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Law360 (April 21, 2020, 3:16 PM EDT ) An investor hit Inovio Pharmaceuticals Inc. executives with a derivative action on behalf of the company in Pennsylvania federal court Monday, accusing the board of directors of lying about the successful development of a COVID-19 vaccine in just three hours.
Shareholder Pedram Beheshti brought breach of fiduciary duty, gross mismanagement, unjust enrichment and other claims against eight company directors, including CEO J. Joseph Kim, just over a month after Inovio investors slapped the company and Kim with a proposed class action over the purported vaccine.
Beheshti alleges that between Feb. 14 and the present, the biotech company's executives artificially inflated its stock price by telling the public in financial filings and in a March 2 televised meeting with President Donald Trump that Inovio's novel coronavirus vaccine was put together three hours after obtaining the virus' genome sequence, and that it could be tested on humans by April.
"Such representations were utterly false," Beheshti said. "Inovio had not developed a working vaccine for COVID-19, but rather, a 'vaccine construct,' i.e., an early stage prototype that after extensive clinical trials, could eventually lead to a viable vaccine."
Between Feb. 14 and March 9, Inovio's share price shot up from $4.15 per share to $19.36 due to the directors' false representations, Beheshti alleged.
But when online investment newsletter and short-seller Citron Research posted a Tweet on March 9 calling for the U.S. Securities and Exchange Commission to investigate Inovio's "ludicrous and dangerous" claims, the purported lie began to unravel, Beheshti said.
Inovio, which develops DNA-based medicines for a variety of cancers and infectious diseases, responded the same day with its own Twitter statement acknowledging that it had developed a vaccine construct, not a fully fledged vaccine, the suit says. Over the following two days, Inovio's share price tumbled to $5.70 per share, or nearly 60%, according to the complaint.
"This two-day stock drop represented a loss in value of over 59%, and expunged roughly $643 million in the company's market capitalization," said Beheshti.
He asserted that bringing his concerns to the board would have been futile because the majority of the board members face a "substantial likelihood of liability," are "beholden to each other" and have "longstanding business and personal relationships with each other."
Beheshti said that one of the directors, David B. Weiner, profited from selling shares while they were artificially inflated, netting $63,000 based on inside information.
Beheshti also argued that the directors' actions have made the company a target of a proposed securities class action and will cost Inovio millions of dollars in legal fees, internal investigations and other related expenditures.
The proposed class action, filed in the same Pennsylvania federal court in mid-March, names Inovio and Kim as defendants and alleges multiple claims of securities fraud over the purportedly false statements.
Beheshti says that at least 20 COVID-19 vaccines are currently being developed by medical and scientific institutions around the world, and while that development is accelerated, experts believe it will take at least a year before any vaccine can be mass produced.
On Tuesday, an Inovio representative told Law360 that it had succeeded in producing a "vaccine construct" within three hours and that it began human trials on April 6.
"A third-party report demonstrated a lack of understanding of the science behind DNA medicines," said spokesman Jeff Richardson, referring to the Citron Research tweet. "Based on extensive prior work creating DNA vaccines using our proprietary DNA medicines platform, we are confident that we have a viable approach to address the COVID-19 outbreak."
Attorneys for Beheshti did not immediately respond to requests for comment.
Beheshti is represented by Timothy Brown of The Brown Law Firm PC and Breandan Q. Nemec of Begley Carlin & Mandio LLP.
Counsel information for the Inovio directors was not immediately available.
The case is Beheshti v. Kim et al., case number 2:20-cv-01962, in the U.S. District Court for the Eastern District of Pennsylvania.
--Additional reporting by Matthew Santoni. Editing by Alyssa Miller.
For a reprint of this article, please contact reprints@law360.com.
