Two months after pandemic lockdowns began, San Diego biotech Sorrento Therapeutics put out a hopeful press release on a COVID-19 breakthrough that some took to tout a cure.
That 1,100-word PR blast of May 15, 2020, didn’t use the word “cure,” but the stock market read between the lines — and favorable coverage by Fox News and others.
“Sorrento IDs Antibody Against COVID-19 That Appears 100% Effective,” headlined a BioSpace.com story.
Sorrento’s share price skyrocketed.
As noted in a 9th U.S. Circuit Court of Appeals decision Monday favoring Sorrento, its stock price rose to a daily high of $9 per share — or 243.5% higher than the prior trading day’s close of $2.62 — and its common stock traded at nearly 78 times its daily volume.
But five days after the release, others threw cold water on Sorrento’s claims.
Its stock price fell from $6.82 a share to $4.55 a share.
Investor Andrew Zenoff of Rancho Santa Fe sued the Judicial Drive company 5 minutes north of Westfield UTC mall in a class action May 26, 2020, alleging securities fraud.
“The gravamen of the [first amended complaint] was that Sorrento had falsely claimed to have developed a cure for COVID-19, misleading investors,” wrote Judge Consuelo Callahan for a three-judge panel.
The suit stressed CEO Henry Ji’s statements in media articles May 15 that “We want to emphasize there is a cure. There is a solution that works 100 percent,” and “If we have the neutralizing antibody in your body, you don’t need the social distancing. You can open up a society without fear.”
But in San Diego federal court, Judge Anthony J. Battaglia granted Sorrento’s motion to dismiss the case, saying Zenoff had failed to make plausible showings of falsity or scienter — a defendant’s knowledge that their conduct is wrongful and intend to act despite this knowledge.
Zenoff appealed and his legal team argued the case Feb. 14 — Valentine’s Day — in Pasadena.
But the court showed little love in its ruling Monday affirming the district court’s dismissal of the suit against the company that filed for bankruptcy a year ago.
Battaglia found claims of a cure to be “a statement of corporate optimism” — in other words, mere ‘puffery’ which ‘cannot state an actionable material misstatement of fact under federal securities law.’”
The appellate court further said:
Zenoff contends that Sorrento “told the world multiple whoppers” concerning a 100% cure for COVID-19. While Defendants’ enthusiasm for STI-1499 might have been overblown, in context, their statements were not materially misleading.
And
Even if the Defendants’ statements could be construed to be misleading, Zenoff would still not be entitled to relief unless his allegations raised the requisite strong inference of scienter.
Plaintiff Zenoff had noted that, in March 2020, Sorrento’s independent auditor had issued a “going concern” qualification to its 2019 audit opinion noting Sorrento’s high cash burn rate and overleveraged capital structure.
Sorrento’s 2019 Form 10-K filed with the Securities and Exchange Commission also had indicated that if it could not raise sufficient financing for its day-to-day operations, it would have to shut down, courts were told.
The appeals court’s opinion shrugged off Zenoff’s suggestion that the “cure” coverage was meant to shore up its bottom line.
“Although Sorrento’s financial situation was clearly helped by the market’s response to the announcement of the development of STI-1499, Sorrento had taken steps to meet its ‘dire financial situation’ well before the announcements of STI-1499,” the 9th Circuit said.
“It seems likely that the bump in the price of Sorrento’s stock in the week of May 15 provided it with more revenue from its agreement with Anarki to purchase stock, but Zenoff does not allege any particular improper or inflated sales.”
The appeals court concluded that in spring 2020, “the possibility of a cure for COVID-19 generated many innocent explanations for Defendants’ statements and the market’s reaction to those statements.”
Two weeks ago, Reuters reported that a federal judge said Sorrento Therapeutics may continue its Chapter 11 bankruptcy case in Texas.
Sorrento filed for bankruptcy in February 2023, and transferring the case now, as the company nears a final sale of its assets, would be inefficient, ruled U.S. Bankruptcy Judge Christopher Lopez in Houston.
On Monday, Sorrento stock closed at less than 1 cent per share.
