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Shareholder Class Actions During, and After, COVID-19
As the global economy surges up and down, companies continue to work to represent accurately to their investors the current state of affairs. Given the turmoil in the markets, an increasing number of plaintiffs are bringing shareholder class action suits, citing corporate statements about COVID-19. Often, these lawsuits point to statements from the company's most recent SEC filings or associated press releases, and argue that the company knew that those statements were false or materially misleading based on actions that the company took not long after its reporting date. As first-quarter earnings season draws to a close, now is a good time to reflect on the shareholder class actions that have been brought to date related to COVID-19, and others potentially yet to come.
This article begins by discussing the most recent putative class action lawsuits related to COVID-19, and concludes by evaluating implications for future lawsuits.
Colony Capital, Inc.
On May 26, the plaintiffs filed a securities-fraud class action lawsuit against Colony Capital, Inc., a global investment firm with a focus on digital real estate, and several of its officers, in the Central District of California. The lawsuit alleges, in part, that Colony made statements in its recent public filings (4Q2019 10-Q, 2019 10-K), and associated earnings calls and press releases that painted a rosy picture of the company's health care and hospitality segments and their respective liquidity positions. For example, the complaint cites the 4Q2019 press release and the 2019 10-K, which both purportedly stated that "with respect to the health care and hospitality units, the Company successfully addressed all material near-term debt maturities allowing the respective business unit leaders to focus on improving cash flows through operational management and capital expenditures."
The complaint continues that the "truth" came to light in the following months, when the company disclosed that its health care and hospitality portfolio companies had defaulted on more than $3 billion in debt as a "result of the economic fallout from COVID-19." The complaint alleges that the company's public statements regarding its health care and hospitality segment were overly optimistic and materially misleading as they failed to disclose that the portfolio companies in those segments "carried unsustainable levels of debt secured by hotels and health care-related properties and were thus at a significant risk of default" due to the prospective impact of COVID-19. The company disclosed the default in its May 8 press release, after which Colony's stock price fell $0.08 per share, or 3.81%, to close at $2.02 per share on May 8.
Sorrento Therapeutics, Inc.
On May 26, the plaintiffs filed a securities-fraud class action lawsuit against Sorrento Therapeutics, Inc. and several of its officers in the Southern District of California. Sorrento had been developing COVID-19 antibody products that could potentially be used to "block and neutralize" the virus in at-risk populations and recently infected individuals. The complaint focuses on May 15, when the company issued a press release allegedly stating that the antibody "demonstrated 100% inhibition" of virus infections, and when the CEO gave an interview where he characterized the breakthrough as a "cure." After these statements the company's share price increased more than 280%.
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