By Dean Seal

Law360 (January 3, 2021, 12:02 PM EST ) After nine months of securities litigation that targeted the travel, pharmaceutical and other industries hardest-hit by COVID-19, the next wave of pandemic-tied filings is building as the economy pushes into a lean winter.

The early stages of the pandemic brought wide speculation about possible investor litigation over the virus' impact on businesses, in light of historical trends showing securities cases tend to surge around crises and stock market turbulence.

Securities litigators told Law360 that the speculation was well-founded, though the level of filings, tied to COVID-19 or otherwise, hasn't yet soared to the degree it did following the dot-com crash of 2001 or the 2007-08 global financial crisis.

Part of that can be attributed to the stock market's record rebound over the course of the year, as well as government bailouts that came to the aid of struggling industries, according to Selendy & Gay PLLC partner Sean Baldwin.

Investors may also find it difficult to challenge company disclosures made back when the "situation was very fluid and unknown," said Akerman LLP partner Brian Miller.

And as many observed early on, securities law's requirement for plaintiffs to prove loss causation — that the revelation of fraud caused a company's stock to drop — can be tricky when stocks fall marketwide.

But this could be a calm before the storm. Litigation funder Burford Capital reported over the summer that the global pandemic was expected to "have both short-term negative and long-term positive impacts" on its business, as operational slowdowns would ultimately give way to "a significant uptick in litigation activity as the world normalizes."

With vaccines now in an early phase of distribution, normalization finally appears to be on the horizon, and securities attorneys tell Law360 they are expecting a new wave of litigation tied to the pandemic in the months to come, with issuer disclosure actions leading the charge.

Litigators see one case as a portent: the U.S. Securities and Exchange Commission's settlement with The Cheesecake Factory on Dec. 4.

Throughout the pandemic, the regulator has largely opted for providing disclosure guidance to public issuers while focusing enforcement on the efforts of fraudsters and other bad actors looking to capitalize on volatile markets and uncertain investors. The agency's enforcement actions have mostly targeted microcap issuers making lofty claims about their own efforts to fight the novel coronavirus, as have some investor actions that have made headway in federal courts.

That's why heads turned in early December when the SEC levied a $125,000 fine against The Cheesecake Factory for allegedly concealing the extent of the financial difficulties it was facing early on in the pandemic.

According to the SEC, the restaurant chain violated reporting provisions of the federal securities laws when it said in press releases attached to March 23 and April 3 regulatory filings that its restaurants were "operating sustainably" during the coronavirus pandemic, when in fact it was losing about $6 million in cash per week and had only an estimated 16 weeks of cash remaining.

In particular, the agency knocked the company for failing to admit in the March 23 disclosure it had already alerted landlords of its intention not to pay April's rent — a fact that came to light through press reports before the company came clean on March 27.

Without admitting or denying the agency's allegations, The Cheesecake Factory agreed to resolve the case with a $125,000 fine — a relatively light penalty given the allegations, several securities litigators told Law360, though the SEC notably went out of its way to draw attention to the company's cooperation with its investigation.

Unlike investor plaintiffs, the SEC doesn't have to prove loss causation, and its case against the Cheesecake Factory came down "fairly quickly compared to the usual two and a half years it takes the SEC to investigate financial reporting cases," Paul Hastings LLP partner and former SEC senior trial counsel Nick Morgan told Law360.

In light of those circumstances, Morgan surmised "this is just the beginning" of a new spate of SEC actions.

"I think we'll see a bunch of these," he said. "And if you use the Cheesecake Factory as sort of a template, where the SEC is using its most powerful tool — the benefit of hindsight — there are going to be a large number of variations on this theme where companies at the early stages were making internal assessments of various things … and the SEC will have the ability to go back through and forensically pick out details that are not consistent with what ultimately happened."

While The Cheesecake Factory did not have to admit to the SEC's allegations as part of its settlement, that in no way bars investors from filing their own securities claims over the same issues. At least three shareholder-focused law firms quickly launched investigations into the company following the announcement of the settlement and are encouraging investors to contact them about any losses they've incurred.

Akerman's Brian Miller, a former SEC attorney, said he expects investors are going to "latch onto the Cheesecake Factory case and the SEC's enforcement activities and ramp up their own pursuits of this type of litigation."

"I think we're at the beginning of a wave," Miller said. "I think you're going to see a lot of pile-on private litigation pursuing those same kinds of theories, and I think we're going to see a lot of derivative litigation."

Howard Fischer, a partner at Moses & Singer and former senior trial counsel for the SEC, similarly foresees a "series of cases that follow the fact pattern" laid out by the Cheesecake Factory case, both in investor suits and SEC enforcement actions, where an issuer allegedly hides the full extent of losses or potential damages tied to the pandemic while touting "unsustainable and unnecessarily rosy projections."

That kind of accusation underlies several of the lawsuits already filed in 2020 against members of the travel, food services and pharmaceutical industries, although those suits typically targeted a company's overt representations about its operations rather than early-pandemic financial disclosures that can now be dissected in retrospect.

Fischer expects the next wave of investor suits and regulatory actions will also target companies for losses that, rather than being concealed, were falsely attributed to the novel coronavirus. Issuers may hope for investors to be more empathetic to struggles connected to a pandemic than to a loss of customers or incompetent management.

"In the next couple of quarters, I think you're going to see a bunch of cases about that," Fischer said. "One of the benefits of a global disaster is that it's a great excuse."

On top of investor and SEC actions examining company disclosures, more derivative actions are likely in store, Simpson Thacher & Bartlett LLP partner Jonathan Youngwood told Law360. These kinds of suits will likely target "the response of boards of directors to the crisis and whether these responses complied with fiduciary duties," he said.

Selendy & Gay's Sean Baldwin also said that "if things change in the market or Congress fails to provide relief," the factors that may have quelled securities litigation in the early stages of the crisis could subside.

And vaccines for the novel coronavirus remain months away from widespread distribution. Alston & Bird LLP partner Robert Long told Law360 that more bad performance in the industries first roiled nine months ago, like travel and food service, "always increases the investor lawsuit risk."

"I predict we will see an uptick in investor lawsuits as other companies continue to struggle during COVID-19, particularly in the long and lean winter months," he said.

--Editing by Kat Laskowski and Philip Shea.

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