In-House Insight
Beware of Securities Law Disclosure Regulations During the Pandemic By Ariadna Caulfield
Ariadna Caulfield is an attorney at Cetrulo LLP. She focuses her practice on banking and financial law, as well as commercial real estate transactions, and complex civil and business matters. ©2021 Ariadna Caulfield. All rights reserved.
Back in the first quarter of 2020, the U.S. Securities and Exchange Commission (SEC) made its first pronouncements about pursuing enforcement actions for securities law violations arising out of the COVID-19 pandemic. Addressing the impact of the coronavirus in the securities market, SEC Chairman Jay Clayton instructed his staff to monitor disclosures related to the pandemic as early as Jan. 29, 2020.1 Clayton also reminded companies in early March 2020 that the way in which they plan for uncertainties and their responses to the pandemic “can be material to an investment decision.”2 Following the warnings made by the SEC in connection with the above-referenced pronouncements, a series of enforcement actions by the SEC ensued. On April 28, 2020, the SEC announced charges against Praxsyn Corporation, a Florida-based company, and its CEO for allegedly issuing false and misleading press releases claiming the company was able to acquire and supply large quantities of N95 or similar masks to protect wearers from the COVID-19 virus. In reality, the SEC alleged, the company never had any masks in its possession, had received no mask orders, and did not have a single contract with any manufacturer or supplier to obtain masks. The SEC’s complaint, filed in U.S. District Court for the Southern District of Florida, charged Praxsyn and its CEO with violating the antifraud provisions of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b5 thereunder, and sought permanent injunctive relief and civil penalties.3 On May 14, 2020, the SEC filed enforcement actions against two more companies for allegedly making fraudulent statements related to COVID-19. In the first action, the SEC charged Applied BioScience, a biotech company in the Southern District of New York, with fraud based on the company’s claims in a press release that it was offering and shipping products to combat the COVID-19 virus.4 According to the SEC’s complaint, the company issued a press release on March 31, 2020, stating that it had begun offering and shipping finger-prick COVID-19 tests to the general public that could be used for “Homes, Schools,
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Hospitals, Law Enforcement, Military, Public Servants or anyone wanting immediate and private results.” The complaint alleged that, contrary to Applied BioScience’s claims, the tests were not intended for home use by the general public and could be administered only in consultation with a medical professional. The complaint further alleged that Applied BioSciences had not shipped any COVID-19 tests as of March 31, 2020, and its press release failed to disclose that the tests were not authorized by the U.S. Food and Drug Administration. On Dec. 4, 2020, the U.S. District Court for the Southern District of New York entered a final judgment against Applied BioSciences Corp. Without admitting or denying the allegations in the complaint, Applied Biosciences consented to the entry of a final judgment enjoining it from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering it to pay a $25,000 civil penalty.5 In the second May 14 enforcement action, the SEC filed a complaint in U.S. District Court for the Middle District of Florida against Turbo Global and its CEO, Robert W. Singerman, alleging that the company issued false and misleading press releases on March 30 and April 3, 2020, regarding a purported “multi-national public-private-partnership” to sell thermal scanning equipment to detect whether individuals had fevers. According to the complaint, the company claimed that this technology could be instrumental in “breaking the chain of virus transmission through early identification of elevated fever, one of the key early signs of COVID-19.” As alleged, the press releases also included statements—attributed to the CEO of Turbo Global’s supposed corporate partner in the partnership—that the technology “is 99.99% accurate” and was “designed to be deployed immediately in each State.” In fact, the complaint alleged, Turbo Global had no agreement to sell the product, there was no partnership involving any government entities, and the CEO of Turbo Global’s supposed corporate partner did not make or authorize the statements attributed to him. According to the complaint, Mr. Singerman drafted the releases, which he knew to be false.6
