By David Axelrod and Kahlil Williams

Law360 (April 16, 2020, 6:32 PM EDT )

David Axelrod

Kahlil Williams

COVID-19 has upended every corner of the financial markets, including the disclosure regime for publicly traded companies. Over the last few weeks, the number of disclosures relating to COVID-19 has exploded, with as many coronavirus-related 8-K filings in the first two days of April (more than 150) as in the first two months of 2020.

Simultaneously, the U.S. Securities and Exchange Commission[1] and Financial Industry Regulatory Authority[2] have announced that they are actively monitoring the markets for "frauds, illicit schemes and other misconduct" concerning COVID-19, and SEC Chairman Jay Clayton recently recognized investors' thirst for information[3] as earnings season approaches.

These developments, combined with substantial market volatility, will provide countless opportunities for regulators (and private parties) to seize on corporate disclosures relating to COVID-19 as the basis for litigation and enforcement actions.

Life science companies researching vaccines and other therapeutic treatments for COVID-19 can expect special attention in this environment. As investors scour public statements and filings for information on products that can help to combat the novel coronavirus, these firms must think carefully about how to describe their development milestones, regulatory progress and ability to scale up production.

While optimistic pronouncements on COVID-19 are likely to attract a wave of new investment, those statements are also likely to prompt litigation and other legal process in the event that such optimism is unfounded or otherwise inappropriate.

Recently, the SEC suspended the trading of securities for several companies that may have provided inadequate or unreliable information to the markets for the creation of a COVID-19 vaccine,[4] testing kits[5] and the production of N95 masks.[6] These steps are in line with the SEC's actions in prior epidemics.

During the Ebola crisis, the SEC suspended trading[7] for firms purportedly involved in Ebola prevention, testing and treatment, after issuing similar warnings to investors[8] of the potential for fraudulent investment schemes. And if past is prologue, firms whose trading is suspended over concerns about their COVID-19 businesses will likely face investigation by the SEC, even if the suspension is temporary.

For example, in Matter of Bravo Enterprises Ltd. and Jaclyn Cruz,[9] Bravo's trading was suspended because of questions about the accuracy of statements concerning the relationship between the Ebola crisis and the company's business prospects. Though the suspension was lifted after 10 business days, Bravo and the SEC continued to litigate the suspension for several months, culminating in the suspension being upheld[10] (months after Bravo's trading had resumed). 

Further, while the SEC may eventually charge companies with making false and misleading statements in connection with potential treatments for COVID-19, private litigants need not (and will not) wait for a formal investigation to conclude before filing suit. Instead, claimants are likely to act on disappointing trial results, regulatory hurdles, negative analyst reports or other bad news that may cause a life science company's stock to decline in value.

Experts have already observed that the biotechnology, health care, and pharmaceutical sector saw more securities class actions[11] than any other industry in 2019. Life science companies have earned this distinction, year after year, due to a flood of litigation based on statements concerning FDA approval, clinical study results and the strength of their legal and regulatory compliance regimes.

Given the scrutiny being paid to companies pursuing treatments for COVID-19, life science companies are likely to remain at the top of that heap. For example, on March 12, Inovio Pharmaceuticals Inc. and its CEO, J. Joseph Kim, were sued in a putative securities fraud class action in the Eastern District of Pennsylvania captioned as McDermid v. Inovio Pharmaceuticals et al.

The complaint alleges, among other things, that defendants made false and misleading statements, on cable television and to the president of the U.S., about the company's creation of a COVID-19 vaccine within three hours. Following those statements, the stock dramatically increased in value, but later declined following calls from a research firm for the SEC to investigate Inovio.

