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Litigation Amid the Covid-19 Pandemic: Emerging Trends in Directors and Officers and Securities Litigation

May 27, 2020

The Covid-19 pandemic has impacted every corporation in every sector of the economy. Hard decisions must be made in regard to workplace safety, layoffs and furloughs, investments, financing and business planning. Challenges to corporate governance will follow. These suits may be retrospective, focusing on alleged failures in regard to disaster preparedness, insurance coverage and contingency planning or prospective, challenging ongoing management, financial and operational decisions. As the economic crisis caused by shelter-in-place and social distancing orders grows, corporations will be faced with selling assets, entering into mergers or financing agreements that would have been unthinkable prior to the pandemic. Shareholder suits are sure to follow.

The current fiscal crisis may be based upon public health issues but it will directly impact all aspects of the corporate world, including securities. Examples of early Covid-19 related securities and D&O claims include:

  • On March 12, 2020, Inovio Pharmaceuticals was sued in a securities class action for representing that it was able to develop a Covid-19 vaccine within three hours and that it planned to start trials in April 2020. The lawsuit alleged that the statements were inaccurate, that Inovio had not developed a vaccine, and that the statement that it designed a vaccine in three hours was “ludicrous and dangerous.” A shareholder derivative lawsuit was later filed against Inovio in the Eastern District of Pennsylvania based on similar facts.
  • On March 12, 2020, a securities class action was filed against Norwegian Cruise Line Holdings, Ltd. under Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 for making false and misleading statements in its 8-K and 10-K public filings in February 2020. The complaint alleged that (1) “the Company was employing sales tactics of providing customers with unproven and/or blatantly false statements about Covid-19 to entice customers to purchase cruises, thus endangering the lives of both their customers and crew members;” and (2) “as a result, Defendants’ statements regarding the Company’s business and operations were materially false and misleading and/or lacked a reasonable basis at all relevant times.” It is alleged that the Company misrepresented in public filings that it has an exemplary track record of resilience in challenging environments, that “the Company’s booked position remained ahead of prior year” and that it “proactively implemented several preventive measures to reduce potential exposure and transmission of Covid-19.”
  • On April 24, 2020, a plaintiff shareholder filed a U.S. securities class action lawsuit against Phoenix Tree Holdings, a company that leases and manages apartments in Wuhan and other Chinese cities, alleging that the company’s January 2020 IPO offering documents failed to disclose the impact of the outbreak on the company’s residential real estate operations in China. It is alleged that the company’s offering documents misrepresented the nature and level of renter complaints the company received before and as of its IPO date relating to the coronavirus, impacting its risk exposure and the value of the company.
  • As more companies are forced to take extreme measures to avoid insolvency as a result of the Covid-19 pandemic and resulting global recession, we foresee an increase in claims relating to alleged corporate mismanagement, inadequacies in financial or operational disclosures, breach of fiduciary duties and violation of security laws. Will corporate decisions be judged based upon long standing statutory and common law standards or in relation to the “new normal?”
    A corporation that has residential real estate interests in Wuhan is an obvious target. But when Zoom, the videoconferencing company that has become synonymous with communication during lockdowns faces a shareholder’s derivative action it’s clear that all corporations are potential targets.
  • On April 7, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Zoom as well as Eric Yuan, the company’s CEO, and Kelly Steckelberg, the company’s CFO. The complaint purports to be filed on behalf of a class of persons who purchased the company’s securities between April 18, 2019 (the date of Zoom’s IPO) and April 6, 2020. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks damages on behalf of the plaintiff class. Plaintiff alleges that the defendants made false and misleading statements regarding the company’s “business, operational and compliance policies.” The complaint further alleges that the defendants misrepresented or failed to disclose that “(i) Zoom had inadequate data privacy and security measures; (ii) contrary to Zoom’s assertions, the Company’s video communications services was not end-to-end- encrypted; (iii) as a result of all the foregoing, users of Zoom’s communications services were at increased risk of having their personal information access by unauthorized parties, including Facebook; (iv) usage of the Company’s video communications services was foreseeably likely to decline when the forgoing facts came to light; and (v) as a result, the Company’s public statements were materially false and misleading at all relevant times.”

It should be noted that although many existing D&O policies are not written with cyber and technology related risks in mind, a failure to protect against and insure for privacy or cyber liabilities could potentially lead to D&O liability. This risk has increased during the current “work from home” era and is highlighted by the suit against Zoom. We will continue to provide updates on this aspect of coronavirus related risk and litigation.


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