Law360 (March 13, 2020, 7:48 PM EDT) -- Inovio Pharmaceuticals Inc.'s stock value skyrocketed after its CEO claimed it was ready to test a COVID-19 vaccine, but a single skeptical tweet caused shares to plummet over two days, a proposed class of shareholders alleged Friday in Philadelphia federal court.
The lawsuit said Pennsylvania-based Inovio's CEO J. Joseph Kim twice claimed that the company had developed a vaccine in a matter of hours for the rapidly spreading new coronavirus, with plans to start human testing in April. But he was called out the day of a $50 million stock offering by Citron Research and eventually walked back the claims, dropping stocks from a high of $19.36 per share to $5.70 per share, the stockholders said.
"Inovio and Kim made false and misleading statements to the market, claiming unequivocally that the company had successfully developed a vaccine against the spread of COVID-19 and that it anticipated rapidly bringing that vaccine to market," the complaint said. "Given the heightened anxiety surrounding this pandemic and the desperate demand for an effective COVID-19 vaccine, defendants knew and were deliberately reckless as to the falsity of their claims."
Seeking to represent a class of all Inovio investors who bought stock between Feb. 14 and March 9, proposed lead plaintiff Patrick McDermid claimed that Kim and Inovio had violated multiple sections of the Securities Exchange Act and sought to recover their losses from the alleged false statements.
The suit said that as fears of the new coronavirus strain were starting to take hold in the United States, Kim said on a Fox Business News program on Feb. 14 that Inovio had developed a COVID-19 vaccine "in a matter of about three hours once we had the DNA sequence from the virus" and "our goal is to start phase one human testing in the U.S. early this summer."
After pharmaceutical executives met with President Donald Trump to address COVID-19 on March 2, Kim allegedly repeated his claim about the "INO-4800" vaccine and said the company could begin testing as early as April. Inovio stock shot up from there, and the company made plans to sell $50 million of its common stock on the open market starting March 9.
But the same day the stock sale was set to begin, activist short-seller Citron Research tweeted that "SEC should immediately HALT this stock and investigate the ludicrous and dangerous claim that they designed a vaccine in 3 hours." Though Inovio's stock reached its $19.36 peak that day, it soon tumbled to $5.70 per share by March 10 for a loss of 71% as the company allegedly tried to walk back the earlier statements.
"The two-day drop wiped out approximately $643 million in market capitalization for the company," the complaint said. "In a message to shareholders that same day, Inovio attempted to blunt the Citron revelations but only highlighted its own misstatements, admitting that it had not developed a COVID-19 vaccine but rather had merely 'designed a vaccine construct' — i.e., a precursor for a vaccine — and that it believed it had a 'viable approach to address the COVID-19 outbreak.'"
The complaint contrasted Kim's bold statements with a Feb. 21 magazine interview with Dr. David Weiner of the Wistar Institute, who said the institute had been working with Inovio on the vaccine project as soon as it learned of the COVID-19 outbreak in China.
"Tellingly, Dr. Weiner is not reported to have stated that Inovio had already developed a vaccine," the complaint said.
The suit said Kim and the Form 8-K the company filed with the SEC on March 9 for its stock sale had overstated the company's progress on the vaccine and its readiness for testing, in violation of the Securities Exchange Act.
"Defendants falsely described their product as a fully completed vaccine when it was nothing of the sort. Defendants falsely claimed they had developed the vaccine in a matter of hours, which is a scientific impossibility. And defendants falsely stated that they would be able to begin human trials in April 2020 when they had no reason to believe that they would have the necessary regulatory approvals to do so," the complaint said.
The suit claimed that the markets for Inovio stock were otherwise normal, but the allegedly fraudulent claims had driven up the value, and the sell-off was triggered by Citron's bubble-bursting tweet. McDermid sought compensatory and punitive damages on behalf of the class as well as attorney fees.
Representatives of Inovio did not respond to requests for comment Friday. An attorney for McDermid declined to comment.
McDermid and the proposed class are represented by Shanon J. Carson, Michael C. Dell'Angelo and Andrew D. Abramowitz of Berger Montague and Jeffrey C. Block, Jacob A. Walker and Mark A. Delaney of Block & Leviton LLP.
Counsel information for Inovio and Kim was not immediately available.
The case is McDermid v. Inovio Pharmaceuticals et al., case number 2:20-cv-01402, in the U.S. District Court for the Eastern District of Pennsylvania.
--Editing by Haylee Pearl.
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