Despite a general decline in securities class action filings in 2020, the economic fallout from the coronavirus pandemic has led to an increase in cases of securities fraud alleging failure to disclose the risks of the pandemic to the investing public. Since the spring of 2020, plaintiffs’ lawyers have filed nearly 30 class actions in securities related to COVID-19. 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., n ° 20 Civ. 6780, 2021 WL 268250 (CD Cal. January 25, 2021). The result in Berg is specific to the facts; thus, while the court ruling provides guidance, the ruling does not exonerate all companies facing allegations of securities fraud related to misrepresentation about the impact of the pandemic on their business operations. The key is whether the risks were known to the defendants but not explained to the investors.

In Berg, the plaintiff claimed, under Sections 11 and 15 of the Securities Act of 1933, that Velocity made false and misleading representations to investors prior to the company’s IPO in January 2020 regarding Velocity’s underwriting standards , increasing the portfolio of non-performing loans and the ability to capitalize on the real estate market. Further, the complaint alleged that Velocity had not disclosed 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 investigation. Initial Public Offering.

In the order dismissing the complaint, the court found that Velocity’s statements regarding its underwriting standards and its portfolio of non-performing loans were not false or misleading. The court also ruled that Velocity could not have been aware of the risks associated with the coronavirus at the time of its IPO, and therefore could not have included a specific disclosure on the impact of the pandemic on its business operations. The court noted, however, that Velocity revealed that its business could be affected by changes in national, regional or local economic conditions or by specific industry segments caused by natural disasters. The notice therefore provides basic guidance to future complainants as to the necessary allegations for claims based on non-disclosure of pandemic risks.

A more recent coronavirus-related securities class action lawsuit filed on February 2, 2021 against Tyson Foods, Inc. asserts claims of securities fraud 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 Forms 8-K, 10-Q and 10-K, which caused Tyson’s share price to artificially inflate. Mingxue Guo v. Tyson Foods Inc. et al., 1: 21-cv-00552, n ° 1 (EDNY February 2, 2021). These claims are more developed than the almost superficial pandemic-related claim in Berg.

The contrast between the allegations against Tyson and those against Velocity is revealing. The critical distinctions relate to what companies knew about the pandemic and when they knew it. A company that has known about the risks the pandemic would pose to its business operations and future prospects in early 2020 can find solace in the Berg decision, while a company like Tyson that has allegedly made false claims about the impact of the virus on its business operations after the events of spring 2020 and throughout the year cannot rely on the Berg dismissal.

As long as the coronavirus pandemic continues to affect the economy and business operations and financial results of companies, we can expect the plaintiffs’ attorneys to continue to file cases and refine their theories of liability against them. companies in sectors affected by the coronavirus. As such, companies should carefully review the content of their public statements to take into account the potential impact of the pandemic on their respective businesses.