COVID Cases: Three Securities Fraud Class Action Lawsuits Born in The Wake of A Global Pandemic

ATTORNEY: JAMES M. LOPIANO | POMERANTZ MONITOR | MARCH/APRIL 2020

Amid the hurricane-like impact of the COVID-19 pandemic, as businesses struggle to mitigate the impacts of an economic downturn caused by a bevy of disruptive market forces—reduced foot-traffic, shelterin- place orders, work-from-home protocols, among others—a crop of interesting securities fraud cases have sprung up. While some remain in the early stages of investigation, others have developed into fully-fledged class action lawsuits under the umbrella of the federal securities laws.

Collectively, these cases demonstrate some of the myriad ways that businesses have allegedly misbehaved during the pandemic. Discussed here are just three examples of complaints related to COVID-19 that have recently been filed in federal court alleging violations of the federal securities laws. Each provides an interesting perspective on how COVID-19 has impacted businesses and investors in disparate fields—from travel, to technology, to finance.

Norwegian Cruise Line Holdings Ltd.

It is well-known how the pandemic shut down the travel industry, particularly for those offering cruise packages. Norwegian Cruise Line Holdings Ltd. (“Norwegian”) is a publicly traded global cruise company that operates the Norwegian Cruise Line, Oceania Cruise Line, Oceania Cruises, and Regent Seven Seas Cruises brands. Firms initiated securities fraud investigations against Norwegian following publication of a Miami New Times article, which reported that several leaked internal emails appeared to show that Norwegian managers were asking sales staff to lie to customers regarding COVID-19 to protect the company’s bookings. According to the article, one such email directed Norwegian’s sales team to tell customers that the “Coronavirus can only survive in cold temperatures, so the Caribbean is a fantastic choice for your next cruise.” Following the article’s publication, Norwegian’s stock price fell sharply, thus prompting the investigations.

Since the article’s publication, two securities fraud class actions have been filed against Norwegian in the United States District Court (“USDC”) for the Southern District of Florida, alleging violations of federal securities laws. Both complaints allege, among other issues, that Norwegian engaged in dubious sales tactics to allay customer fears over possible health risks, using unproven or blatantly false statements about COVID-19 to entice them to book cruises, thus endangering the lives of both their customers and crew members.

These lawsuits not only exemplify the potential need for businesses to reduce sales expectations and related pressures on employees amid a pandemic, but also to ensure that those in management positions are taking the pandemic seriously enough—whether interacting with staff internally, or interacting with potential customers and investors, who put both their money and their lives on the line when relying on the company’s statements.

Zoom Video Communications, Inc.

Zoom Video Communications, Inc. (“Zoom”) operates a digital video communications application that exploded in popularity with the COVD-19 pandemic. From 10 million people on Zoom daily as of December 2019, that number has ballooned to approximately 300 million in mid-2020. Until recently, at least, the company’s video conferencing services were widely viewed as one of the best alternatives to in-person meetings for both professional and personal circles, especially in light of the social distancing constraints caused by the pandemic.

Problems blossomed almost as fast as the service itself. Firms initiated securities fraud investigations against Zoom following disclosures during the pandemic related to alleged undisclosed cybersecurity weaknesses and privacy violations—with just one example being “Zoom bombings,” nicknamed after incidents where malicious third parties had hacked their way into Zoom meetings.

These allegations came to a head in late-March 2020, when major organizations including NASA, SpaceX, and New York City’s Department of Education—all of which previously relied on Zoom for remote employee communication—banned Zoom’s use following news that it shared certain user data with Facebook, even if Zoom users did not have a Facebook account. These organizations also cited allegations that Zoom’s video encryption capabilities were not as secure as the company had previously claimed. Adding insult to injury, on April 1, 2020, Yahoo! Finance reported that a malicious actor in a popular dark web forum had leaked 352 compromised Zoom accounts’ email addresses, passwords, meeting IDs, host keys and names, among other personal information. One such account reportedly belonged to a major U.S. healthcare provider, and seven more to various educational institutions. The impact of these disclosures was particularly alarming given Zoom’s widely touted use among businesses and the public during the pandemic. Zoom’s stock price fell sharply following these disclosures, prompting firms to investigate.

Since these issues came to light, two securities fraud class actions have been filed against Zoom in the USDC for the Northern District of California. Both complaints allege, among other issues, that Zoom had inadequate data privacy and security measures, that, contrary to Zoom’s assertions, its video communications service was not end-to-end encrypted, and that, as a result, Zoom’s users were at an increased risk of having their personal information accessed by unauthorized parties. These concerns were magnified by the platform’s exponentially expanded use during the COVID-19 pandemic, which had essentially turned Zoom into a household name for consumers. With so many businesses and families relying on Zoom’s services for remote communication, the importance of Zoom’s touted security advantages arguably expanded in the public mindset, thus potentially making inaccuracies in statements concerning such security even more devastating for shareholders.

iAnthus Capital Holdings, Inc.

iAnthus Capital Holdings, Inc. (“iAnthus”) is a Canadian holding company whose principal business activity is to provide shareholders with diversified exposure to best-in-class licensed cannabis cultivators, processors, and dispensaries throughout the United States. iAnthus is also heavily leveraged and relies on equity and debt financing to fund its operations.

Securities fraud lawsuits were initiated against iAnthus following its announcement on April 6, 2020 that it did not make interest payments due on certain debentures on March 31, 2020, as a result of financial hardship related to COVID-19. iAnthus’ stock price fell sharply following the announcement.

A securities fraud class action complaint has been filed against iAnthus in the District Court for the Southern District of New York. The complaint does not so much allege that iAnthus’ missed interest payments were themselves indicative of fraud—after all, many businesses are at risk of default, or have already defaulted, on payments following COVID-19 related difficulties. Rather, the complaint takes issue with iAnthus’ previous representations that it would use certain funds withheld and escrowed under debenture agreements to make those payments. According to the complaint, that money was set aside to prevent an interest payment default, yet defendants never disclosed that the escrowed funds had ever been released, exhausted, or were otherwise unavailable to satisfy interest payment obligations. Consequently, the complaint alleges that iAnthus’ statements concerning the agreements were false or misleading in light of iAnthus’ decision not to use the funds when needed.

Here, circumstances arising from the COVID-19 pandemic arguably called iAnthus’ bluff, so to speak, with respect to using the funds at issue in the manner it previously touted.

In Sum

As with society at large, these cases, and others that are sure to follow, are just a small indication that COVID-19 is making an indelible mark on securities litigation as this sudden pandemic has uprooted life, business, and the markets.