The early months of the pandemic, marked by steep market declines and uncertainty about the virus' impact on the global economy, brought wide speculation about a possible surge in investor litigation in line with historical trends of securities cases spiking around crises and stock market turbulence.
Some major cases were filed in those early months — two targeting major cruise operators and a handful of others accusing companies of either misrepresenting their efforts to help fight the coronavirus or concealing known effects the pandemic would have on their financial outlooks.
But after 12 months, only about 25 proposed securities class actions tied to the pandemic remain active in federal courts, according to an analysis by Law360. Six of those have come in 2021, suggesting that the flow of such cases may continue, but not at the level some may have anticipated early on.
"My sense is that it is probably going to be a trickle rather than a huge wave," said Sasha Aganin, senior vice president at litigation consulting firm Cornerstone Research.
Identified in China in December 2019, COVID-19 was officially declared a pandemic by the World Health Organization on March 11 last year. A pair of proposed securities class actions with allegations directly related to the virus were filed one day later.
The first came from investors in Inovio Pharmaceuticals Inc., which had seen its stock price skyrocket after its CEO claimed weeks earlier that the company had developed a vaccine in a matter of hours for the rapidly spreading virus and planned to start human testing by April.
Inovio had ridden that wave to a $50 million stock offering on March 9, but that same day, activist short-seller Citron Research publicly called on the U.S. Securities and Exchange Commission to investigate the company's "ludicrous and dangerous claim that they designed a vaccine in three hours." Inovio shares tumbled 71% over the course of the following day, and investors filed suit two days later.
The second major case targeted Norwegian Cruise Lines in the wake of its own stock price plunges. Investors said the company had made rosy statements about its financial outlook and safety protocols in February, while quietly pressuring sales agents to give potential customers false assurances about the growing pandemic.
Both of the actions, which are ongoing, were filed amid staggering marketwide stock price declines that reached a nadir around March 20. They asserted the kinds of allegations that have since become typical of securities litigation related to the pandemic, particularly in the case against Inovio, the first of about nine active lawsuits targeting health care-oriented companies in connection with the race to combat the virus.
"The majority of pandemic-related cases initially involved allegations that the defendant company had made false and misleading claims of drug, vaccine or [personal protective equipment] efficacy or misrepresented its prospects of developing an approved COVID-19 vaccine or treatment," Cohen Milstein Sellers & Toll PLLC partner Laura Posner told Law360.
In April, for instance, investors accused health care supplier SCWorx Corp. of claiming it would sell millions of COVID-19 rapid testing kits in a deal that turned out to be backed by alleged fraudsters and convicted felons. The following month, Sorrento Therapeutics Inc. was hit with a securities suit over statements its CEO made to Fox News referring to Sorrento's COVID-19 treatment research as a "cure."
Other types of pandemic-related securities suits emerged in the spring as well, including actions accusing companies of either concealing operational deficiencies that were exposed by the pandemic, as is the case in an ongoing suit from April against Zoom Video Communications Inc., or using the pandemic to explain away other shortcomings, as a proposed class of investors in cannabis company iAnthus Capital Holdings Inc. claimed that same month.
And like Norwegian, Carnival Corp. was tagged with an investor suit in late May for allegedly concealing COVID-19 infections on its ships and spreading the virus "at various ports throughout the world."
But by early summer, the pandemic had distinguished itself from other major market disruptions that had spurred large volumes of securities litigation in the past.
Securities claims require investors to prove loss causation, or connect a company's stock drop with the revelation of a fraud, which can be tricky when stocks fall marketwide. And when the pandemic struck in early 2020, public companies were quick to issue disclosures about risks they could face as a result of lockdowns and general slowdowns in economic activity.
"[Proving loss causation] may be difficult if you have a company announcing a bundle of bad news, and one of the most prominent pieces of the bundle is, 'Hey, demand for our services is down because the economy is shut down,'" Aganin told Law360.
Aganin, a co-author of Cornerstone's annual securities class actions report, said he'd "thought there would be more" securities suits filed over the risk disclosures that abounded early in the pandemic and whether investors found them to be sufficiently cautious.
"But we didn't see a large wave of litigation related to pandemic-related risks in the second quarter or third quarter," Aganin said. "Part of this may be due to the fact that investors take a forward-looking view of what's happening with companies. Investors in information-efficient markets are not myopic. They don't just say, 'It's horrible outside the window, therefore it'll be horrible forever.'"
That may partly explain why, unlike the mortgage crisis a decade earlier — where equity markets remained depressed for more than a year after a dramatic downshift — the steep declines in late February and March of last year were reversed in a matter of months. Investors may have viewed the pandemic as a finite event, and companies' accompanying risk disclosures in those early months as "temporary setbacks," Aganin said.
"The first quarter was a disaster and then markets were on an upswing, and investors in general took the view that when the dust clears, life will be maybe not completely the same, but at least not as horrible as it was in the first quarter, and stock prices perhaps were not reacting as negatively to pandemic-related news for individual companies," he told Law360. "That would be my hypothesis."
Simpson Thacher & Bartlett LLP partner Jonathan Youngwood also said that issuers' quick disclosures early in the pandemic, as well as the fact that "markets have been incredibly resilient and have largely rebounded throughout the past year," help explain why the virus-tied securities cases seen in the past 12 months have been "very company-specific, rather than being event-driven."
"That makes the current situation very different than, for example, the financial crisis of 2008-09," he said. "Unlike the litigation that stemmed from the financial crisis, my sense is that, barring any dramatic resurgence of the pandemic or related market turbulence, COVID-related litigation won't spur the same volume or longevity of case filings as we saw following the financial crisis."
The cases filed since last spring have indeed been company-specific, and with few exceptions, have tended to include allegations echoing those made in that earlier spate of suits.
Investors have continued to take companies in the health care sector — like Vaxart Inc. and, more recently, AstraZeneca — to federal court over public statements about their respective vaccine developments, while issuers such as Tyson Foods Inc. and private prison operator GEO Group Inc. have been accused of misrepresenting their responses to the pandemic.
Attorneys who spoke to Law360 were split on how long the flow of investor actions is likely to continue, but the lack of a more substantial uptick in suits hasn't come as a surprise to plaintiff-side securities litigators. Avi Josefson of Bernstein Litowitz Berger & Grossmann LLP said his firm "never saw the pandemic as driving a wave of securities cases."
Cohen Milstein's Posner similarly said it was primarily the defense bar that speculated about COVID-19 being a significant driver of securities fraud class actions, which has "largely not come to fruition." She told Law360 that the influx of virus-related securities suits seen so far is unlikely to continue, even against the health care industry, "given where the country is in drug development relating to COVID-19."
"There may be a few more cases involving allegations that a company's projections or revenue and income representations were false and misleading, but assuming that the economy picks up as expected and we begin to return to a more 'normal' lifestyle, I think those cases will grow even less common as well," she said.
--Editing by Aaron Pelc and Alanna Weissman.
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