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Law360 (April 30, 2020, 9:31 PM EDT) -- Investors slapped a health care supplier with a proposed securities fraud class action on Wednesday, claiming it misled them by boasting it was poised to sell millions of COVID-19 rapid testing kits in a deal that turned out to be backed by alleged fraudsters and convicted felons.
The U.S. Securities and Exchange Commission halted trading for SCWorx stock on April 22, citing "questions and concerns" over the "adequacy and accuracy of publicly available information," according to an agency release.
Daniel Yannes accuses SCWorx Corp. and its CEO, Marc S. Schessel, of tricking him into investing by trumpeting a deal to acquire 2 million virus test kits a week, "valued at $35 million per week," only to have the company's share price come tumbling down days later when a research firm called the deal "completely bogus" and reported that other players in the deal appeared unable to deliver.
The stock-drop suit claims SCWorx's false and misleading statements caused the investors to suffer "significant losses and damages." Yannes snapped up 4,000 shares for more than $50,000 on the day the company released news of the supposedly lucrative deal, according to an attached certificate.
SCWorx declined to comment Thursday.
The complaint — leaning heavily on the words of investment research firm Hindenburg Research — unloads on Schessel, claiming "SCWorx's CEO has a checkered past, including pleading guilty to felony tax evasion charges and paying a judgment in a lawsuit alleging he submitted fraudulent expense reports."
The company supplying SCWorx with the COVID-19 tests, Promedical, "is laden with red flags," according to the suit, quoting Hindenburg. "Its CEO is a convicted rapist and formerly ran another business accused of defrauding its investors and customers. The CEO was also alleged to have falsified his medical credentials."
Moreover, the Chinese test-kit manufacturer which supposedly was providing the kits to Promedical said it had no relationship with Promedical, claiming SCWorx's supplier "fraudulently misrepresented themselves" as selling its COVID-19 kits, Hindenburg reported.
Promedical refutes the Hindenburg report.
"It's completely false what the media article reported," Promedical CEO Neran De Silva told Law360 on Thursday, insisting the company was the Chinese firm's distributor to North America and that legal action "for defamation and damages are on foot."
With regards to Promedical's business with SCWorx, De Silva said SCWorx "never confirmed or placed any orders or made any deposit payment to confirm the orders. Therefore, whatever they have published, that is entirely their responsibility."
"My personal history is irrelevant for the good that we do," De Silva added.
The lawsuit goes on to allege that SCWorx's buyer is also suspect, noting the research firm said the small "virtual health care company started by a 25-year-old in August 2018" doesn't seem capable of handling the $840 million in orders that SCWorx had claimed it could.
"On this news, the company's share price fell $1.19, or more than 17%, over three consecutive trading sessions," Yannes noted in his complaint.
SCWorx misled its investors through its failure to tell investors that the company's COVID-19 test-kit supplier "had previously misrepresented its operations," that its "buyer was a small company" unlikely to support the large volume of orders, and therefore its "purchase order for COVID-19 tests had been overstated or entirely fabricated," Yannes said in the suit.
Yannes' proposed class of investors includes "hundreds or thousands of members" who bought stock in SCWorx between the April 13 deal announcement, when the company's stock price shot up to $12 per share, and the April 17 Hindenburg report.
In addition to class certification, Yannes seeks damages and attorney fees on two securities fraud counts.
Counsel for Yannes did not immediately respond to a request for comment Thursday.
Yannes and the investors are represented by Gregory B. Linkh, Robert V. Prongay, Charles H. Linehan and Pavithra Rajesh of Glancy Prongay & Murray LLP and Frank R. Cruz.
SCWorx is represented by Sullivan & Worcester.
The case is Yannes v. SCWorx Corp. et al., case number 1:20-cv-03349, in the U.S. District Court for the Southern District of New York.
--Editing by Janice Carter Brown.
For a reprint of this article, please contact reprints@law360.com.
