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At Holden Litigation
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Directors and Officers Liability

On March 4, 2020, the Securities and Exchange Commission (“SEC”) released an order cautioning companies to inform investors of potential COVID-19-related business risks.[1] Unfortunately, the SEC’s cautionary statement did not appear to prevent corrupt practices within the corporate sector.[2] By April 2020, the first wave of allegations involving coronavirus-related securities fraud and misconduct by major corporate directors and officers (“D&O”) went public.[3] Initially, there was a fair amount of skepticism as to whether any of these allegations of executive misconduct would ever see the light of a courtroom. After all, a D&O claim had never been litigated in connection with any other virus outbreak in recent history.[4] This skepticism was quickly put to rest with the swift filings of securities class action lawsuits against two major corporations in the medical and tourism industries — Inovio Pharmaceuticals, Inc. and Norwegian Cruise Lines.[5] The allegations against the directors and officers range from wrongful public misstatements to blatantly misleading sales tactics.[6] As the American economy experiences tremendous obstacles from the COVID-19 pandemic, directors and officers must adjust to fulfill their fiduciary duties to their corporations and do so without running afoul of securities laws.

A. Norwegian Cruise Lines and the COVID-19 smokescreen.

The COVID-19 outbreak tested the ethical standards of many businesses and corporations with the sudden and dramatic halt of the global economy. The dilemma was real for many corporate executives – disclose potential business/market-related disruptions and risk bankruptcy or keep up appearances to gain marketable securities.

Certain shareholders highlighted this predicament in their securities class action lawsuit against Norwegian Cruise Lines (“Norwegian”), its Chief Executive Officer, Frank J. Del Rio (“Del Rio”), and Chief Financial Officer, Mark A. Kempa (“Kempa”).[7] Plaintiffs to the lawsuit represent shareholders who purchased shares from February 20, 2020, through March 12, 2020.[8] The class period begins on February 20, 2020, when Norwegian published its COVID-19 press release along with its Form 8-K filed with the SEC.[9] The press release stated that Norwegian’s cruise sales flourished in spite of the pandemic and that the company was even ahead of its yearly sales goals.[10] Norwegian partly attributed its success to having “proactively implemented several preventive measures to reduce potential exposure and transmission of COVID-19” and boasted that the company “has an exemplary track record of demonstrating its resilience in challenging environments.”[11]

On February 27, 2020, Norwegian filed a Form 10-K with the SEC which stated that the company “must meet the U.S. Public Health Service’s requirements” and noted that it is rated “at the top of the range of CDC and FDA scores achieved by the major cruise lines.”[12] Norwegian cites its 10-K risk factors as “[t]he spread of the COVID-19 coronavirus, particularly in North America, could exacerbate its effect on [Norwegian].[13] Any future wide-ranging health scares would also likely adversely affect our business, financial condition, and results of operations.”[14] Shareholder Plaintiffs allege that these and several other statements within Norwegian’s SEC filings were intentionally inaccurate and misleading.[15]

Shareholder Plaintiffs allege that Norwegian’s D&Os made false and misleading statements and/or failed to disclose:

  1. The Company was employing sales tactics of providing customers with unproven and/or blatantly false statements about COVID-19 to entice customers to purchase cruises, thus endangering the lives of both their customers and crew members; and
  2. As a result, Defendants’ statements regarding the Company’s business and operations were materially false and misleading and/or lacked a reasonable basis at all relevant times.[16]

Plaintiffs bolstered their claims by reference to allegedly leaked emails from Norwegian executives grooming their employees on how to publicly downplay COVID-19.[17] In a March 11, 2020, Miami New Times exposé entitled “Leaked Emails: Norwegian Pressures Sales Team to Mislead Potential Customers About Coronavirus,” the first allegations of corporate misrepresentations were made against Norwegian.[20]

On March 12, 2020, the Washington Post ran an article entitled “Norwegian Cruise Line Managers Urged Salespeople to Spread Falsehoods About Coronavirus” which alleged even more misconduct by the corporation’s directors and officers.[21] The article reported that leaked internal memoranda included statements such as “[t]he coronavirus will not affect you” and “Fact: Coronavirus in humans is an ‘overhyped pandemic scare.’”[22] The article quotes unnamed company executives as being furious by the alleged email leaks and quotes one executive as stating “[o]ne of our own ratted.”

