Contractor Fights Investors' Claims Over COVID Test Kit Deal

By Emilie Ruscoe
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Law360 (November 19, 2020, 11:38 PM EST) -- Hospital contractor SCWorx and its chief executive told a Manhattan federal judge on Wednesday that a proposed class of investors failed to show that the company had lied in connection with a COVID-19 test supply deal that purportedly fell apart in the spring.

In a Nov. 18 dismissal bid, the company and its CEO Marc Schessel told U.S. District Judge John G. Koeltl that the latest version of the investor suit it faces doesn't include any allegations that the company was trying to mislead anyone when, in the spring as coronavirus case numbers swelled, it announced that its new subsidiary Direct-Worx had received a purchase order for 2 million coronavirus rapid test kits, "with provision for additional weekly orders of 2 million units for 23 weeks, valued at $35M per week."

Schessel and the company noted that rather than inferring they might have tried to trick investors, the "more compelling inference to be drawn from the alleged facts and the circumstances existing in the marketplace for medical supplies for COVID-19 in the early days of the pandemic (i.e., when numerous hospitals and states scrambled to quickly secure medical supplies) is that defendants relied in good faith on [contractor] ProMedical's ability to deliver the test kits, but were misled."

The defendants cited Schessel's experience working on supply chain-related matters, including during his time in the Marines, as a consultant to the United Nations and epidemic-related sourcing SCWorx did for big hospital chains in the past, characterizing the company as "uniquely positioned to provide immediate assistance to its healthcare clients" as the public health crisis mounted.

"During this time, the marketplace for PPE and COVID-related supplies was filled with illegitimate products and scams, and it was extremely difficult to secure quality supplies as the healthcare systems' traditional supply chains were breaking down," the defendants said, although they added that despite the crush of scams, the company still felt confident it would be able to find real suppliers because of its supply expertise.

In connection with the allegedly soured supply deal, the U.S. Securities and Exchange Commission in April took the dramatic step of halting trading of SCWorx shares, citing "questions and concerns" about the "adequacy and accuracy of publicly available information" on the company's stock. Trading was still suspended when the suit was filed.

Companies producing and purveying medical supplies used for the diagnosis and treatment of the coronavirus, especially firms that trade on public markets, have faced extraordinary scrutiny from regulators and the public in the months since COVID-19 was designated a pandemic.

In particular, market trajectory has been defined in recent weeks by trends that analysts have attributed to expectations about the development of coronavirus vaccines, given the implications of such a vaccine for the American economy, which remains hobbled by the virus' spread. More than a quarter-million Americans have died of the virus, data from Johns Hopkins shows.

On Thursday, counsel for Schessel declined to comment and counsel for SCWorx and the investors did not immediately respond to requests for comment.

The proposed class is represented by Frederic S. Fox, Donald R. Hall, Pamela A. Mayer, Laurence D. King and Mario M. Choi of Kaplan Fox & Kilsheimer LLP.

SCWorx is represented by Carole Bernstein of the Law Offices of Carole R. Bernstein.

Schessel is represented by Paul R. Bessette, Michael J. Biles and S. Saliya Subasinghe of King & Spalding LLP.

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.

--Additional reporting by Frank Runyeon and Dean Seal. Editing by Jay Jackson Jr.

For a reprint of this article, please contact reprints@law360.com.

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Case Information

Case Title

Yannes v. SCWorx Corp. et al


Case Number

1:20-cv-03349

Court

New York Southern

Nature of Suit

Securities/Commodities

Judge

John G. Koeltl

Date Filed

April 29, 2020

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