), the 12^th covid-related securities class action lawsuit to be filed so far this year – a fact that is remarkable at this late date so long after the initial COVID outbreak. Indeed, there already have been, according to the Stanford website, more COVID-related securities suits filed YTD in 2024 than there were in the full year 2023 (when there were 11).

When all is said and done, the COVID-related lawsuits by year end will represent a significant percentage of all securities suit filings in 2024. Finally, it should also be noted that this lawsuit is, according to the data on the Stanford website, 78^th COVID-related securities suit to be filed since the initial COVID outbreak in the U.S. in March 2020.