Despite Warnings, Wave of Pandemic-Related Securities Suits Never Really Materialized

Shareholder Advocate Spring 2021

April 27, 2021

By David Maser

In March of 2020 the COVID-19 coronavirus was declared a pandemic, and two COVID-related securities class action lawsuits were quickly filed. The filing of these cases led to a heated debate of whether plaintiffs’ attorneys would leverage the effects of the pandemic to file an increased amount of securities class actions.

A year ago, in April 2020, Kent Schmidt, a California attorney who specializes in defending businesses in litigation, said a “tsunami” of class-action lawsuits in three areas—consumer, employment, and shareholder cases—was already sweeping ashore. “These early filings can be indicative of the liabilities that companies should take into consideration and inform their practices now to avoid getting hit with one of these costly lawsuits,” he told Newsweek. “I think we’re going to see these cases play out for years.”

Mr. Schmidt’s view was not unique. Many in the defense bar quickly assumed that there would be an increase in the filing of securities fraud class actions, along with insurance, consumer, and other types of cases.

Perhaps not surprisingly, most lawyers who represent plaintiffs in shareholder lawsuits had a different opinion of whether the pandemic would lead to a wave of frivolous securities filings. “Trying to take advantage of a worldwide tragic epidemic disaster? I just hope those suits aren’t brought,” Steven J. Toll, Cohen Milstein’s Managing Partner and the Co-Chair of its Securities Litigation & Investor Protection practice, said to Reuters in March 2020.

To this point, the plaintiffs’ bar appears to have done a better job of forecasting—at least with respect to shareholder lawsuits. As of March 2021, a total of 28 coronavirus outbreak-related securities class action lawsuits have been filed. While 28 securities lawsuits over 12 months is not a small number, it hardly constitutes a flood of litigation, given the 300 to 400 securities class action filed each year.

Cohen Milstein Partner Laura Posner was recently quoted by Law360 as saying that the huge numbers of COVID-19 filings predicted by the defense bar had “largely not come to fruition.” In fact, Ms. Posner told Law360, she expected to soon see a return to normal filing levels of lawsuits, even against the pharmaceutical industry, “given where the country is in drug development relating to COVID-19.”

“There may be a few more cases involving allegations that a company’s projections or revenue and income representations were false and misleading, but assuming that the economy picks up as expected and we begin to return to a more ‘normal’ lifestyle, I think those cases will grow even less common as well,” she said.

Mr. Toll said the “tsunami” never came to pass in part because the unpredictable nature of the pandemic made it hard for plaintiffs to meet the heightened pleading standards required for securities fraud lawsuits to succeed.

“It would have been extremely difficult to show a direct link of any subsequent stock price decline to an earlier fraudulent statement about the pandemic—in other words, to connect the dots to satisfy the element of loss causation,” he told the Shareholder Advocate.

“When the pandemic hit and started to change the nature of how society functioned, it really wasn’t known what the impact would be,” Mr. Toll said. “Thus, it would be very hard to allege a company had the requisite intent under the securities laws to commit fraud—that it was intentionally or recklessly misleading the investing public about the impact of the pandemic on its future earnings or profitability.”

Finally, Mr. Toll said, U.S. stock markets’ broad and sharp decline in early 2020 followed by an equally broad upswing helped keep the number of shareholder lawsuits in check. “When most or all stocks in a particular segment decline, it makes it almost impossible to claim an alleged fraud caused this loss when similar stocks all declined in the same manner,” he said. When stocks across the board rise, he added, it erases any shareholder losses.

Meanwhile, it is also true that litigation in general increased during the pandemic. Law360 reports that restaurants, bars and businesses filed more than 6,900 lawsuits related to the pandemic in 2020 with nearly 1,400 filed over insurance coverage alone and are making their way both state and federal courts. For the most part, these lawsuits reflect the enormous economic and physical damages wrought by the COVID-19 pandemic on individuals and businesses across the country, who have turned to the courts for help when other remedies fail them.