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Law360 (June 7, 2021, 8:47 PM EDT) -- Biotech company CytoDyn Inc. executives have been hit with a derivative suit in a Washington federal court, accusing the company of inflating its stock price by overhyping a purported COVID-19 treatment while executives dumped millions of shares.
Stockholder David Berndt said in Friday's suit that the company, which is focused on the development of a drug with potential benefits for HIV patients, made an "about-face" and began touting that drug as a COVID-19 treatment, resulting in a significant increase in the company's stock price. While CytoDyn stock traded for less than $1 per share throughout 2019, the price peaked at more than $10 per share in June 2020, Berndt said.
The suit names Chairman of the Board Scott A. Kelly, President and CEO Nader Z. Pourhassan, chief financial officer Michael Mulholland and directors Jordan G. Naydenov, Alan P. Timmins and Samir R. Patel. The Vancouver, Washington-based company is a nominal defendant.
Berndt alleged that "while the company's stock price was sufficiently inflated with the COVID-19 cure hype, long-term shareholders, including defendants Nader Z. Pourhassan and Michael Mulholland, dumped millions of shares."
In April 2020, Pourhassan sold more than 4.8 million shares of company stock — about 85% of his total holdings of company stock — for more than $15.7 million in total proceeds, after purchasing shares at prices less than $1 per share, Berndt alleged. That December, Mulholland sold more than 1.1 million shares for more than $5.8 million in total proceeds, then sold more than 711,000 shares for more than $4.4 million in proceeds a week later, according to the suit.
Berndt said the company released materially false and misleading statements in violation of federal securities law, including through an August 2020 press release in which the company announced it had requested emergency-use approval from the U.S. Food and Drug Administration. It would later be revealed that the company did not actually make such a request to the FDA, according to the suit.
Brandt also alleged the company issued press releases describing the results of certain data on its drug, Leronlimab, but buried a disclosure that "the primary endpoint of the study — lowering all-cause mortality at Day 28 — was not statistically significant."
According to the suit, company stock dropped in the trading days following the release of that data, to close at $2.35 on March 9, 2021.
Berndt said the executives' "scheme began to unravel" when The Wall Street Journal reported Aug. 25, 2020, that CytoDyn was not being considered for Operation Warp Speed, the federal initiative to accelerate the production of COVID-19 vaccines and treatments, and had only completed a preliminary qualification to be included in the initiative. Company stock dropped more than 17% to $3.15 over the following two trading days, according to the suit.
Berndt also alleged that CytoDyn's lender — Iliad Research and Trading LP, which is not a defendant in the case — acted as an unregistered securities dealer for CytoDyn.
"Through Iliad's actions with respect to the company, including entering into the convertible promissory note and its amendments, converting the note to newly issued shares of company stock, and settling those shares into the market at a profit, Iliad operated as an unregistered securities dealer and generated substantial profits," Berndt alleged.
According to the suit, the U.S. Securities and Exchange Commission filed suit against Iliad and its related entities in September 2020, alleging they violated the mandatory dealer registration requirements of federal securities law and calling Iliad's principal a "recidivist violator of the federal securities laws."
Berndt alleged the company "aggressively employed stock promotion firms that create misleading newsletters and internet postings to hype investment in CytoDyn and promote the use of Leronlimab as a COVID-19 treatment."
Berndt's suit includes counts of breach of fiduciary duty, waste of corporate assets, unjust enrichment and violations of the Exchange Act. He asked the court to direct the defendants to "take all necessary actions to reform and improve the company's corporate governance, risk management, and internal operating procedures to comply with applicable laws and to protect the company and its stockholders from a repeat of the rampant wrongful conduct described herein."
Counsel for Berndt and most of the named defendants did not immediately respond to requests for comment Monday. Patel could not be reached for comment, and the company declined to comment.
Berndt is represented by Duncan C. Turner of Badgley Mullins Turner PLLC and Thomas J. McKenna and Gregory M. Egleston of Gainey McKenna & Egleston.
Counsel for the defendants was not available Monday.
The case is David Berndt v. Scott A. Kelly et al., case number 3:21-cv-05422, in the U.S. District Court for the Western District of Washington.
--Editing by Andrew Cohen.
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