SCWorx Corp.'s CEO and two other board members were hit with a lawsuit in Delaware Chancery Court claiming they pushed the health care supply chain company to begin marketing “completely bogus” Covid-19 rapid tests in a fraudulent bid to hype its struggling stock early in the pandemic.
The derivative suit accuses them of positioning SCWorx—which was in the mixed martial arts promotional business before transitioning to health logistics—as a reseller of test kits initially obtained by Australian company Promedical Equipment Pty. Ltd. from “well-respected Chinese firm” Wondfo. It doesn’t name Promedical as a defendant.
SCWorx’s stock skyrocketed 434% on news that the small company had a distribution deal worth $35 million a week, according to the complaint. But it allegedly began falling again after a report by investigative firm Hindenburg Research cited significant “red flags” in April.
Those concerns included the “checkered past” of SCWorx CEO Marc S. Schessel, who had previously pleaded guilty to tax evasion and paida fraud judgment, and Promedical’s chief executive, a “convicted rapist” who has been accused of fraud, the suit says.
The Hindenburg report also concluded that the deals touted by Promedical made little sense on their face. It noted that Wondfo had “disavowed any relationship” with Promedical, which had “fraudulently misrepresented” itself as a reseller, according to the complaint.
Promedical published a statement on its website April 3, two weeks before the Hindenburg report, characterizing Wondfo’s claims as a “false statement” made to “unfairly retaliate” after it became “disgruntled” over a dispute between them.
Moreover, the company that had supposedly committed to buying $840 million dollars in kits from SCWorx was a virtual health startup recently founded by a 25-year-old that had just three employees, Hindenburg found.
The report accused SCWorx of “potentially nefarious business practices at a time when our country and its citizens are arguably at their most vulnerable” and warned investors that trading in its shares would likely be halted.
That soon happened, according to the complaint. Although trading eventually resumed in August, the company’s stock price has been “anemic,” the suit says.
Its claims echo a derivative suit filed in a Manhattan federal court in June and a proposed securities class action filed there in late April.
The complaint was made public Wednesday after originally being filed under seal Oct. 28.
Cause of Action: Breach of fiduciary duty; corporate waste; unjust enrichment.
Relief: Damages, costs, fees, and corporate governance reforms.
Response: SCWorx and Promedical didn’t immediately respond to requests for comment Thursday.
Attorneys: The plaintiff is represented by O’Kelly & Ernst LLC and Gainey McKenna & Egleston.
The case is Zarins v. Schessel, Del. Ch., No. 2020-0924, complaint unsealed 11/4/20.