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Law360 (August 24, 2020, 5:09 PM EDT ) An SCWorx Corp. shareholder hit the health care data company's top brass with a derivative suit in New York federal court Friday, alleging they misled investors about a contract to sell millions of COVID-19 antibody testing kits that turned out to be "completely bogus."
Investor Josstyn Richter claims that four of SCWorx's officers and directors, including founder and CEO Marc S. Schessel, exposed the company to civil litigation, government investigations and financial losses in the millions by touting the testing kit deal.
They failed to disclose to investors that the buyer, Rethink My Healthcare Inc., was too small a company to afford or handle the number of testing kits Schessel said it had agreed to purchase — 2 million kits per week at a price of $35 million each week for 23 weeks — and that the Australian supplier, ProMedical Equipment Pty Ltd., had a history of fraudulent activity, Richter alleges.
"The individual defendants failed to correct and caused the company to fail to correct these false and misleading statements and omissions of material fact, rendering them personally liable to the company for breaching their fiduciary duties," Richter said. "Additionally, in breach of their fiduciary duties, the individual defendants willfully or recklessly caused the company to fail to maintain an adequate system of oversight, disclosure controls and procedures, and internal controls over financial reporting."
Richter brought breach of fiduciary duty, unjust enrichment, gross mismanagement and other claims against Schessel and three current and former board members, according to the complaint.
This is the second derivative suit filed against SCWorx's officers and directors over the testing kits, and follows three proposed securities class actions, all in the same court, records show.
According to Richter, SCWorx announced an agreement on April 13 to sell a total of 48 million COVID-19 rapid testing kits supplied by ProMedical to Rethink My Healthcare, which would deliver the kits to hospitals and health care providers around the country.
Between April 9 and the end of trading on April 13, SCWorx's stock price shot up from $2.25 per share to $12.02, the suit says.
A conference call and a public financial filing in the following days included "completely falsified" information about the purchase order that omitted the fact that Rethink My Healthcare was "a relatively tiny company" unable to pay for that many testing kits, and that ProMedical had "a history rife with fraudulent misrepresentations," Richter said.
A pair of analyst reports on April 14 and 17 slammed the purchase deal as "ludicrous" and "completely bogus," the complaint says. Following the latter report, known as the Hindenburg Report, SCWorx's stock tumbled 17%, according to Richter.
The U.S. Securities and Exchange Commission then suspended the company's stock trading effective April 22, the suit says. By the 30th of that month, the deal was scrapped.
SCWorx's stock went back on the market on Aug. 10 and was trading at $1.53 per share as of Monday.
Representatives for SCWorx and counsel for Richter did not respond to requests for comment Monday.
Richter is represented by Phillip C. Kim of The Rosen Law Firm PA.
Counsel information for the officers and directors was not immediately available.
The case is Richter v. Schessel et al., case number 1:20-cv-06760, in the U.S. District Court for the Southern District of New York.
--Additional reporting by Frank G. Runyeon. Editing by Alyssa Miller.
For a reprint of this article, please contact reprints@law360.com.
