An investor lawsuit against a Utah company alleges its principals falsely claimed its coronavirus diagnostic test was “100% accurate” and before doubts about the claim became widely reported, directors and officers of the company were selling off their own stock at its inflated price.
The securities fraud lawsuit has been brought against Co-Diagnostics in federal court in Utah on behalf of investors the complaint says have lost millions of dollars.
The complaint notes that while many global and American companies have been engaged in a race to find therapeutics and hopefully a vaccine to combat the coronavirus, some other companies and corporate executives have sought to “unfairly exploit” the pandemic for their financial gain. “Defendant Co-Diagnostics is one of those companies,” the complaint charges.
The Utah company was formed in 2013 to take advantage of DNA-testing technology developed by Brent Satterfield, Ph.D., a biomedical engineer. According to Co-Diagnostics, it began developing Covid-19 tests using a technology called CoPrimer, which was developed and patented by Satterfield before the outbreak.
The investors allege a scheme under which the company’s inflated claims of success in coronavirus tests boosted its historically low stock price to new highs. However, as the media and regulators began to question the accuracy of such tests, the company’s stock price began falling.
The investors allege that Co-Diagnostics, its directors and officers— “including PhD-level scientists who should know better” —made “continual, knowing and willful misstatements about their main product to pump up the price of CoDiagnostics’ stock while the officers and directors exercised low priced options and dumped their stock into the market.”
The company became the first to win approval to sell its tests in the European Union in February and in April in the U.S. News of these approvals and the subsequent rise in sales boosted the firm’s stock price. Co-Diagnostics got a $5 million contract with the state of Utah to supply tests and a $26 million contract with Iowa totaling $26 million with Iowa.
The stock, which closed on December 31, 2019 at $0.8952 per share, jumped to $15 in February and topped $17 per share in early March; then settled at about $8.00 per share.
However. trouble began in April 30 when the Salt Lake Tribune reported results from Co-Diagnostics’ TestUtah.com were raising questions about accuracy. Co-Diagnostics issued a press release that stated that Co-Diagnostics covid-19 tests were “100% accurate.”
The complaint includes data showing the tests are less than 100% accurate and Federal Drug Administration statements that no test is 100%.
The company stuck to its claims of 100% accuracy and, as it neared the release of its first quarter results, on May 14, the stock reached an all-time high of $29.72.
That same day, the Salt Lake Tribune reported that Co-Diagnostics’ tests were likely to have a much higher false negative reporting rate than others and that the firm “declined to join other major Utah labs in a joint experiment to confirm one another’s quality.” The Tribune article also reported on concerns relating to TestNebraska.com and TestIowa.com.
According to the complaint, in its earnings call, Co-Diagnostics reported that it achieved record sales in the first quarter and finally reached profitability. However, it did not address the testing accuracy.
When the negative news broke, the stock price began to fall, closing the day at $22.13 after hitting an intra-day low of $18.35, a greater than 38% decrease in price within hours. The stock price further fell to just over $15 per share when markets opened on May 15.
“Their fraudulent misstatements, and disregard for the basic scientific principles that make their falsity of their statements clear in retrospect, cost investors to lose millions of dollars,” the complaint says.
At the same time, “with a cloud of doubt hanging over the company’s claims of accuracy,” the complaint says Co-Diagnostics’ directors and officers have been selling their shares into the market “reaping millions of dollars from the fraud-inflated price of the stock,” according to the plaintiff investors.
The investors seek certification as a class action lawsuit and compensatory damages in favor of against all defendants, jointly and severally, plus legal costs.
The suit was filed by lawyers from Smith Washburn in Salt Lake City and two Miami law firms, Fasano and Marcus Neiman Rashbaum & Pineiro.
This is not the first investor lawsuit over claims surrounding coronavirus breakthroughs. In March Pennsylvania-based Inovio Pharmaceuticals became the target of a lawsuit alleging it falsely claimed it has developed a vaccine for COVID-19 that would go into testing as soon as next month. But the pharmaceutical firm has said the allegations are based on a misunderstanding of the medical science.
Insurance underwriters have been bracing for a rash of D&O lawsuits as part of the fallout from the pandemic. Ratings agency A.M. Best said it expects protracted litigation.
“It’s likely that the COVID-19 pandemic will ultimately lead to greater complexity regarding emerging D&O claims and litigation issues,” said David Blades, associate director, industry research and analytics for A.M. Best. He said the “inherent complexities of unique COVID-19 claim scenarios” could lead to protracted litigation for many claims.
Blades said D&O insurers could be facing possible claims over company responses to the pandemic and any failures to protect against substantial financial losses. Other potential claims might concern misleading disclosures relative to the pandemic, government investigations into applications for pandemic relief, and claims stemming from the financial troubles of travel, leisure, hospitality, retail and other sectors hit hard by the pandemic and lockdowns.
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