Judge Partially Grants COVID Test Maker Chembio’s Motion to Dismiss Securities Litigation

United States District Judge Allyne R. Ross reached a decision on Wednesday in a class action suit initially filed in the Eastern District of New York against Chembio Diagnostics, Inc., its senior executives and directors, and Robert W. Baird & Co. Inc. and Dougherty & Company LLC, who are the underwriters of Chembio’s secondary stock offering. The plaintiffs, who are investors in Chembio, alleged that the defendants had violated both the Securities Act of 1933 and the Securities Exchange Act of 1934 surrounding their COVID-19 antibody testing product.

In early 2020, the Food and Drug Administration (FDA) declared that the COVID-19 outbreak was a public health emergency and that they would begin granting certain diagnostic and antibody tests FDA emergency use authorizations, or EUAs. An EUA is a “temporary approval of a product relevant to the declared public health emergency and requires a less rigorous review process than the FDA’s process for regular long-term approval.” EUAs are issued when there is an urgent need for the product and a reasonable belief that the product may be effective.

Chembio is a developer and seller of “diagnostic solutions and products for the treatment, detection, and diagnosis of infectious diseases.” Chembio applied for an EUA for their antibody testing, which the FDA granted them based on promising data collected by Chembio. Their stock subsequently rose over $10, prompting Chembio to submit an amendment request to the FDA so the product could be used in point-of-care settings. Tests done by the Department of Health and Human Services, the National Institutes of Health, and the National Cancer Institute later indicated less promising results than Chembio had initially submitted.

Chembio continued to promote the use of the product in point-of-care settings to investors, even having defendants Baird and Dougherty assist with the process. The FDA informed Chembio in late May that they had done nothing to adequately address the concern presented by the new data, and if they did not soon, the FDA would have to “take steps and/or request that [Chembio] take additional actions to protect the public health as appropriate.” The FDA revoked Chembio’s EUA in mid-June of 2020, noting that it was “not reasonable to believe the product may be effective in detecting antibodies against [COVID-19].” Chembio’s stock price went down over 60%.

Defendant Chembio moved for the plaintiff’s complaint for violations of the Exchange and Securities Act to be dismissed in its entirety on the grounds that it failed to “state a claim pursuant to Federal Rule of Civil Procedure.” Judge Allyne R. Ross granted the motion in part.

The judge dismissed the plaintiff’s claim under the Exchange Act where they alleged that the defendants intentionally disseminated false and misleading statements, explaining that they had not “persuasively alleged with sufficient specificity an inference of fraudulent intent that is at least as compelling as competing inferences of non-fraudulent intent.” Partially dismissed was the plaintiff’s claim that the defendants were liable for preparing and publishing untrue statements. The judge dismissed Chembio of the claim but denied dismissal to defendants Baird and Dougherty. The judge also dismissed the other Exchange Act claims made by the plaintiff since they were contingent upon the prior Exchange Act claim, which the judge dismissed.

The Judge concluded, saying that the Exchange Act claims would be dismissed in full, while the Securities Act claims would be dismissed “except as to the underwriter defendants [Baird and Dougherty].” The plaintiffs will have the opportunity to amend their Securities Act claims, but not their Exchange Act claims.The plaintiffs were represented by Kaplan Fox & Kilsheimer, while the defendants were represented by K&L Gates and Latham & Watkins, LLP.