Legal Update

Feb 24, 2021

Initial Decisions on Motions to Dismiss COVID-19 Securities Class Actions Offer Mixed Results

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Seyfarth Synopsis: Two recent decisions on motions to dismiss in COVID-related class action securities litigations—one successfully dismissed, the other largely surviving—show that a bare allegation of failure to predict the extent of the pandemic in public filings may not be enough to state a claim, but more robust allegations of misleading investors on COVID issues may be viable.

Separate federal courts recently decided motions to dismiss in two of the earliest filed COVID-related securities litigations, with notably different outcomes. On January 25, 2021, the Central District of California in Berg v. Velocity Financial, Inc., dismissed a claim of alleged failure to adequately disclose COVID risks.[1] And on February 16, 2021, the Eastern District of Pennsylvania in McDermid v. Inovio Pharmaceuticals, largely permitted claims to proceed in connection with alleged overly-optimistic statements about a company’s COVID response, including a claim that the company had “constructed” a vaccine in three hours[2] Though the pandemic presents novel issues, the courts’ analyses in these cases focus on fundamental securities law principles, and offer a window into potential outcomes for similar cases.

Velocity Financial: Alleged Failure to Disclose COVID Risks in January 2020 Not Enough to State a Section 11 Claim

Velocity Financial is a real estate finance company that went public in January 2020, before the risks of COVID were well known by the public. After the stock dropped, plaintiff brought a putative class action[3] alleging, among other things, false and misleading statements in the IPO registration statement in violation of Section 11 of the Securities Act of 1933. Notably, plaintiff’s allegations included that “Defendants painted a ‘rosy’ picture of the real estate market when the market was really set to collapse because of the coronavirus pandemic”[4] and that defendants “should have disclosed the uncertainty in the real estate market because of the coronavirus pandemic.”[5]

In dismissing the claim based on the alleged “rosy” statement characterizing the market for investor real estate loans as substantial and durable,” the court emphasized that “[g]enerally, securities claims may not hinge on a corporation’s optimistic market projections,” and analogized the alleged misstatements at issue to similar statements that had been dismissed in other cases as puffery, such as that a company is in “a pretty good position” or “there is potential growth in the [] market.”[6] The court also swiftly rejected plaintiff’s theory that defendants should have disclosed COVID-related uncertainty in the real estate market, concluding that “Plaintiff does not allege that Defendants would or could have known the extent of the coronavirus pandemic, or even the presence of the disease in America, at the time of the IPO.”[7]

Inovio: Alleged Overly-Optimistic Statements Regarding Pandemic Capabilities May Survive Motion to Dismiss

As previously discussed, in March 2020 Inovio Pharmaceuticals became one of the first companies sued for alleged COVID-related securities violations when its CEO allegedly touted the company’s ability “to fully construct our vaccine within three hours” and its plan to start trials in April of 2020.[8] Plaintiff brought a putative class action alleging that these and other alleged misstatements regarding Inovio’s progress towards vaccine dose production and relationship with the federal government’s “Operation Warp Speed” violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.[9]

On February 16, 2021, the Eastern District of Pennsylvania declined to dismiss the complaint’s allegations in connection with statements about constructing a vaccine or progress towards vaccine dose production,[10] but dismissed allegations in connection with statements about the company’s inclusion in Operation Warp Speed.[11]

With regards to the statement about constructing a vaccine, Inovio argued that the statement was not misleading, as it had “designed” a vaccine in three hours, and “construct” and “design” were synonymous terms.[12] The court found that the question was one of fact, and not appropriate for determination at a motion to dismiss. The court also found scienter to be adequately pled, given, among other things, allegations that the CEO had the background and experience in the pharmaceutical industry to understand the difference between “constructing” and “designing” a vaccine.[13] The court similarly rejected defendants’ loss causation arguments, finding that the allegation that the company stock price “tumbled” following the first announcement that company had “designed” but not “constructed” a vaccine to be sufficient to state a claim.”[14]

The court also declined to dismiss allegations regarding production capabilities and goals for 2020 vaccine production, rejecting defendants’ contention that these qualified for immunity under the PSLRA’s Safe Harbor provision for forward-looking statements.[15] For example, the court found an alleged statement that the company was “on track” to produce one million doses by the end of 2020 to be “inextricably linked” to “current manufacturing capabilities.”[16]

Takeaways

The first motion to dismiss decisions in COVID-related class action securities litigation show that pandemic related securities law claims will be subjected to the same analysis as other securities claims. Thus disclosures by companies should be carefully reviewed through this lens.This is illustrated by the findings seen in, for example, the Velocity Financial court’s finding that certain statements were mere puffery or the Inovio court’s finding that the company’s announcement regarding involvement with Operation Warp Speed was not actually misleading. They also show that the allegation of a lack of COVID disclosures at a time before the pandemic was in full swing should not be enough to state a claim, as in Velocity, however it may be more difficult to secure dismissal of alleged statements that could be construed as overly-optimistic assessments of one’s own business or products in response to the pandemic, as in Inovio. More clarity should emerge as additional COVID-related securities suits reach the dismissal stage. As noted, companies should continue to be proactive and minimize risk by carefully reviewing disclosures and including cautionary language.

[1] Berg v. Velocity Financial et al, 2:20-cv-06780-RGK-PLA, ECF No. 53 (C.D. Cal.); available via Stanford University here: http://securities.stanford.edu/filings-documents/1074/VFI00_01/2021125_r01x_20CV06780.pdf.

[2] McDermid v. Inovio Pharmaceuticals et al, 20-01402 , ECF No. 85 (E.D. Pa.); available here: https://www.paed.uscourts.gov/documents/opinions/21D0179P.pdf

[3] Velocity Financial, supra n. 1 at 2.

[4] Id. at 14.

[5] Id. at 16.

[6] Id. at 14-15.

[7] Id. at 16.

[8] See McDermid v. Inovio, 2:20-cv-01402-GJP (E.D. Pa.), Compl. ¶ 5.

[9] McDermid v. Inovio, supra n. 2 at 8.

[10] Id. at 11.

[11] The court rejected plaintiffs’ argument that defendants led investors to believe that the company had been chosen to receive government funding for its vaccine when it had been chosen only to participate in a government-backed study. Instead, the court found that defendants disclosed that the company was selected for the study in question. Id. at 25-26.

[12] Id.

[13] Id. at 14.

[14] Id. at 17.

[15] Id. at 18.

[16] Id. at 19.