COVID-19: A Review of Recent Securities Fraud Enforcement Actions

Michael Bongiorno is partner, Jessica Lewis is counsel, and Sierra Shear is senior associate at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale memorandum by Mr. Bongiorno, Ms. Lewis, Ms. Shear, Christopher Davies, Timothy J. Perla, and Robert Kingsley Smith. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

As noted in our earlier alert concerning securities enforcement actions, as COVID-19 spread swiftly across the United States in the early months of 2020, the Securities and Exchange Commission (SEC) began issuing warnings about potential pandemic-related disclosures, fraud and disruptions to the financial markets. [1] On January 30, 2020, SEC Chairman Jay Clayton announced that the SEC staff would monitor and, to the extent necessary, provide guidance regarding disclosures “related to the potential effects of the coronavirus.” [2] Shortly thereafter, the SEC began assembling a cross-divisional working group to monitor “the real and potential effects of COVID-19 on public companies, including with respect to potential reporting challenges” and public disclosures. [3]

In addition to providing disclosure-related guidance, throughout the crisis the SEC also has “actively monitor[ed]” “markets for frauds, illicit schemes and other misconduct affecting investors relating to COVID-19.” Most recently, on May 12, 2020, SEC Co-Director of Enforcement Steven Peikin outlined the responsibilities of the Enforcement Division’s Coronavirus Steering Committee, which was created to respond to COVID-19-related enforcement issues, including microcap fraud, insider trading, accounting or other disclosure improprieties, and market-moving announcements by issuers in industries particularly impacted by the COVID-19 pandemic. [4] According to recent SEC public announcements, the Coronavirus Steering Committee has “developed a systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry.” [5] In addition to identifying “highly impacted” industries, the SEC has also noted that “microcap stocks may be particularly vulnerable to fraudulent investment schemes, including coronavirus-related scams.” [6]

In the wake of this targeted oversight, this month the SEC began bringing COVID-19-related securities fraud claims against issuers, filing at least three complaints in federal court against microcap and penny stock issuers alleging securities fraud violations under Section 10(b) of the Securities Exchange Act. In a press release announcing the filing of two complaints, Peikin described the actions as “demonstrat[ing] the SEC’s vigilance over public companies that make materially misleading claims in press releases.” [7] These cases provide instructive context for any company issuing public disclosures related to COVID-19 and an initial view of the SEC’s COVID-19-related securities fraud enforcement activity.

* * *

Applied Biosciences Corp. On May 13, 2020, the SEC filed suit against Applied Biosciences Corp. (APPB), a biotechnology issuer, in the Southern District of New York. The SEC alleges that between late March 2020 and late April 2020, APPB made false and misleading statements in a series of press releases describing APPB’s efforts to manufacture and sell COVID-19-related products. The SEC alleges that on March 25, 2020, APPB issued a press release falsely stating that the company “diverted manufacturing resources” to manufacture products designed to fight COVID-19 and had “formulated its [own hand-]sanitizing blends according to CDC guidelines.” One week later, on March 31, 2020, the company issued a second allegedly inaccurate press release stating that APPB “had begun shipping a line of ‘Home [COVID-19] Test Kits’ to ‘be used for Homes . . . or anyone wanting immediate and private results’ and touted results in under 15 minutes using only a finger prick.” The SEC alleges that the company “misleadingly failed to disclose that the FDA had not approved or authorized the sale of any at-home test kits” and that each of these statements was false and misleading.

The SEC alleges that after the publication of the March 31, 2020, press release, APPB’s “stock price increased almost 80 percent from the previous day.” Two weeks later, on April 13, 2020, the SEC suspended trading in APPB stock for 10 days.

Praxsyn Corporation. On April 28, 2020, the SEC filed suit in the Southern District of Florida against Praxsyn Corporation, a healthcare company, and its CEO. The complaint alleges that on February 27, 2020, Praxsyn issued a press release stating that it was negotiating the sale “of millions of masks meeting the standards for N95 masks” and was vetting suppliers to establish a dependable supply chain of masks. Approximately one week later, on March 4, 2020, Praxsyn issued a second press release claiming that “it had a large number of N95 masks on hand and had created a ‘direct pipeline from manufacturers and suppliers to buyers’ of the masks.” Then, on March 31, 2020, Praxsyn issued a third press release disclosing that “it never had masks on hand”—a statement that, according to the SEC, was supported by “[d]ozens of emails and other documents from late February through March [that] show that the [CEO] and at least one Praxsyn director knew efforts to obtain and sell N95 or other masks were proving futile.”

