The Covid-19 pandemic and related market disruption will undoubtedly lead to shareholder class-action suits against publicly traded companies and their directors and officers.
We expect securities class action suits arising out of the Covid-19 pandemic to focus largely on alleged disclosure violations, including claims that the company misrepresented products intended for use during the pandemic or measures it took or is taking in response to the pandemic; claims the company downplayed or failed to disclose the current or anticipated impact of the outbreak on its production, sales, customers, or profits; and claims the company used the outbreak to conceal misconduct or other negative information.
Challenges for Plaintiffs in Covid-19 Era
The current pandemic certainly creates opportunities for event-driven litigation, but it also gives rise to substantial challenges for plaintiffs to prove securities fraud claims.
Establishing loss causation will be particularly difficult given market-wide declines that have impacted nearly every public company across all industries. While plaintiffs typically need not establish that an alleged misrepresentation was the sole cause of a stock’s price decline, they do need to link their losses to the alleged misrepresentation as opposed to intervening market forces.
To some extent, plaintiffs are in uncharted waters in light of the swiftness, severity, and global nature of the market volatility caused by the Covid-19 pandemic.
Scienter is also likely to pose a challenge for securities class-action plaintiffs. Demonstrating knowledge of falsity, particularly in disclosures focusing on risk assessments and future projections, will be difficult given the unprecedented nature of this global pandemic and the uncertainty that it has created.
In past shareholder litigation arising from public health crises, allegations that a company failed to accurately estimate and disclose all risks associated with an outbreak rarely were successful due to the difficulty in alleging scienter. Note, however, that while actions under Sections 10(b)(5) and 20(a) of the Securities Exchange Act of 1934 must meet a heightened standard of scienter, cases filed under certain other provisions of the Securities Act of 1933, such as Section 11 for misstatements in registration statements, do not require fraudulent intent.
Although the “fraud on the market” theory, which assumes that any misrepresentations are automatically incorporated into a company’s stock price, creates a presumption of investor reliance, recent case law allows that presumption to be rebutted as early as the class certification stage. Plaintiffs may struggle to maintain the presumption of reliance in light of the broad market fluctuations and substantial media coverage regarding the impact of Covid-19.
Finally, there is a moral aspect to the current pandemic that may impact the judicial appetite for reflexively filed class-action suits. Unlike, for example, the global financial crisis of 2007-2008, where plaintiffs arguably had the moral upper hand in seeking vindication for allegedly untoward practices in the mortgage and finance industries, here, the villain is a virus that has been causing widespread hardship and death.
These circumstances may also lead plaintiffs’ lawyers to be pickier about the cases they choose to bring. Companies, however, should not expect to be given a pass for bad behavior and should not expect to be able to conceal misconduct or other negative information simply by painting it with a Covid-19 brush.
Inoculating Against Risks
Despite the operational, logistical, and economic challenges that Covid-19 has brought, companies must continue to be mindful of their disclosure obligations.
In the last several weeks, the Securities and Exchange Commission has taken a number of steps to ease the burden on reporting companies by extending filing deadlines and expressly reminding companies of disclosure considerations and best practices. Companies should be aware of these developments and take advantage of them where appropriate.
Further, given the uncertainty created by the pandemic, companies should be especially careful when making disclosures about the potential risks associated with the virus, the company’s financial future, and other forward-looking statements.
In making projections and other forward-looking statements, companies are reminded of the Private Securities Litigation Reform Act’s safe harbor, which protects forward-looking statements if (1) they are identified as forward-looking and accompanied by “meaningful cautionary statements” identifying factors that may cause actual results to differ from those predicted; or (2) the plaintiff fails to prove that the statement was made with actual knowledge that it was false or misleading.
While any public company can be subject to securities litigation arising from its handling of Covid-19, companies operating in industries most impacted by the pandemic—such as health care, travel, and retail—should be on particularly high alert for potential suits.
The first Covid-19 class actions, for example, have targeted companies in the medical and travel industries. The first case, filed on March 12 against Inovio Pharmaceuticals, Inc. and its CEO, alleges that Inovio made false statements about its development of a Covid-19 vaccine.
That same day, a securities fraud action was also commenced against Norwegian Cruise Line Holdings, Inc. and its top two executives, alleging that Norwegian made false or misleading claims regarding its economic outlook and Covid-19 safety procedures. A second complaint with similar allegations was filed against Norwegian on April 1.
Prior public health crises, such as the 2004 avian flu outbreak and the 2014 Ebola outbreak, similarly led to securities class-action suits against biotechnology companies and medical equipment manufacturers for allegedly making false and misleading statements regarding vaccines, drugs, and medical equipment intended to combat the outbreaks.
While substantial uncertainty about the future of Covid-19 securities class actions remains, companies that remain vigilant about their disclosures will be best positioned to avoid or defeat potential securities fraud claims.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Mendy Piekarski is senior counsel in Thompson Hine’s Business Litigation practice group in New York. His experience includes federal and state court litigation and arbitration in areas of law including complex breach of contract, shareholder and securities litigation, class action defense, business torts, fraud, internal investigations, and SEC and FINRA investigations.
Renee Zaytsev is senior counsel in the firm’s Business Litigation practice in New York. She is a trial and appellate lawyer with more than a decade of experience representing businesses and individuals in complex commercial and corporate disputes, including claims arising under the federal securities laws, M&A and shareholder litigation, partnership disputes and business divorces, and fiduciary breach claims.
Anna Stark is an associate in the New York office of Thompson Hine and is business litigator and a white-collar criminal practice lawyer. She focuses on her practice on matters involving civil and criminal antitrust, fraud, securities, breach of contract, and business torts in state and federal courts as well as tribunals.