Since I first started tallying the coronavirus-related securities class action lawsuits back in March, a recurring issue has emerged – it has become increasingly difficult to keep a firm handle on what makes a case “coronavirus-related.” Even in just the short time I have been tracking the cases, there have already been a number of close calls, as I have previously discussed, for example, here. A couple of new lawsuits filed this week present further challenges. As discussed below, I have concluded that both of the two new lawsuits count as coronavirus-related, but their inclusion on my list will probably cause my tally to diverge from other similar tallies even further than is already the case now.
The UCO ETF Lawsuit
The first of these two cases was filed on July 28, 2020 in the Southern District of New York against ProShares Ultra Bloomberg Crude Oil, an ETF that trades under the ticker symbol “UCO.” A copy of the complaint can be found here. The UCO securityholder that filed the complaint also named as defendants the firm that manages the ETF, as well as several of its individual executives. UCO is designed to permit investors to invest in the performance of crude oil as measured by the price of West Texas Intermediate crude oil futures. The ETF was intended to mirror the price movements of the WTI benchmark.
According to the complaint, in developments in early 2020 made UCO’s investment strategy “unfeasible.” For starters, oil demand “fell precipitously as governments imposed lockdowns and businesses halted operations in response to the COVID-19 pandemic.” In addition, Saudi Arabia and Russia “launched a price war.” As demand dropped, excess supply expanded, and prices plummeted. The confluence of factors caused a rare market dynamic called a “super contango” in which futures prices exceeded spot prices. These and other dynamics caused UCO to suffer exceptional losses and undermined UCO’s ability to meet its investment objectives.
In March 6, 2020, UCO announced a public offering of UCO shares, in connection with which the fund filed a Registration statement with the SEC. During the course of March, UCO filed a series of amendments to the Registration Statement. The complaint alleges that Registration Statements and amendments “failed to disclose and/or misrepresented the concrete harms and acute risks to the Fund posed by the COVID-19 pandemic, the Russia/oil price war, and the influx of investor capital into the Fund,” as well as the market dynamics caused by the super contango. Ultimately, the complaint alleges, UCO deteriorated to the point that UCO suffered billions of dollars of losses and was forced to abandon its investment strategy.
In April and May 2020, the complaint alleges, the defendants belatedly acknowledged the threats and adverse impacts that UCO had been experiencing at the time of the March offering, but which the defendants allegedly failed to disclose to investors in a timely manner. The complaint seeks to recover damages on behalf of the allegedly harmed investors.
The circumstances described in the complaint are complex and involve a host of causative factors. However, one of the specific causal factors, and the one the complaint mentions first, is the disruption to the global oil market caused by the COVID-19 outbreak and resulting governmental shutdown orders. There were of course other important factors involved, including the Russia/Saudi Arabia price war. However, because the complaint identifies the corornavirus outbreak as one of the key sources for the disruption that cause UCO’s losses, I believe this new lawsuit should be included on my list of coronavirus-related securities class action lawsuits.
While I believe the inclusion of the UCO lawsuit on the list is justified in and of itself, the inclusion of the new lawsuit on the list is also consistent with my prior decision to include on the list the lawsuit filed on June 19, 2020 against United States Oil Fund LP, which maintains USO, an ETF also designed to track daily changes in the spot price of the WTI. The USO lawsuit is discussed at length in my prior post, here. The allegations raised in the complaint concerning the USO ETF are very similar to the allegations in the complaint involving the UCO ETF.
The Velocity Financial Lawsuit
The second of the two lawsuit filed this week raising coronavirus issues was filed on July 29, 2020 in the Central District of California against Velocity Financial, certain of its directors and officers, and the offering underwriters who conducted the company’s January 16, 2020 IPO. A copy of the Velocity Financial complaint can be found here. Velocity is a real estate finance company that originates and manages loans to borrowers for residential and commercial real estate purchases.
The complaint alleges that the at the time of the IPO, the defendants failed to disclose that the company’s non-performing loans had dramatically increased in size from the figures provided in the IPO offering materials. According to the complaint, the defendants also “failed to provide any information to investors regarding the potential impact of the novel coronavirus on Velocity’s business and operations, despite the fact that the international spread of the virus had already been confirmed by the time of the IPO.”