The complaint alleges that trading volume in Praxsyn stock “increased significantly after both releases” and that Praxsyn’s stock price approximately doubled after the first two releases, “fluctuating between $.0095 and $.0188” on February 27, 2020, and between “$.0053 and $.0091” on March 4, 2020. On March 26, 2020, the SEC suspended trading of Praxsyn stock for 10 trading days.

Turbo Global Partners. On May 14, 2020, the SEC filed suit in the Middle District of Florida against Turbo Global Partners, a digital marketing company, and its CEO. The SEC alleges that Turbo issued two false and misleading press releases that described a purported “strategic alliance” between Turbo and BeMotion, Inc., to sell thermal scanning equipment. Turbo’s March 30, 2020, press release stated that Turbo and BeMotion “were actively selling equipment that scans large crowds to detect individuals with elevated fevers,” which the release claimed could “be instrumental in breaking ‘the chain of virus transmission.’” Turbo further stated that BeMotion was part of a public-private partnership “for this innovation which . . . is the only scanning technology on the planet with non-contact intelligent human temperature screening and facial recognition,” allegedly attributed numerous false statements to BeMotion’s CEO, and asserted that the thermal scanning equipment was “available to be deployed immediately” and could be shipped “within five days of receiving an order.” On April 3, 2020, Turbo issued a second press release stating that Turbo’s CEO had been in contact with governors and CEOs for major retailers concerning the availability and procurement of the thermal scanning equipment. The complaint alleges that each of these statements was false and misleading.

The SEC concludes that the alleged misstatements “materially affected the trading” for Turbo stock by doubling trading volume and inflating the stock price following their release. On April 9, 2020, the SEC suspended trading of Turbo stock for 11 trading days.

* * *

As we have previously reported, since the onset of the COVID-19 pandemic, the SEC has aggressively messaged its intent to remain vigilant and protect investors from fraud in the current environment. The SEC has specifically identified companies with low or micro market capitalizations as being particularly vulnerable to coronavirus-related scams. These initial actions—brought against companies based on alleged misrepresentations pertaining to critical COVID-19 safety equipment and prevention products, including hand sanitizer, COVID-19 test kits, N95 masks and thermal scanners—reflect the SEC’s commitment to target companies that it views as taking advantage of the volatility and instability inherent in the pandemic. Although the number of investigations launched by the SEC that may result in litigated enforcement actions remains limited, and we do not yet know the extent to which these litigated enforcement actions are representative of nonpublic SEC investigations, these cases provide an important window into the SEC’s active securities fraud enforcement efforts in the COVID-19 era.

Endnotes

1Look Out for Coronavirus-Related Investment Scams—Investor Alert, Securities and Exchange Commission (Feb. 4, 2020); Frauds Targeting Main Street Investors—Investor Alert, Securities and Exchange Commission (Apr. 10, 2020).(go back)

2Jay Clayton, Proposed Amendments to Modernize and Enhance Financial Disclosures; Other Ongoing Disclosure Modernization Initiatives; Impact of the Coronavirus; Environmental and Climate-Related Disclosure (Jan. 30, 2020).(go back)

3SEC Coronavirus (COVID-19) Response (last visited May 26, 2020).(go back)

4Steven Peikin, Keynote Address: Securities Enforcement Forum West 2020, Securities and Exchange Commission (May 12, 2020).(go back)

5Id. (go back)

6Look Out for Coronavirus-Related Investment Scams—Investor Alert, supra note 1.(go back)

7SEC Charges Companies and CEO for Misleading COVID-19 Claims, Press Release, Securities and Exchange Commission (May 14, 2020).(go back)

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One Comment

  1. geronimo rodriguez
    Posted Saturday, June 20, 2020 at 9:38 pm | Permalink

    great summary. what is the best way to deliver information on covid microcap securities fraud regarding a us issuer ? thanks

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