Following the negative press coverage, Norwegian’s share price dramatically dropped 26.7% — resulting in losses for investors.[24] Plaintiff shareholders allege the losses were the direct result of the wrongful misstatements and misleading sales tactics of Norwegian directors and officers.[25]

B. Inovio Pharmaceuticals and the COVID-19 bait-and-switch.

On March 12, 2020, the second COVID-19-related securities class action lawsuit was filed against Inovio Pharmaceuticals, Inc. (“Inovio”) and its Chief Executive Officer, J. Joseph Kim (“Kim”).[26] Plaintiff shareholders allege that, on February 14, 2020, Kim appeared on Fox Business News and announced Inovio had developed a COVID-19 vaccine in only three (3) hours after obtaining the DNA sequence from the virus.[27] Kim further declared that Inovio’s “goal is to start phase one human testing in the U.S. early this summer.”[28] Inovio’s stock rose more than ten (10%) within days after the broadcast.[29]

On March 2, 2020, President Donald J. Trump had a meeting with several leaders in the medical and pharmaceutical industries to discuss the U.S. plan of action for the COVID-19 national crisis.[30] The meeting was highly publicized and nationally broadcast through multiple media outlets.[31] Kim attended this meeting at the White House on behalf of Inovio to discuss its medical breakthroughs with regard to the virus.[32] While speaking to President Trump during the live broadcast, Kim again stated that Inovio had developed a COVID-19 vaccine within three (3) hours and that human testing would begin in April 2020.[33] After the White House conference, Inovio’s share price “more than quadrupled” reaching an intraday high of $19.36 on March 9, 2020.[34]

The excitement would not last long. On March 9, 2020 – the same day as Inovio’s intraday-high record – Citron Research released a statement on social media:

[@Inovio] SEC should immediately HALT this stock and investigate the ludicrous and dangerous claim that they designed a vaccine in 3 hours.  This has been a serial stock promotion for years. This will trade back to $2. Investors have been warned.[35]

The day after Citron Research’s Twitter statement, Inovio’s share price dropped from $18.72 to $9.83 per share.[36] This drop represented a 71% decline from the share-class-period high and a $643 million loss of market capitalization.[37] After the Citron Research statement, Inovio allegedly attempted damage control by qualifying its previous statements as not actually having created a vaccine, but having designed a “vaccine construct.”[38]

Plaintiff shareholders filed their securities class action lawsuit alleging that Inovio and its CEO Kim “falsely described their product as a fully completed vaccine when it was nothing of the sort.”[39] The defendants “falsely claimed they had developed the vaccine in a matter of hours which is a scientific impossibility.”[40] The defendants also “falsely state[d] that they would be able to begin human trials in April 2020 when they had no reason to believe that they would have the necessary regulatory approvals to do so.”[41]

Plaintiffs are alleging corporations and executives have used COVID-19 as an opportunity to portray themselves as positioned to take advantage of the outbreak or as positioned to prosper because of the outbreak.[42] Despite the lack of precedent for D&O liability during pandemic-induced economic downturns, the post-pandemic American judicial system will likely become overwhelmed by shareholders who experienced substantial losses during the 2020 stock market crash.

C. Securities Exchange Act of 1934: Litigation and Defenses.

Norwegian’s and Inovio’s corporate misstatements and fraudulent behavior are alleged violations of the Securities Exchange Act of 1934.[43] The Plaintiffs in these securities class action lawsuits allege that corporate executives blatantly misled their investors and artificially inflated stock prices.[44] Specifically, Norwegian and Inovio are alleged to have violated Section 10(b) (17 C.F.R. § 240.10b-5) of the Securities Exchange Act of 1934 which states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

  1. To employ any device, scheme, or artifice to defraud,
  2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
  3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.[45]

Additionally, the directors and officers are alleged to be liable in their individual capacities under Section 20(a) (15 U.S.C. § 78(a)) which states:

Joint and several liability; good faith defense. Every person who, directly or indirectly, controls any person liable under any provision of this title [15 USCS §§ 78a, et seq.] or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable (including to the Commission in any action brought under paragraph (1) or (3) of section 21(d) [15 USCS § 78u(d)]), unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.[46]

At first blush, securities lawsuits against corporate directors and officers for COVID-19-related misconduct may appear to be plaintiff’s verdict cases. In reality, D&O defendants have strong defenses refuting the presumed nexus of alleged corporate misconduct and shareholder losses. This is due largely to the pandemic’s overall devastation to the American economy.[47] COVID-19 will undoubtedly cause a record-setting recession and the totality of its impact is not yet recognized.[48] Simply put, the American economy went “[f]rom full throttle to sudden stop” according to Wells Fargo economists.[49]

COVID-19 caused the history’s largest point crash for the Dow Jones Industrial Average on March 9, 2020 – one week later, it did it again.[50] The Dow hit a record 2,997.10 loss on March 16, 2020, beating even the 1929 Black Monday record low.[51] The downward spiral caused by COVID-19 fears continued worsening as global fears of the virus heightened, businesses shut down, and oil prices plummeted.[52]

