Vaxart Inc.'s board was hit with a Delaware lawsuit claiming it helped a hedge fund linked to it, Armistice Capital LLC, make hundreds of millions on insider trades around news that Vaxart would be getting federal funding for its work on a Covid-19 vaccine.
“Through their disloyal behavior, the board members have secured substantial sums for themselves and Armistice Capital, to the detriment of Vaxart,” the Chancery Court complaint says.
The partly redacted shareholder lawsuit, which also targets Armistice, was made public Wednesday, two days after Vaxart announced that the U.S. Food and Drug Administration had cleared the way for initial trials of its coronavirus vaccine candidate.
It accuses Vaxart’s board of agreeing to raise the ownership ceiling contained in millions of Armistice’s stock warrants so the firm could make strategically timed trades that earned it $266 million in total when news broke of Vaxart’s participation in “Operation Warp Speed,” the federal vaccine project.
The changes allowed Armistice to exercise the warrants unless doing so would increase its Vaxart stake to 20%, up from a previous limit of 10%, according to the complaint.
That allowed the hedge fund to buy millions of shares at $0.30 to $1.10 per share at a time when the federal funding news and other developments were sending it to highs of $14, the suit says.
The move was allegedly connected to a broader selloff by Armistice, which once controlled a majority of Vaxart, as promising vaccine-related news drove the drugmaker’s price up steadily starting in January.
But Armistice “abruptly paused its selloff after June 3" because “it knew Vaxart’s stockprice was poised to skyrocket,” the suit says. It allegedly amended the stock warrants a few days later.
Of the $266 million the hedge fund netted on Vaxart stock, $191 million is attributable to the warrant scheme, according to the complaint.
Two members of Vaxart’s board are directly affiliated with Armistice, while the others benefited from lucrative “equity arrangements they approved for themselves” in a “quid pro quo” that required the support of the Armistice-linked directors, the suit says.
It was originally filed under seal Sept. 8.
The derivative claims echo a pair of proposed securities class actions filed in the U.S. District Court for the Northern District of California in late August and early September. Other plaintiffs’ law firms have also announced that they’re considering securities suits.
Cause of Action: Breach of fiduciary duty; unjust enrichment; corporate waste.
Relief: Damages, costs, fees, and an order requiring the board “to implement a one-time set aside,” potentially in the form of a dividend, to offset the “excessive” equity awards.
Response: “At this time, we are not able to discuss ongoing litigation,” Vaxart said in a statement Wednesday. Armistice didn’t immediately respond to a request for comment Wednesday.
Attorneys: The plaintiff is represented by Ashby & Geddes PA, Fields Kupka & Shukurov LLP, and Pomerantz LLP.
The suit was originally filed under seal Sept. 8.
The case is Galjour v. Floroiu, Del. Ch., No. 2020-0767, complaint unsealed 9/16/20.