Derivative Suit Says Biotech Co. Lied About COVID-19 Vaccine

By Rachel O'Brien
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Law360 (September 18, 2020, 3:47 PM EDT) -- An investor of biotechnology company Vaxart has accused the company's officers of enriching themselves and artificially inflating stock prices by lying about receiving government funding to develop a COVID-19 vaccine, according to a shareholder derivative suit filed in California federal court Thursday.

Shareholder David Stachowski alleges breach of fiduciary duty, unjust enrichment and securities violations against officers of Vaxart, which has been working to develop a COVID-19 vaccine but wasn't selected to participate in the U.S. Department of Health and Human Services' Operation Warp Speed.

The HHS program, provided with almost $10 billion from Congress, funds companies producing at least three million doses of a COVID-19 vaccine by January 2021.

While Vaxart's vaccine candidate had been part of a trial on primates that a federal agency organized with Operation Warp Speed, Vaxart wasn't selected to receive funding, as they claimed, according to the suit.

"Defendants, however, saw an opportunity to enrich themselves," the filing alleges.

Telling investors that they were selected to develop a vaccine artificially inflated the stock price, which dropped when it was reported that it wasn't true, according to the suit.

At the beginning of January 2020, the company's shares were worth about 35 cents, according to the suit. But in late January, Vaxart began working on a vaccine and its share price began rising.

A June 26 press release touting the company's progress in developing a vaccine said it had been selected to participate in Operation Warp Speed, causing the company's stock price to soar from $3.19 per share to as high as $14 and closing at $8.04 per share, the suit alleges.

"By June 26, 2020, however, defendants had already thrown their fiduciary duties out the window in an effort to enrich themselves," the complaint alleges.

Stachowski says Vaxart's executives and the company's biggest shareholder, hedge fund Armistice Capital LLC, changed warrant agreements — that allowed it to buy stock at prices between $0.30 and $1.10 per share — on about 21 million shares in early June.

That was done to make "it easier for the hedge fund to rapidly acquire the 21 million shares, rather than having to buy and sell in smaller batches," according to a July 25 New York Times article cited in the suit.

After the June 26 announcement caused the stock price to surge, Armistice, whose founder and one of its managing directors are members of the Vaxart board, bought Vaxart stock more rapidly than the former terms would have allowed, profiting more than $197 million, the suit says.

On June 15, when CEO Andrei Floroiu was promoted to that role from director, he was granted stock options to buy more than 1.7 million shares at $2.46 per share, according to the suit. The stocks were worth about $4.3 million but became worth more than $28 million, the shareholder suit says.

The Times article also noted that Vaxart board members got the right to buy shares at prices well below the stock's trading price.

"These well-timed stock option grants and the warrant changes are an illegal use of inside information termed spring-loading and are a breach of defendants' fiduciary duties," the suit alleges.

The Times article also noted that the company, with just 15 employees, has never brought a vaccine to market.

"Although Vaxart has been severely injured, defendants have not fared nearly so badly," the complaint alleges. "On the contrary, defendants have collectively pocketed millions of dollars in fees, salary, incentive-based compensation payments and other benefits that were not justified in light of Vaxart's performance while under their stewardship."

Investors filed a putative class action in August, similarly alleging Vaxart "exaggerated the prospects of its COVID-19 vaccine candidate" and artificially inflated its stock price, which dropped when the truth came out.

Counsel for Stachowski and counsel for the Vaxart executives didn't immediately respond to requests for comment Friday.

Stachowski is represented by Benny C. Goodman III and Erik W. Luedeke of Robbins Geller Rudman & Dowd, Brian J. Robbins and Gregory E. Del Gaizo of Robbins LLP, and Leonid Kandinov of Barr Law Group.

Vaxart Inc., executives Wouter Latour, Andrei Floroiu, Todd Davis, Michael Finney, and Robert Yedid are represented by Riccardo DeBari, Renee Zaytsev, and Mendy Piekarski of Thompson Hine LLP, and Jonathan Shapiro and Daniel Martin of Baker Botts LLP.

The case is Stachowski, et al, v. Boyd, et al, case number 3:20-cv-06525, in the U.S. District Court for the Northern District of California.

--Editing by Rebecca Flanagan.

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