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Law360 (June 15, 2020, 7:47 PM EDT) -- A Salt Lake City company that received the world's first regulatory clearance to sell COVID-19 diagnostic tests in Europe was hit with a securities suit on Monday for claiming its tests were "100% accurate."
A complaint in Utah federal court alleges that Co-Diagnostics Inc. and its top executives pumped up the company's stock price by making "continual, knowing and willful misstatements about their main product, a COVID-19 diagnostic test," only to have the price tumble when its claim to be manufacturing "100% accurate" tests was undermined last month.
"Their fraudulent misstatements, and disregard for the basic scientific principles that make their falsity of their statements clear in retrospect, cost investors ... millions of dollars," the suit contends. "Unlike many securities fraud cases, the Co-Diagnostics fraud is blunt and simple to understand."
Co-Diagnostics has seen its stock price explode this year in tandem with the spread of the novel coronavirus; the company was trading at $0.91 per share at the beginning of the year and in danger of being delisted from Nasdaq, but joined the rat race of drug companies aiming to develop accurate COVID-19 diagnostic tests.
According to the investor suit filed Monday, Co-Diagnostics "seemingly won that race" when it received regulatory clearance on Feb. 24 to export its test kits to Europe — the first U.S. company to do so. By the end of February, its stock price was trading at more than $15 per share.
Then, on April 6, the company announced it'd received emergency use authorization for its tests from the U.S. Food and Drug Administration. But during this time, Co-Diagnostics' officers and directors were making "unequivocal statements to the market that its COVID-19 tests were 100% accurate — a staggering claim that appeared to set Co-Diagnostics apart from other competitors developing COVID-19 tests," the lawsuit claims.
"Co-Diagnostics' market-first test, together with its claims that its tests were perfectly accurate, allowed Co-Diagnostics to sign lucrative contracts with state governments in the U.S. and governments around the world," the suit adds. "As a result of this misrepresentation and the influx of taxpayer dollars to Co-Diagnostics, the company's stock soared — until it crashed."
On May 14, after having reached a share prices high of nearly $30, Co-Diagnostics was set to announce its first-quarter earnings, but reports began circulating before an earnings call that the company was "reticent to participate in U.S.-based testing to verify its accuracy claims," the lawsuit contends. This caused the company's share price to drop to around $22 before the earnings call could take place, the suit says.
During the call, the company's top brass offered a glowing report about the company's sale of 6 million test kits, but made no mention of allegations that its tests were not as accurate as represented, the suit alleges. That same evening, the FDA publicly announced that no COVID-19 tests were 100% accurate.
When markets opened on May 15, Co-Diagnostics' share price slid to under $16 and "never rebounded" due to "expectations that the stock will trend lower due to the company's product not being what it promised, public skepticism, and the realization by investors that Co-Diagnostics was a flash-in-the-pan company that achieved astronomical gains by deceiving the public while it was wrestling with an unprecedented global pandemic," the lawsuit claims.
The company's share price closed at $17.42 on Monday.
According to the suit, the company's directors and officers have been rapidly exercising stock options for pennies and dumping shares into the market to reap million-dollar proceeds.
"The officers and directors, knowing the truth of the company's products and its future prospects, are taking their profits at cost to the public markets before the company inevitably becomes a penny stock once more," the suit claims.
Loren Washburn, an attorney for the investor that filed the suit, told Law360 on Monday that "it is apparent that the company overstated the capabilities and accuracy of its Logix Smart COVID-19 tests that were rushed to market so Co-Diagnostics could be the first to market."
"Co-Diagnostics, Inc. has not only hurt the public by claiming its tests are more effective than they actually are, but it has caused the investing public to lose hundreds of millions of dollars based on Co-Diagnostics' material misrepresentations," Washburn said in an email. "It is apparent that the insiders are now knowingly capitalizing on those misrepresentations by exercising low priced options and selling into the inflated market their false claims created."
A representative for Co-Diagnostics did not immediately respond to a request for comment Monday.
The investors are represented by D. Loren Washburn of Smith Washburn LLP, Michael A. Pineiro of Marcus Neiman Rashbaum & Pineiro LLC and Michael C. Fasano of Fasano Law Firm PLLC.
Counsel information for Co-Diagnostics is not yet available.
The case is Gelt Trading v. Co-Diagnostics et al., case number 2:20-cv-00368, in the U.S. District Court for the District of Utah.
--Editing by Alanna Weissman.
For a reprint of this article, please contact reprints@law360.com.