As a result, D&O defendants must heavily focus their litigation strategy on loss causation. By a preponderance of the evidence, plaintiff shareholders must prove their share losses came as a direct result of the D&O’s misrepresentations or fraudulent behavior. The extrinsic circumstances of the American economy make this a nearly impossible burden to prove. In an economy where there are significant domestic and international travel bans in place, the stock market broke record lows twice in one week, national agricultural production is at an all-time low, the oil and gas industry is on the brink of bankruptcy, and over twenty-six (26) million Americans are unemployed, a plaintiff cannot prove that  corporate executives’ conduct was the absolute cause of their share loss. Defendants will successfully raise doubt to a plaintiff shareholder’s securities claims by arguing a pandemic American economy caused the stock market to crash. Whether D&O misconduct or omissions occurred or not, the outcome is the same.

Further, D&O defendants must litigate aggressively that the timeline of events surrounding the share loss alone is not enough for liability. Basically, the fact that share prices dropped only after ‘the truth’ of D&O wrongdoing became public is not enough to prove the losses resulted from the conduct. The courts have long held that the sequence of events leading to share losses does not satisfy causation.[53]

For example, the Supreme Court case Dura Pharms., Inc. v. Broudo involves a group of people who purchased stock between April 15, 1997, and February 24, 1998 (“Respondents”).[54] Respondents brought a securities fraud class action against Dura Pharmaceuticals and some of its managers and directors (“Dura”).[55] Respondents claimed: (1) Dura made false statements regarding profits; (2) Dura falsely claimed the FDA would soon approve an asthmatic spray device; (3) Dura stated in February 1998 that sales would be slow; (4) Dura announced eight months later that the FDA would not approve the spray device; and (5) Dura’s stock dropped in value the next day and recovered within a week.[56] Most importantly, Respondents claimed they had paid an inflated price for stock and thereby suffered damages.[57]

The District Court dismissed the complaint holding it failed to allege loss causation adequately.[58] However, the Ninth Circuit reversed in part the spray device claim holding Respondents had adequately alleged loss causation. The Ninth Circuit reasoned, “plaintiffs establish loss causation if they have shown that the price on the date of purchase was inflated because of the misrepresentation.”[59] The Supreme Court granted certiorari since the Ninth Circuit’s reasoning was different from other Circuits’ holdings.

The Supreme Court stated that, to adequately plead a Section 10(b) claim “involving publicly traded securities and purchases or sales in public securities markets,” a plaintiff must sufficiently plead:

  1. A material misrepresentation (or omission)…
  2. Scienter, i.e., a wrongful state of mind…
  3. A connection with the purchase or sale of a security…
  4. Reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as “transaction causation…
  5. Economic loss… and
  6. “Loss causation,” i.e., a causal connection between the material misrepresentation and the loss….[60]

The Supreme Court rejected the Ninth Circuit’s reasoning and claimed it is simply “wrong.”[61] The Supreme Court reasoned there is no suffered loss since the ownership of a share offset the inflated purchase. In fact, shares are usually purchased with the mindset of selling at a later date; and if the shares were sold before the FDA news came out, there would be no loss.[62] Furthermore, if sold at a loss at a later date, the loss may not be directly from the misrepresentation but due to other reasons.[63] For example, a change in “economic circumstances, altered investor expectations, new industry-specific or firm-specific facts, conditions, or other events”  considered separately or as a whole may have changed the prices.[64] The Supreme Court  opines that, although the securities statute is in place to maintain public confidence in the marketplace, it is “not to provide investors with broad insurance against market losses.”[65]

Furthermore, the Supreme Court held that the Private Securities Litigation Reform Act of 1995 (“PSLR”) contends that securities fraud complaints must “specify” every misleading statement with all facts “on which  that belief was formed” and “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”[66] Although the Supreme Court accepts that the pleading rules are not in place to inflict a great burden on a plaintiff, the rules do not allow “a plaintiff to forgo giving any indication of the economic loss and proximate cause that the Plaintiff has in mind would bring about harm.”[67] Respondents’ Complaint failed because merely alleging that Dura’s share price dropped after the truth came out is insufficient alone to prove causation for the price inflation.[68] Therefore, the Supreme Court reversed the Ninth Circuit’s judgment.[69]

This case applies directly to SEC litigation where plaintiffs claim a drop in stock market prices was due to alleged misrepresentation of directors and officers. Consequently, D&O defendants have an advantage in COVID-19 litigation as loss causation will be nearly impossible for a Plaintiff shareholder to prove in a securities class action lawsuit.


