COVID-19 and the Litigation Pandemic

POMERANTZ MONITOR | MAY JUNE 2022

By The Editors

In January 2020, as the novel coronavirus spread globally and the death toll rose, so too did peoples’ fears. While many companies diligently shared information about their new risks with shareholders, others sought to profit from the widespread anxiety. On March 12, 2020, one day after the World Health Organization declared the novel coronavirus to be a pandemic, the first COVID-19-related securities class action lawsuits were filed. Each of these litigations is representative of a separate trend in subsequent securities class actions related to COVID-19: cases that target industries, such as pharmaceuticals, whose products are involved in responding to the coronavirus, and cases that target industries that the virus directly affected, such as cruise lines.

One of the two securities class actions filed on March 12, 2020, targeted Inovio Pharmaceuticals, Inc. (“Inovio”) and its CEO, J. Joseph Kim. Kim, in two public appearances in February 2020 – one on Fox Business News and one with President Trump – claimed that Inovio had already developed a COVID-19 vaccine and would start phase one testing in the early summer. Inovio’s stock price skyrocketed amidst a buying frenzy – that is, until Citron Research disclosed that Inovio did not, in fact, have a viable vaccine. Subsequently, the company was forced to acknowledge that it had merely “designed” one. According to the complaint, that disclosure led to a two-day drop in Inovio’s share price that “wiped out approximately $643 million in market capitalization for the Company, marking a 71% decline from its Class Period high.”

The second COVID-19-related securities action filed on that day sued Norwegian Cruise Line Holdings (“NCL”) on behalf of a proposed class of shareholders who had purchased shares of the company during the three weeks before the pandemic was declared. On February 20, 2020, NCL issued a press release stating that “despite the current known impact” from the coronavirus outbreak, as of the week ending February 14, 2020, “the Company’s booked position remained ahead of prior year and at higher prices on a comparable basis.” In other words, they had plenty of ticketed passengers and NCL was still planning on setting sail with them. It further stated that the company “has an exemplary track record of demonstrating its resilience in challenging environments” and that NCL had “proactively implemented several preventive measures to reduce potential exposure and transmission of COVID-19.”

The complaint alleged that these statements, as well as others in the company’s SEC filings published concurrently with the press release, were false and misleading. The complaint quoted a Miami New Times article that reported that leaked internal NCL emails demonstrated that the company had pressured its sales teams to mislead customers about the coronavirus and to respond to customers’ concerns by suggesting, among other things, that the virus could not survive in warm Caribbean climates. The article further reported that while news of the coronavirus was dramatically reducing cruise bookings, management was “trying to downplay the disruption in sales at all costs.”

The Securities and Exchange Commission (“SEC”) gave initial COVID-19 guidance to companies when, on April 8, 2020, its Chairman, Jay Clayton, and Director, Division of Corporation Finance, William Hinman, issued a joint statement titled “For Investors, Markets and Our Fight Against COVID-19.” They stated that company disclosures should “respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.”

Inovio and Norwegian Cruise Line: The Rulings

In February 2021, the court largely upheld the Inovio plaintiffs’ claims described above; the case is ongoing.

As for Norwegian Cruise Line, on April 10, 2021, Judge Robert N. Scola, Jr. of the Southern District of Florida granted NCL’s motion to dismiss with prejudice. As Kevin M. LaCroix posted on the D&O Diary on April 12, 2021 “Judge Scola seemed comprehensively skeptical of the plaintiff’s case.” The judge held that the statements at issue were protected by the “safe harbor” provision for forward-looking statements of the Private Securities Litigation Reform Act of 1995. This provision encourages companies to provide projections of future financial results and other forward-looking statements, so long as such statements are identified as forward-looking and accompanied by strong cautionary disclosure about factors that could cause actual results to differ materially from those disclosed in the statements.

Judge Scola also held that, as to the alleged marketing scheme to downplay the impact of the coronavirus, plaintiff made the assumption “that at the time these statements were made, the statements were false,” but the Judge wrote that “it is worth noting that at the time the alleged marketing scheme was taking place, then-President Trump made similar statements regarding COVID-19 and therefore it is arguable that these statements were not even deceptive, insofar as they aligned with the pronouncements of our nation’s President.”

Lest some are tempted to speculate on Judge Scola’s political leanings, given his reliance on President Trump as an arbiter of truth, the Monitor would like to point out that the judge was appointed by President Obama.

The Trajectory: Then to Now

Early COVID-related securities actions focused on companies that relied on misrepresentation to increase share price and insufficient risk disclosures prior to the pandemic. Years later, these continue to be central to many complaints. The initial cases primarily targeted companies that the virus directly impacted, such as pharmaceutical companies and cruise lines. As allegations broadened to include challenges to companies’ representations about how the pandemic impacted projections of future financial performance and consumer behavior, so too, the types of industries targeted by securities lawsuits expanded. Technology companies, manufacturers of pandemic-related products, travel companies, finance, utility, and social media companies have all been sued for violations of the federal securities laws. The Securities and Exchange Commission (“SEC”) has stepped in to address COVID-19 related fraud with enforcement actions. Derivative cases stemming from COVID-19 securities class actions have been filed against directors of corporations for inadequately fulfilling their fiduciary duties during the pandemic.

On January 26, 2022, Pomerantz was appointed co-lead counsel in a putative securities class action lawsuit against biotechnology company, Novavax, Inc., arising from Novavax’s statements made in connection with its failed attempt to bring its COVID-19 vaccine candidate, NVX-CoV2373, to market. Plaintiffs allege that Novavax misled investors about the vaccine’s purported successful development, production, and imminent approval by the U.S. Food and Drug Administration (“FDA”). “In reality,” according to the complaint, “Novavax’s vaccine was nowhere close to being approved for use: (a) because the vaccine’s purity and potency numbers fell well below FDA safety requirements as a result of severe manufacturing problems including several undisclosed contamination events at its two U.S. manufacturing facilities; (b) because of a failure to manufacture the vaccine at scale; and (c) because of supply chain disruptions—all of which caused significant delays that jeopardized any chance Novavax had to capitalize on the market for Covid-19 vaccines.”

A series of partial disclosures, beginning on May 10, 2021, revealed problems with NVX-CoV2373, including manufacturing issues and delays with its application for Emergency Use Authorization from the FDA. Finally, on October 19, 2021, Politico published an article entitled “They rushed the process: Vaccine maker’s woes hamper global inoculation campaign.” The article reported that Novavax “faces significant hurdles in proving it can manufacture a shot that meets regulators’ quality standards” with respect to NVXCoV2373” and cited anonymous sources as stating that Novavax’s “issues are more concerning than previously understood” and that the company could take until the end of 2022 to resolve its manufacturing issues and win regulatory authorizations and approvals.

Pomerantz is vigorously fighting to vindicate defrauded Novavax shareholders’ rights and recover their losses caused by fraud.