The complaint also alleges that Kim eventually admitted that the company had merely designed a vaccine construct, rather than an actual vaccine, and accuses Inovio of falsely stating that it would be able to being human trials in April 2020 "when they had no reason to believe they would have the necessary regulatory approval to do so." Inovio reportedly began human trials recently.[12]

Regardless of whether or not such potential securities fraud suits have merit, it is clear that companies involved in providing potential solutions to the pandemic have particular litigation risks in this environment. We suggest these companies take the following steps to mitigate those risks with respect to their public filings and statements:

Use Cautionary Language When Appropriate

Companies can still project optimism without inviting lawsuits. However, all disclosures and public statements relating to potential vaccines, therapies, or products concerning treatment of COVID-19 should employ cautionary language (i.e., "we expect" or "I estimate") to take advantage of safe harbor protections of the securities laws.

Moreover, any estimates or projections, like other disclosures, should have a reasonable basis, and companies should consider disclosing the bases for their projections where appropriate. Companies should also give fulsome descriptions of potential regulatory hurdles and carefully assess their prospects and timelines for regulatory approval.

Take Your Time

The SEC recently extended[13] the deadlines for companies to file certain periodic reports, including 10-Qs. Though a company must file an 8-K[14] to take advantage of the extension (explaining the reasons for delay, an estimated date for filing, and including a company-specific risk factor explaining the impact of COVID-19 on the business), this option may be attractive to life science companies among others that have been materially affected by COVID-19 and want to avoid compounding any problems with inaccurate or incomplete disclosures.

Avoid Selective Disclosure 

Increasingly, companies are filing their internal memoranda[15] about layoffs, compensation cuts and other business developments as Regulation FD disclosures, in order to limit selective disclosure and blunt opportunities for insider trading.[16] However, life science firms must also take great care to ensure that lab professionals, clinical personnel and others in possession of material, nonpublic information about product development do not trade on that information or disseminate it to others selectively.

Plan Ahead

Material information underlying your company's disclosures may take longer to collect and disseminate to accountants, consultants, etc., and it may take those professionals more time to complete their analysis. Given the attention that the SEC will pay to the accounting and financial reporting[17] of publicly traded companies, your company should build in more time to complete your disclosures, hold earnings calls or issue financial guidance.

Update Your Filings

Companies with COVID-19-related businesses whose trading volume spikes are prime targets for the SEC. Where such companies do not regularly file with the SEC, they will likely attract additional scrutiny and risk suspension of trading.

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David Axelrod is a partner and Kahlil Williams is an associate at Ballard Spahr LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://www.sec.gov/Coronavirus.

[2] https://www.finra.org/rules-guidance/key-topics/covid-19/regulatory-operations-update.

[3] https://www.cnbc.com/2020/04/07/cnbc-transcript-sec-chairman-jay-clayton-speaks-with-cnbcs-andrew-ross-sorkin-on-squawk-box-today.html.

[4] https://www.sec.gov/litigation/suspensions/2020/34-88585.pdf.

[5] https://www.sec.gov/litigation/suspensions/2020/34-88582.pdf.

[6] https://www.sec.gov/litigation/suspensions/2020/34-88584.pdf.

[7] https://www.sec.gov/news/press-release/2014-262.

[8] https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/investor-37.

[9] SEC File No. 3-16292.

[10] https://www.sec.gov/litigation/opinions/2015/34-75775.pdf.

[11] https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2019-Year-in-Review.pdf.

[12] https://www.businessinsider.com/inovio-coronavirus-vaccine-trial-starts-in-philadelphia-kansas-city-2020-4.

[13] https://www.sec.gov/rules/other/2020/34-88318.pdf.

[14] https://www.sec.gov/rules/exorders/2020/34-88465.pdf.

[15] https://www.sec.gov/Archives/edgar/data/27904/000168316820001117/delta_ex9901.htm.

[16] https://www.ballardspahr.com/alertspublications/legalalerts/2020-03-30-public-companies-face-heightened-risk-of-insider-trading-due-to-covid-19-volatility.

[17] https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.

[18] https://www.sec.gov/litigation/suspensions/2020/34-88477.pdf.

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