The last week has been a social and economic catastrophe, with markets plunging, recession looming and businesses that seemed perfectly healthy in February suddenly on the brink of failure. You might think those are optimal conditions for shareholder class action lawyers. Defense firms certainly do. Skadden Arps Slate Meagher & Flom, Paul Weiss Rifkind Wharton & Garrison and Akerman have all issued alerts warning clients to brace themselves for securities class actions based on their disclosures or responses to the COVID-19 epidemic.
And in fact, two have already been filed. The Rosen Law Firm brought a March 12 shareholder class action alleging that Norwegian Cruise Lines deceived investors by failing to disclose the allegedly false assurances its salespeople were giving customers about the coronavirus. On the same day, Block & Leviton and Berger & Montague filed a securities fraud complaint against the biotech company Inovio, alleging that its CEO made false statements about the development of a vaccine for COVID-19.
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But after talking Tuesday with four shareholders’ lawyers – including Jason Leviton, whose firm filed the Inovio suit - I don’t think there’s going to be an imminent flood of COVID-19 related securities class actions. To the contrary, the plaintiffs’ lawyers I spoke to said they have no intention of filing reflexive class actions alleging that companies slammed by the pandemic failed to provide adequate risk warnings to shareholders. “Trying to take advantage of a worldwide tragic epidemic disaster?” said Steven Toll of Cohen Milstein Sellers & Toll. “I just hope those suits aren’t brought.”
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The underpinnings of the COVID-19 crisis are fundamentally different, the lawyers said, than those of the 2008 crash. That downturn led to a decade of securities litigation because investors felt duped by the mortgage and finance industries, which created and sold the defective securities at the root of the crisis. Shareholders sued to prove that banks and other defendants deliberately misrepresented not just the quality of the securities and but also the risk they faced from exposure to toxic mortgage-backed certificates and more complex instruments referencing them.
This time, said Toll, Leviton, Bleichmar and Darren Robbins of Robbins Geller Rudman & Dowd, there’s no analogous systemic deception. Fraud claims will be idiosyncratic. If, say, a company claims to have two factories manufacturing medical equipment but actually only has one in operation, Leviton said, it can expect to be sued by investors. “But if they think we’re going to knock Apple for not having disclosed coronavirus before it happened,” he said, “that’s insane.”
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Interestingly, the lawyers said their institutional investor clients aren’t focused at the moment on potential fraud class actions but on more immediate problems like figuring out how to operate. Leviton, Robbins and Toll said their lawyers, too, are getting used to working at home and navigating new court rules addressing the virus.
So yes, when things begin to return to normal, there will be shareholder class actions against companies that were exposed in the COVID-19 downturn. But as Toll and Bleichmar said, let’s hope they’re not frivolous disclosure suits.
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