Despite a general decline in filings of securities class action litigation in 2020, the economic fallout from the coronavirus pandemic has led to an uptick of securities fraud cases alleging failure to disclose risks of the pandemic to the investing public. Since spring of 2020, plaintiffs’ attorneys have filed close to 30 COVID-19 related securities class action lawsuits. On January 25, 2021, a California federal district court issued the first decision granting a motion to dismiss such a complaint in Berg v. Velocity Financial, Inc., No. 20 Civ. 6780, 2021 WL 268250 (C.D. Cal. Jan. 25, 2021). The result in Berg is fact-specific; thus, while the court’s holding provides some guidance, the decision does not exonerate all companies facing securities fraud allegations related to misrepresentations about the impact the pandemic has had on their business operations. The key is whether the risks were known by the defendants but not spelled out to investors.
In Berg, the plaintiff asserted claims under Sections 11 and 15 of the Securities Act of 1933 that Velocity made false and misleading statements to investors ahead of the company’s January 2020 IPO regarding Velocity’s underwriting standards, rising portfolio of non-performing loans, and ability to capitalize on the real estate market. Additionally, the complaint alleged that Velocity failed to disclose the potential impact of the coronavirus pandemic on Velocity’s business and operations, despite the fact that the international spread of the novel coronavirus had already been confirmed at the time of the IPO.
In the order dismissing the complaint, the court held that Velocity’s statements concerning its underwriting standards and non-performing loan portfolio were neither false nor misleading. The court also held that Velocity could not have known about the coronavirus risks at the time of its IPO, and thus could not have included a specific disclosure about the pandemic’s impact on its business operations. The court, however, did note that Velocity disclosed that its business might be affected by changes in national, regional, or local economic conditions or specific industry segments caused by acts of God. The opinion thus provides some basic guidance to future plaintiffs as to the necessary allegations for claims based on failure to disclose pandemic risks.
A more recent coronavirus-related securities class action lawsuit filed February 2, 2021, against Tyson Foods, Inc. asserts securities fraud claims under the Securities Exchange Act, Sections 10(b) and 20(a), and Rule 10b-5. The plaintiff alleges that Tyson knowingly made false and/or misleading statements in its Form 8-K, 10-Q, and 10-K filings, all of which caused Tyson’s stock price to be artificially inflated. Mingxue Guo v. Tyson Foods Inc. et al., 1:21-cv-00552, No. 1 (E.D.N.Y. Feb 2, 2021). These claims are more fully developed than the almost-cursory pandemic-related claim in Berg.
The contrast between the allegations against Tyson and those against Velocity are telling. The critical distinctions relate to what the companies knew about the pandemic and when they knew it. A company that is alleged to have known about the risks that the pandemic would pose to its business operations and future prospects in early 2020 may find comfort in the Berg decision, whereas a company like Tyson that is alleged to have made false statements about the impact of the virus on its business operations after the events of spring 2020 and throughout the year cannot rely upon the Berg dismissal.
As long as the coronavirus pandemic continues to affect the economy and companies’ business operations and financial results, we can expect that plaintiffs’ attorneys will continue to file cases and refine their liability theories against companies in industries impacted by the coronavirus. As such, companies must carefully examine the contents of their public statements to take into account the potential impact of the pandemic on their respective businesses.
