In the latest coronavirus outbreak-related securities suit, a Canadian diagnostic medical testing company that hoped to obtain emergency regulatory authorization for its rapid COVID-19 antigen test has been hit with a securities class action lawsuit after the company failed to obtain the regulatory approvals. A copy of the plaintiff’s complaint, filed on December 17, 2020 in the Central District of California, can be found here. In addition, as discussed below, this past week, the SEC separately filed a coronavirus-related enforcement action against a biotechnology company that touted its ability to provide a blood-based diagnostic test for the coronavirus.
Sona Nanotech, which is based in Nova Scotia, Canada, is in engaged in the business of researching and developing products for diagnostic test and medical treatment applications. The company’s shares trade over-the-counter in the U.S.
On July 2, 2020, the company announced positive results of its rapid detection antigen test and its development plan. The press release detailed the test’s laboratory validation and stated that the company intended to enter independent clinical in-field evaluation studies to be used in its planned submission to the FDA for emergency use authorization (EUA). The company stated that the results of the field studies should be available by the end of July, which the company would use for final submissions to regulatory authorities in multiple jurisdiction.
On August 6, 2020, the company announced a delay in the results from the evaluation studies. The press release stated that the delays had resulted from the need for ethics review board approvals and the need to modify testing protocols to accommodate regulatory updates. The press release stated that tests were expected to return their full results within two weeks. On this news, the price of the company’s shares fell over 34%.
On October 29, 2020, the company announced that the FDA had “deprioritized” its review of Sona’s COVID-19 antigen test. The press release stated that the FDA had notified Sona that the company’s request for emergency use authorization for the marketing of the company’s rapid antigen test is “not a priority” and that consequently the authorization “will not be issued at this time.” The company’s share price fell an additional 48% on this news.
On November 25, 2020, the company announced that it had withdrawn its application for an Interim Order authorization from Health Canada for the marketing of its rapid COVID-19 antigen test, in order to obtain more clinical data to augment its submission. The company’s share price fell a further 67% on this news.
On December 17, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against the company, its CEO, and its CFO. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between July 2, 2020 and November 25, 2020. The complaint alleges that:
Defendants made false and/or misleading statements and/or failed to disclose that: (1) it was unreasonable for Sona to represent that it could receive results from field studies of its COVID-19 antigen test within a month; (2) Sona’s positive statements about its COVID-19 antigen test were unfounded as the FDA would deprioritize EUA approval of Sona’s antigen test finding it did not meet “the public health need” criterion; (3) it was unreasonable for Sona to believe that data gathered over such a short period of time would be sufficient for approval of its antigen test by either the FDA or Health Canada; (4) Sona would have to withdraw its submission for Interim Order (“IO”) authorization from Health Canada for the marketing of its COVID-19 antigen test as it lacked sufficient clinical data to support approval; and (5) as a result, defendants’ statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.
The complaint alleges that the defendants breached Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
By my count, the new lawsuit against Sona is the 23rd coronavirus-related securities class action lawsuit to be filed since the U.S. outbreak began earlier this year. As time has gone by, disagreements have emerged among various observers whether or not various lawsuits are or are not in fact pandemic-related. Thus, my tally of the COVID-19 suits differs from that of other publicly available sources, such as, for example, the Stanford Law School Securities Class Action Clearinghouse (whose tally can be found here).
As I have noted before, the lawsuits generally fall in one of three categories: First, there are the suits involving companies that sustained a coronavirus outbreak in their facilities (such as cruise ship lines and private prison systems); second, there the companies who touted their ability to prosper as a result of the pandemic (such as vaccine manufacturers and diagnostic testing companies); and third, companies who operations or financial results were disrupted by pandemic-related closures or stay at home orders. The new lawsuit against Sona is a textbook example of the second category of cases.
It is interesting that this lawsuit is just coming in now. Most of the COVID-related lawsuits were filed in the months after the outbreak first emerged. Since the end of August, there have been just three of these coronavirus-related lawsuits filed, one in October, one in November, and now this one in December. In that regard, it is worth noting that the various statements on which the case is based were made during the summer and fall. The case serves as a reminder that as the public health emergency phase of the pandemic continues to stretch out far beyond what anyone anticipated at the outset, companies are continuing to make statements about how the pandemic is affecting the company’s operations, performance, and business prospects. This case shows that this ongoing statements can and in some cases will result in misrepresentation claims.
With 23 coronavirus-related securities suits filed so far this year, it is fair to say that the coronavirus suits are an important securities litigation phenomenon and that the suits have been a significant factor in the overall number of securities suit filings this year. Just the same, even with now 23 lawsuits, these type of suits simply have not materialized as the sort of wave of lawsuits that, for example, followed the global financial crisis. However, it does seem like these kinds of suits will continue to accumulate, particularly as the public health crisis phase continues. I expect that there will be more of these kinds of cases to come, particularly with respect to the third category of cases I described above – that is, involving companies whose operations, finances, or prospects were disrupted by the pandemic.
SEC Files Enforcement Action Against Biotechnology Company Claiming a Blood Test for COVID-19: On December 17, 2020, the SEC filed an enforcement action against Decision Diagnostic Corp. and its sole director and CEO, Keith Berman. A copy of the SEC’s complaint can be found here. The complaint alleges that in Spring 2020, Berman “went on a publicity blitz to portray the company as having created a working, break-through technology that could accurately test for Coronavirus disease 2019 … using just a finger-prick of blood and provide results in less than a minute.” However, the SEC alleges, the company did not have a test, only an idea that had not materialized into a product.”
The SEC alleges that Berman’s various statements drove up the price of the company’s shares, which trade over-the-counter in the U.S. On April 23, 2020, the Commission issued an order suspending trading in the company’s stock. Between the time of the company’s first press release about its supposed test on March 3, 2020 and the time the SEC suspended trading in the company’s shares, the company’s share price rose nearly 1,200%. In addition, trading volume in the company’s shares also soared, rising 860% in early April, and 1,700% a few days later.
The SEC’s complaint alleges that Berman and the company violated Section 10(b) of the Exchange Act of 1934. The complaint seeks to enjoin Berman and the company from violating the securities laws; an order requiring the company and Berman to pay civil money penalties; a bar prohibiting Berman serving as a director or officer of any public company; and a bar prohibiting Berman from participating in penny stock transactions.
By my count, this coronavirus-related enforcement action is the seventh that the agency has brought during the period since the outbreak first began in this country. Most of the enforcement actions have, like this one, involved small companies that made statements about the company’s ability to profit from the pandemic. (The one exception is the settled enforcement action the agency brought against Cheesecake Factory based on the company’s statements about the impact of the coronavirus on its operations and finances, as discussed here.)
Interestingly, the SEC enforcement actions primarily have related to alleged misrepresentations made in the very early stages of the outbreak; the agency has not yet filed any actions based on more recent statements. Those kinds of actions may be yet to come. In any event, it seems likely that there will be further COVID-19-related enforcement actions to come, particularly actions involving alleged misrepresentations – of the kind alleged in the Cheesecake Factory action – pertaining to the impact of the pandemic on operations and finances.