Navigating shareholder and government scrutiny of COVID-19 product claims



August 27, 2020

Life Sciences Alert

Author(s): Seth D. Levy, Hannah Bornstein, Neal J. Gauger

As shareholders and regulatory agencies ramp up scrutiny of companies making claims about COVID-19, businesses must tread carefully to ensure they remain on the right side of the law.

With no end in sight to the COVID-19 pandemic, the public and press have been quick to embrace good news about potential preventative products, treatments, and vaccines for the virus. In July 2020, a small UK biotech company, Synairgen, announced the development of a COVID-19 treatment, claiming that it would reduce the occurrence of severe virus symptoms by 79%. The breakthrough was hailed by the New York Times, the BBC, PharmaTimes, and other leading publications as a major breakthrough.[1] Synairgen’s financial profile rose as well, with the company’s stock price spiking 450% immediately after its press release, culminating in a 2,800% price increase since January 2020.[2] As coverage continued, however, scientists raised concerns about the announcement—the study had not been peer-reviewed, and it had only involved 101 patients.[3]

It remains to be seen whether Synairgen’s treatment will prove effective on a larger scale, or if its results can be independently verified. But as other biotechnology, pharmaceutical, medical device, and supplement companies have fallen short of their public claims and promises relating to COVID-19, significant interest—and legal action—has been pursued by companies’ shareholders and government regulators alike. In the past several months, a number of companies publicizing COVID-19 products and cures have faced shareholder suits, destabilized stock prices, and general business turmoil. In addition to these private actions, the Securities and Exchange Commission (“SEC”), Federal Trade Commission (“FTC”), Food and Drug Administration (“FDA”), and the Department of Justice have launched aggressive investigations into claims of COVID-19 cures and treatments. Faced with the pressures of time, intense public scrutiny, and the potential for substantial profits, companies making claims about COVID-19 need to tread carefully to ensure they remain on the right side of the law.

Consider the case of Inovio Pharmaceuticals, based outside of Philadelphia. Inovio aggressively publicized early results of its internal COVID-19 vaccine testing, claiming in March 2020 that it had constructed a vaccine for COVID-19 “within three hours” of receiving the virus’s genetic sequence.[4] On the strength of its press release, Inovio’s chief executive officer, Dr. J. Joseph Kim, was invited to a summit with President Trump, where Dr. Kim claimed that Inovio could mass manufacture a vaccine itself, requiring only “the federal government’s support to help scale up manufacturing.”[5]

Immediately after the White House summit, Inovio’s stock price rose 220%. After critics questioned Inovio’s ability to deliver—noting that the company had never brought a vaccine to market in over a decade of existence—the company’s stock dropped 66%. Additional fluctuations have followed. All told, Inovio’s value has boomeranged between $500 million and $3 billion over the past six months. This instability has spurred two class-action investor lawsuits against Inovio and Dr. Kim, alleging claims of false statements, stock pumping, breach of fiduciary duties, and a range of other securities fraud claims. Shareholders and external critics have also called for an SEC investigation, which may be ongoing.

Sorrento Therapeutics, a San Diego-based biotechnology company, has faced similar legal action for its aggressive COVID-19 treatment claims. On May 15, 2020, Sorrento announced that it had discovered an antibody capable of 100% prevention and inhibition of COVID-19. In a follow-up interview with Fox News, Sorrento founder Dr. Henry Ji was quoted, “We want to emphasize that there is a cure. There is a solution that works 100%.”[6] Much like Inovio, Sorrento immediately faced stock volatility—the company’s share price spiked more than 200% over two days, then crashed 50% from its high a week later.[7] Investors responded with a class action lawsuit in June, alleging that Sorrento’s claims violated the Securities Exchange Act, and that Dr. Ji and the company had “overstated the prospects” of their research.

In just the past week, investors in Vaxart, Inc. filed suit, alleging that the San Francisco-based company had not only misled about its ability to produce a COVID-19 vaccine, but it also had falsely publicized that the United States’ Operation Warp Speed initiative was funding the company’s efforts.[8] After an article by the New York Times revealed that Vaxart had lied to the public, Vaxart shares crashed, taking the company’s value with it.

Government action has been similarly aggressive. The SEC has halted trading for dozens of companies on the New York Stock Exchange, and has charged several companies with egregious stock manipulation and fraud charges. For example, in May 2020, the SEC charged Applied BioSciences Corp., alleging that it had made false claims to the public. The company announced that it was producing and distributing “at home” finger-prick COVID-19 tests that would provide “immediate and private results.”[9] In fact, Applied BioSciences had not shipped any tests, and the tests it had developed at that point had not received the necessary marketing authorization from the FDA.

In June 2020, the SEC undertook an emergency action and obtained an asset freeze against five individuals and six offshore entities for illegal stock sales boosted by promotional campaigns involving false and misleading information designed to fraudulently capitalize on the COVID-19 pandemic. One promotion included claims that a company could produce medical quality facemasks and another that a company had automated kiosks for retailers to use in response to the pandemic. This was all part of an alleged “pump and dump” COVID-19 product scheme, with the SEC referring at least one individual to face criminal charges.[10]

The FTC has sent out over three hundred warning letters to companies selling unapproved products believed to make “deceptive or scientifically unsupported claims” about COVID-19 treatments, and has filed suit against many others. For example, Golden Sunrise Nutraceutical was charged with marketing a $23,000 treatment program that promised to ensure the “disappearance of viral symptoms within two to four days.”[11] Other companies continue to be wrapped up in active FTC litigation. Some cases have resolved, resulting in industry-wide bans for their executives.

