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When Near-Perfect Isn’t Good Enough – Lawsuit Alleges Securities Law Violations by COVID-19 Test Manufacturer

When Near-Perfect Isn’t Good Enough – Lawsuit Alleges Securities Law Violations by COVID-19 Test Manufacturer

The global coronavirus pandemic has brought confusion and uncertainty to just about every aspect of life, but one thing remains constant: following a dramatic drop in stock price, an issuer’s public statements will be scrutinized, and securities litigation may follow.  As a class action lawsuit recently filed in Utah federal district court illustrates, publicly traded companies must be all the more vigilant in ensuring the accuracy of their public statements in today’s highly volatile and uncertain times, and face significant risk when reporting on issues related to the pandemic.

On June 15, 2020, shareholders of Co-Diagnostics, Inc. filed a class action lawsuit in the District of Utah alleging that they suffered damages because they paid artificially high prices for Co-Diagnostics’ stock as a result of Co-Diagnostics’ false and misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  Co-Diagnostics manufactures DNA-testing technology that is used to diagnose a wide range of diseases, including the Zika virus, tuberculosis, and HIV.  In the immediate aftermath of the emergence of COVID-19, Co-Diagnostics began developing a diagnostic test for the novel coronavirus.  On February 24, 2020, Co-Diagnostics’ test received approval to sell in the European Community, making it the first COVID-19 diagnostic test to receive regulatory approval.  It was also the first COVID-19 diagnostic test to receive approval from the U.S. Food and Drug Administration.  As a result, Co-Diagnostics’ stock rose dramatically, from $0.90 a share on December 31, 2019 to $29.72 a share on May 14, 2020.

According to the lawsuit, Co-Diagnostics stated publicly that its COVID-19 test was “100% effective” in detecting the virus.  Co-Diagnostics benefited from this statement with the sale of millions of dollars’ worth of tests to 50 countries and 12 U.S. states.  On April 30, 2020, certain news media outlets reported flaws in Co-Diagnostics’ tests that revealed that the accuracy figures were based on a small sample size, and indicated that the tests were less than 100 percent accurate.  However, Co-Diagnostics allegedly failed to revise any of its past statements touting the 100 percent effectiveness of its tests.  The FDA ultimately announced that no diagnostic test was 100 percent accurate, further undermining Co-Diagnostics’ prior claims.  Following this announcement, Co-Diagnostic’s stock price fell to $15 a share on May 15, 2020.

While plaintiffs in the lawsuit acknowledge that Co-Diagnostics’ tests may be between 95 percent to 99.5 percent accurate, they argue that because of the nature of diagnostic testing, even a small percentile of difference in accuracy can have enormous consequences for public health and safety guidance.  According to the lawsuit, the directors and officers of Co-Diagnostics, some of whom are PhD-level scientists, should have recognized the importance of this difference and informed the public accordingly.  Instead, Co-Diagnostics allegedly continued to proclaim that its test was 100 percent accurate even as outside sources questioned the accuracy of that assertion.

Given how much is still unknown about COVID-19, government officials and public health experts, including the World Health Organization and Centers for Disease Control, have altered their description of the virus and guidance for best practices to stay safe from infection.  Such uncertainty presents a challenging environment for publicly traded companies, which have an obligation to provide shareholders with accurate information even as it pertains to COVID-19, and to revise any past statements in the event that new information renders those statements misleading or inaccurate.  Regardless of the outcome of this lawsuit, companies should remain vigilant in ensuring that their public statements are robustly supported by the most up-to-date information available.

Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.