It is 2021 and COVID-19 is still a health crisis. On the business front, some have been resilient, while others have suffered catastrophically. When it comes to D&O litigation, the plaintiffs’ bar has been active. It is useful to review where this litigation landed in 2020 in order to understand what to expect in 2021. In the year ahead, we will see more of this type of litigation (e.g., Decision Diagnostics was sued by plaintiffs this month), but as the health crisis starts to taper off so too should this type of litigation.
The State of COVID-19 Litigation
COVID-19 Litigation by the Numbers
According to the latest data from Woodruff Sawyer’s proprietary database of D&O litigation, the number of securities class action lawsuits filed against public companies was down in 2020 compared to 2019 (210 versus 268, respectively), but the rate of filing was certainly still robust.
Approximately 10% of the securities class actions in 2020 were related to COVID-19 across various industries. Specifically, the distribution of COVID-19 class actions across sectors was as follows:
- Healthcare: 8 cases
- Financial: 6 cases
- Technology: 3 cases
- Transportation: 3 cases
Types of COVID-19 Lawsuits and Enforcement Actions
Twenty companies were sued in COVID-19-related securities class actions as a result of one of the following events:
Impacted directly by a virus outbreak: Carnival Cruise Line is one example of this type of litigation. The company was sued for allegedly mishandling its response to the initial outbreak of the coronavirus when 19 cruise ships were connected to nearly 2,000 reported cases of COVID-19 and at least 58 deaths.
Impact of the virus on the world’s economies, which directly affected the company’s immediate or projected finances. One such example is Colony Capital, Inc., a real estate investment trust that was sued for misrepresentation of revenue growth. Despite statements of addressing all of its near-term debt maturities, the company is alleged to have hidden the fact that it had an unsustainable level of debt associated with its hotel and healthcare properties.
Business disruption that exposed vulnerabilities in operations. Zoom Video Communications, Inc. is an example of a company that was sued over misrepresentations of its data privacy and security measures, and lack of transparency about user data that was being transferred to Facebook. These vulnerabilities surfaced as a result of ramped-up usage of its product during the pandemic.
Direct involvement of virus-related matters such as the development of treatments for the virus, manufacturing virus-related products, and more. A well-known example here is Inovio Pharmaceuticals, Inc., which was sued for statements made by its CEO alleging that they had developed a COVID-19 vaccine and were planning to start trials in April 2020.
The Securities and Exchange Commission indicated early on that they had their eye on pandemic-related disclosures. Kevin LaCroix at the D&O Diary has tracked the SEC’s actions and found that the SEC did indeed bring seven pandemic-related enforcement actions in 2020, with six of these related to “company statements about how the companies involved were positioned to be able to profit from the pandemic.”
These six enforcement actions were against:
- Praxsyn and its CEO, Frank Brady, for misleading statements about the availability of masks to protect from the virus.
- Applied Biosciences Corp. for exploiting the pandemic for profit by dramatically shifting to pandemic-related products.
- Turbo Global Partners, Inc. and its CEO, Robert Singerman, for false statements around the availability of virus-related products.
- Jason C. Nielsen, a penny stock trader, for allegedly defrauding investors for personal profit related to a biotech company investment.
- Mark Schena, president and chief science officer at Arrayit, a biotech company (which is the same company involved in the previous enforcement involving Mr. Nielsen.) This action alleged Mr. Schena made false statements to investors about the status of the company’s financial reports.
- Decision Diagnostics Corp and its CEO, Keith Berman, for falsely claiming have developed a rapid, finger-prick COVID-19 diagnostic test.
Instructive on the disclosure front is the SEC’s action against restaurant chain The Cheesecake Factory in December 2020 for “making misleading disclosures about the impact of the COVID-19 pandemic on its business operations and financial condition.”
According to the SEC, this is the first of its kind related to an enforcement action against a public company for misleading investors about the financial impact of the pandemic. According to Woodruff Sawyer’s proprietary database on securities class actions, shareholders have not yet sued The Cheesecake Factory. That could, of course, change.
The Future of COVID-19 Litigation and D&O Insurance
The pandemic continues to remain unresolved, and we do not know how long businesses will be impacted by it. As a result, companies will continue to make disclosures about the pandemic. While I do not expect to see as many COVID-related securities class actions in 2021 as we did in 2020, we already know there will be some.
Many management teams and directors may be vulnerable to the desire to make optimistic projections concerning their prospects as vaccines become more widely available and life returns to normal. Unfortunately, no one really knows what the return-to-normalcy timeline will begin. For this reason, directors and officers are better served by taking a conservative disclosure posture.
With regard to insurance, at the start of the pandemic, some carriers were attempting to put broad COVID-19 exclusions on their D&O policies with the clear intent of excluding potential litigation stemming from the virus, including litigation that may arise based on poor disclosures. As the pandemic continues, we see some carriers continue to attempt to do this, but on a much more selective basis.
The more usual path for insurance underwriters is to take a more nuanced approach to those industries or activities that are more susceptible to the fallout of the pandemic, for example, the airline and hospitality industries or any company engaged in manufacturing. These types of companies are then asked more in-depth questioning by insurance carriers. In some cases, insurance carriers are asking for responses to written questionnaires as companies are renewing or placing D&O insurance.
This focus on underwriting reflects carriers’ focus on companies’ finances and disclosure protocols as well as whether the company has a sensible safety protocol in place. Now is a good time for companies to review how they are handling any pandemic-related disclosures and safety protocols. In many cases, it will be well worth the expense of consulting with outside litigation counsel in order to make a company’s disclosure as clear and as uninteresting to the plaintiff’s bar as possible.
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