Similarly, the FDA has taken swift and aggressive action against numerous companies that the FDA believes made fraudulent claims that their products prevent, treat, mitigate, diagnose, or cure COVID-19.[12] Since the outset of the pandemic in early March, the agency has issued over a hundred warning letters to companies that the agency believes have marketed a wide variety of unapproved products, including, for example, hand sanitizers, essential oils, CBD products, and testing kits. The FDA’s actions are not limited to warning letters, but also include pursuing seizures, injunctions, and criminal prosecutions.

The Department of Justice has been the most aggressive of all. In March 2020, Attorney General William Barr directed U.S. Attorneys in all fifty states to prioritize the investigation and prosecution of Coronavirus-related fraud schemes, and Deputy Attorney General Jeffrey Rosen further directed each U.S. Attorney to appoint a Coronavirus Fraud Coordinator to prioritize and direct the prosecution of Coronavirus-related crimes.[13]] The response from prosecutors around the country has been swift and harsh. For example, prosecutors in the Northern District of California charged Mark Schena, the president of Arrayit Corporation, with committing health care fraud and securities fraud in connection with the company’s claims concerning COVID-19 testing.[14] In press releases, Mr. Schena repeatedly claimed his company could accurately, quickly, and cheaply test for COVID-19 using a single drop of a patient’s blood. Investors flocked to the company, doubling its value overnight, before it crashed. Now the subject of a federal prosecution, Mr. Schena faces up to twenty years in prison if convicted.

These lawsuits and government actions could merely be the tip of the iceberg—as the pandemic stretches on, the number of private and regulatory actions likely will continue to grow. Of course, some entities and individuals will continue their aggressive approach no matter the consequences. In early August 2020, Sorrento sent out another press release, this time trumpeting its ability to test and diagnose COVID-19 in thirty minutes.[15] Sorrento claims a 97% accuracy rate, but has yet to announce any timeline for release. Nevertheless, Sorrento’s stock price has jumped yet again.

The need for companies to exercise care in their public statements, shareholder announcements, and marketing claims about drugs, vaccines, medical devices, and a host of other products isn’t new. And, while the regulatory landscape is rapidly shifting in response to the pandemic—for instance, to accelerate clinical testing and approval of new vaccines and therapeutics—it’s long been a reality that regulators closely monitor the life sciences sector. However, the pandemic raises two unique issues that should be borne in mind by any company developing products and services that might address COVID-19. First, the unprecedented urgency for these products and services has created an atmosphere where misleading statements can have enormous, and even catastrophic, impacts around the globe. Second, perhaps more than any health issue in modern times, the global community is universally desperate for products and services, creating an audience for communications from life sciences companies that is vastly larger, and far less familiar with, the reality of complex issues like vaccine development. In this environment, it’s no wonder that shareholders, regulators, and the consumer public alike are eagerly listening and acting quickly in response to information from these companies. From the regulators and shareholders, misleading statements can bring about dire consequences for companies. However, those consequences are certainly no more serious than the tragic reliance of an unwitting public on misleading statements that result in serious injury or loss of life. In this most unusual and difficult time, companies legitimately doing the critical work of developing products and services that might quell the pandemic would be well advised to thoughtfully consider their external communications.

If you are interested in more coverage of related topics, please see our other alerts, “PPE procurement considerations in light of recent DOJ criminal complaint against foreign mask manufacturer,” June 11, 2020; “First PPP fraud prosecution provides preview of government scrutiny for which all CARES Act beneficiaries must prepare” May 8, 2020; “New House committee on coronavirus may shift investigatory landscape for federal fund recipients,” May 01, 2020; and “Managing risks that come with federal funds,” March 27, 2020 or visit our blog to view our recent webinar and key takeaways, “Navigating biotech partnerships during the COVID-19 pandemic,” June 11, 2020.


  1. See, e.g. Rowlatt, Justin. “Coronavirus: Protein treatment trial 'a breakthrough,’” BBC News.
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  2. McSweeney, Eoin. “Synairgen shares soar 450% on Covid-19 treatment hopes,” CNN Business.
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  3. [Back to referencea>Mueller, Benjamin. “New Treatment for Covid-19 Shows Promise, but Scientists Urge Caution,” N.Y. Times.
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  4. Gelles, David and Murphy, Heather. “This Company Boasted to Trump About Its Covid-19 Vaccine. Experts Are Skeptical,” N.Y. Times.
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  5. Id.
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  6. Terry, Mark. “Sorrento Responds to Criticism of COVID-19 Neutralizing Antibodies,” BioSpace.
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  7. Sozzi, Brian. “Sorrento Therapeutics CEO: We are not a ‘pump and dump’ scheme,” Yahoo! Finance.
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  8. LaSusa, Mike. “Biotech Co. Lied About COVID-19 Vaccine, Investors Say,” Law360.
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  9. SEC Charges Company for Misleading Covid-19 Claims,” SEC.
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  10. SEC charges microcap fraud scheme participants attempting to capitalize on the COVID-19 pandemic,” SEC.
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  11. FTC Sues California marketer of $23,000 COVID-19 ‘Treatment’ plan,” FTC.
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  12. Fraudulent Coronavirus Disease 2019 (COVID-19) Products,” FDA.
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  13. Attorney General William P. Barr urges American public to report COVID-19 fraud,” DOJ.
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  14. Medical technology company president charged in scheme to defraud investors and health care benefit programs in connection with COVID-19 testing,” DOJ.
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  15. Sorrento’s new COVID-19 test could be a game changer, says 5-star analyst,” Yahoo! News.
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The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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