The complaint alleges that the failure to disclose the growing proportion of the company’s loans that were non-performing as of the time of the IPO was materially misleading. The complaint further alleges that “the failure to disclose information concerning the onset of the coronavirus pandemic, or its actual and potential implications for the Company’s operational and financial condition and prospects, rendered” the offering materials “materially incomplete and misleading.” By May 15, 2020, the company’s share price had declined 80% below the IPO offering price.
Setting aside the substantive question as to what was known and should have been disclosed in the company’s offering documents about the coronavirus in mid-January, weeks before the first case had even been confirmed in the United States, there is the further question about whether the complaint’s allegations pertaining to the coronavirus outbreak are sufficient to make this case coronavirus-related. Complicating this “counting” question is the fact that the complaint’s allegations concerning the supposed coronavirus omissions are, well, thin. The complaint’s substantive allegations pertaining to the coronavirus consist of two paragraphs in the 24-page pleading document. But though the allegations are thin, they are there; the complaint alleges that the company’s failure in January 2020 the effects that the coronavirus could have on the company’s business operations violated the defendants’ duties to investors under the federal securities laws. Though this it is a very close question, I believe the Velocity Financial lawsuit, too, should be included in the tally of coronavirus-related securities class action lawsuits.
While I believe that the inclusion of the Velocity Financial lawsuit on the list is justified in and of itself, the inclusion of Velocity Financial lawsuit on the list would be consistent with my prior decision to include the lawsuit filed in April against Phoenix Tree Holdings Limited, a Chinese residential real estate company that also completed its IPO in January 2020 and also allegedly omitted to disclose the impact the COVID-19 outbreak could have on the company’s operations. The Phoenix Tree case is discussed here.
Discussion
The difficulty of saying what exactly does or doesn’t make a case “coronavirus outbreak-related” means that different minds might reach different conclusions about whether or not a particular case belongs on the tally of coronavirus-related litigation. Given this difficulty, it is hardly surprising that different minds might reach different conclusions about whether or not to include a given case in the tally. Even before the filing of latest two difficult cases discussed above, my tally differed from that being maintained on the Stanford Law School Securities Class Action Clearinghouse website, here (click on the COVID-19) link.
The Stanford website has a current tally of 12 cases, whereas my list (prior to the addition of the two cases discussed above) had 16 cases. The four cases in my tally that Cornerstone Research has not included are the securities suits that have been filed against Zoom; Colony Capital; Wells Fargo; and iAnthus Capital Holdings. Each of the company names in the preceding sentence are linked to the blog posts in which I explain my reasoning for including these cases in my tally.
In any event, with the addition of the two cases discussed above, my more-inclusive running tally of the coronavirus-related securities suits stands at 18. The 18 cases can be generally grouped into one of three categories: (1) companies whose facilities were the site of the transmission of the coronavirus (cruise ships, private prisons); (2) companies that made statements about their ability to profit from the coronavirus (vaccine manufacturers, diagnostic testing service providers); and (3) companies that suffered a business downturn as a result of the pandemic and ensuing government shut down orders (real estate firms, etc.)
As noted above, among the 18 coronavirus-related cases are two oil price futures ETFs, and several real estate firms, real estate finance companies, or real estate investment trusts (including Phoenix Tree Holdings, Colony Capital, and Velocity Financial).
Though there has been a steady stream of coronavirus-related securities suit filings, 18 lawsuits over the course of five months, in the overall context of securities class action filing activity in this country, is not a huge number of lawsuit filings. As Alison Frankel noted in a July 27, 2020 post on her On the Case blog entitled “There is No Wave of COVID-19 Shareholders’ Class Actions (Yet)” (here), COVID-19 “has not been much of a factor in private securities filings so far.” However, she suggests, pandemic-related securities could “tick up” in the year’s second half “as anxious companies look for good news to report.”
Frankel suggest that “if plaintiffs’ lawyers have plans to target big companies for defrauding shareholders in their response to COVID-19, they’re biding their time.” Frankel quotes a plaintiffs’ lawyer as saying that it is “too soon to know whether COVID-19 will lead to a boom in shareholder class actions.” She also quotes that plaintiffs’ lawyer as saying that he is not surprised that there hasn’t yet been a rush of filings against companies that missed their projections during the first and second quarters, but the filing rate could change “if those businesses promise better prospects and don’t deliver.” It could be interested, the lawyer suggested, to “talk in a year and a half.”