[1] S.E.C. Notice, 85 Fed. Reg. 17610 (Mar. 30, 2020).

[2] Complaint, McDermid, et al. v. Inovio Pharms., Inc., et al., No. 2:20-cv-01402-GJP (E.D. Pa. 2020); Complaint, Douglas, et al. v. Norwegian Cruise Lines, et al., No. 1:20-cv-21107 (S.D. Fla. 2020).

[3] Id.

[4] E.g. There were no securities lawsuits filed against directors or officers during the MERS, SARS or Ebola outbreaks.

[5] Complaint, Inovio Pharms., Inc., et al., No. 2:20-cv-01402-GJP (2020); Complaint, Norwegian Cruise Lines, et al., No. 1:20-cv-21107 (2020).

[6] Id.

[7] Complaint, Norwegian Cruise Lines, et al., No. 1:20-cv-21107 (2020).

[8] Id.

[9] Complaint, Norwegian Cruise Lines, et al., No. 1:20-cv-21107 (2020). Norwegian’s Form 8-K contained its stable financial results for fourth quarter 2019 and year-end 2019.

[10] Id.

[11] Id.

[12] Norwegian Cruise Line Holdings Ltd., Annual Report at 18 (Form 10-K) (Dec. 31, 2019).

[13] Id. at ¶ 26.

[14] Id. at ¶ 22.

[15] Complaint, Norwegian Cruise Lines, et al., No. 1:20-cv-21107 (2020).

[16] Id. at ¶ 21.

[17] Id. at ¶ 22.

[18] Alexi C. Cardona, Leaked Emails: Norwegian Pressures Sales Team to Mislead Potential Customers About Coronavirus, Miami New Times (Mar. 11, 2020),

[19] Id.; Complaint, Norwegian Cruise Lines, et al., No. 1:20-cv-21107 (2020).

[20] Id.

[21] Drew Harwell, Norwegian Cruise Line Managers urged salespeople to spread falsehoods about coronavirus, Wash. Post (Mar. 12, 2020),

[22] Id.

[23] Id.

[24] Complaint, Norwegian Cruise Lines, et al., No. 1:20-cv-21107, ¶ 24 (2020).

[25] Id. at ¶ 44.

[26] Complaint, Inovio Pharms., Inc., et al., No. 2:20-cv-01402-GJP (2020).

[27] Id. at ¶ 4.

[28] Id.

[29] Id.

[30] Id. at ¶ 5.

[31] Complaint, Inovio Pharms., Inc., et al., No. 2:20-cv-01402-GJP (2020).

[32] Id. at ¶ 18.

[33] Id.

[34] Id. at ¶ 5.

[35] @CitronResearch, Twitter (Mar. 9, 2020, 9:23 AM),

[36] Complaint, Inovio Pharms., Inc., et al., No. 2:20-cv-01402-GJP, ¶ 6 (2020).

[37] Id.

[38] Id.; To analogize, Inovio’s statement is like saying it built a house and then later stating it only meant that it had the blueprints designed.

[39] Id. at ¶ 23.

[40] Id.

[41] Complaint, Inovio Pharms., Inc., et al., No. 2:20-cv-01402-GJP, ¶ 23 (2020).

[42] See Id.

[43] Complaint, Inovio Pharms., Inc., et al., No. 2:20-cv-01402-GJP (2020); Complaint, Norwegian Cruise Lines, et al., No. 1:20-cv-21107 (2020).

[44] Id.

[45] 17 C.F.R. § 240.10b-5.

[46] 15 U.S.C. 78(a).

[47] Kathleen Howley, COVID-19 will cause a record setting recession, economist say, HousingWire (Mar. 27, 2020),

[48] Id.

[49] Id.

[50] Kimberly Amadeo, How Does the 2020 Stock Market Crash Compare With Others?, the balance (last updated Apr. 27, 2020),

[51] Id.

[52] Id.

[53] Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005).

[54] Id. at 339.

[55] Id.

[56] Id.

[57] Id. at 340.

[58] Dura Pharms., Inc., 544 U.S. at 340.

[59] Id.

[60] Id. at 341. (emphasis added).

[61] Id. at 342.

[62] Id.

[63] Dura Pharms., Inc., 544 U.S. at 343.

[64] Id.

[65] Id. at 345. (emphasis added).

[66] Id. (quoting 15 U.S.C. § 78u-4).

[67] Id. at 347.

[68] Dura Pharms., Inc., 544 U.S. at 347.

[69] Id.

Alisa Baird, Litigating an Invisible Enemy: Will the United States Insurance Industry Survive the Covid-19 Pandemic?, 56 Tulsa L. Rev. 169 (2021).

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