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SEC continues trend of COVID-related enforcement

The SEC shows no signs of slowing down on taking enforcement actions against COVID-related fraud by public companies. On March 31, 2022, the SEC reached a settlement with healthcare software company SCWorx, whom the SEC charged with making false claims about COVID testing kits.  The SEC also took enforcement action against the former CEO, continuing its efforts to hold individual executives accountable.

In its complaint against SCWorx, the SEC alleged that the company had issued a press release in April 2020 claiming it had a buyer who had committed to purchasing two million COVID rapid test kits from SCWorx, with weekly orders following, totaling millions of dollars. SCWorx’s stock shot up 425% the day following the press release. The SEC alleges that SCWorx did not have an executed purchase contract with a buyer nor any supplier from which it could purchase the kits, yet continued to make false and misleading statements about its test kits. The SEC briefly suspended trading of SCWorx’s stock in late April and early May of 2020.

SCWorx agreed to pay $628,000 in disgorgement, penalties, and prejudgment interest to settle the claims, while neither admitting nor denying the allegations. Notably, the SEC also seeks to bar the company’s CEO from holding officer or director positions in the future. The CEO also faces criminal charges in the District of New Jersey based on the same alleged conduct and SCWorx also recently settled a class action for $3.3 million that stemmed from the same behavior.

The SEC’s action against SCWorx and its CEO continues a trend of enforcement actions the agency has taken to protect investors against false and misleading claims related to the COVID pandemic. Early in the pandemic, even prior to the March 2020 lockdowns that began after the virus started circulating widely in the U.S., the SEC acted swiftly to curb dubious claims by public companies about their COVID-related business.

Beginning in February 2020 the SEC, which has the power to temporarily suspend the trading of a company’s stock when it deems it in the public interest, suspended trading in the stocks of several biotech companies that made unsubstantiated claims about their COVID business prospects. Over the course of 2020, the SEC temporarily suspended trading of over thirty companies’ stocks due to COVID-related issues.

Similarly, in May 2020—just months after the start of the pandemic—the SEC filed its first COVID-related complaint against pharmaceutical company Praxsyn Corp. and its CEO, alleging that the company falsely represented to investors that it was negotiating the purchase and distribution of bulk orders of N95 masks, and suggested that it had masks in stock. However, as the company later admitted in a press release, it never had any masks and had been unable to obtain any safe and functional masks. The company and its CEO later settled the charges with the SEC in August 2020 for $65,000. Numerous other enforcement actions by the SEC alleging similar conduct by companies hoping to cash in on the market for test kits, masks, vaccines, and other critical COVID-related supplies have followed.

The SEC recently released an Investor Alert urging investors to be on the lookout for false statements related to COVID tests, treatments, or products in company materials. Companies may use these false statements to inflate the value of their stock.

Whistleblowers who have knowledge of misrepresentations made by public companies about COVID-related misrepresentations, false statements, and omissions to investors can submit a confidential whistleblower tip to the SEC through its whistleblower program, and may be eligible for a reward.

SEC whistleblower rewards range between 10% and 30% of the monetary sanctions collected by a SEC action if they total over $1 million. Whistleblowers also are eligible for rewards based on sanctions collected in related enforcement actions, if there is a successful SEC enforcement action.

Whistleblowers’ identities are kept anonymous and confidential, with certain rare exceptions. The Dodd-Frank Act prohibits employers from firing, harassing, demoting, suspending, threatening, or otherwise retaliating against whistleblowers who report potential securities law violations to the SEC.

For a free, confidential review of your matter by experienced SEC whistleblower lawyers, contact Phillips & Cohen.

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