In the now more than two-and-a-quarter years since the initial COVID-19 outbreak in the US, a significant number of COVID-related securities class action lawsuits have been filed. What is surprising is not that the suits have been filed; rather, it is that even at this late date, the COVID-related suits continue to be filed. As time has gone by, however, it has become increasingly challenging to say with clarity whether a particular lawsuit is or is not “COVID-related.” The securities class action lawsuit filed late last week against online information platform, Yext, illustrates the increasing difficulty of making the COVID-related categorization, as discussed below.
Yext operates a cloud-based platform that allows consumers to ask and obtain answers to questions online. Its shares are traded on NYSE. According to the recently filed securities complaint, even as there was a resurgence in COVID cases in 2021, “Yext consistently assured investors that pandemic-related impacts on the Company’s business were limited as the Company adapted to lockdowns and improved efficiencies in its sales and other operations. ”
On March 8, 2022, Yext announced its results for the fourth quarter and fully year of its 2022 fiscal year. The company’s quarterly revenue fell slightly below consensus estimates. The company also lowered its outlook for the first quarter of fiscal 2023 and for the full year of fiscal 2023, compared to consensus estimates. The company also disclosed the departure of its CEO and CFO.
In the conference call accompanying the financial results, the incoming CEO noted a number of factors that contributed to the results, including “fragmentation in our interactions with customers and out the ability to deliver premium service and support.” The incoming CEO also noted that the company had experienced “a really significant disruption in our business,” such as that during the fourth fiscal quarter “over 50% of our in-person events were canceled because of the Omicron surges.” He added that the company could improve its “sales motion so that it’s more efficient during disruptions like that.” The securities suit complaint alleges that the company’s stock price fell more than 9% on the news.
On June 17, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against the company and its now former CEO and CFO. A copy of the complaint can be found here. The lawsuit purports to be filed on behalf of a class of investors who purchased the company’s securities between March 4, 2021 and March 8, 2022.
The complaint alleges that during the class period, the defendants made false or misleading statements or failed to disclose that: “(i) Yext’s revenue and earnings were significantly deteriorating because of, inter alia, poor sales execution and performance, as well as COVID-19 related disruptions; (ii) Accordingly, Yext was unlikely to meet consensus estimates for its full year fiscal 2022 financial results and fiscal 2023 outlook; and (iii) as a result, the Company’s public statements were materially false and misleading at all relevant times. “
The complaint alleges that the defendants violated Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
By my count, this lawsuit is the 52nd COVID-19-related securities class action lawsuit to be filed since the initial coronavirus outbreak in the US in March 2020. It is also the ninth COVID-related securities class action to be filed so far in 2022.
But while I have been tracking lawsuits that I classify as COVID-related for now over two years, it has become increasingly challenging to make the “COVID-related” classification. As this case shows, COVID-related allegations are increasingly accompanied by a range of other financial or operational allegations. The disappointing financial news in the company’s March 2022 financial release related only in part to COVID-related issues. Not only were there disclosures of other operating problems, but also the announcement of the departures of the CEO and CFO, which undoubtedly contributed to the company’s share price decline. However, because the plaintiff’s complaint stressed the COVID impacts it seemed appropriate to me to classify this case as COVID-related.
I contrast the allegations in this case with the allegations in the lawsuit recently filed against Tupperware. As discussed in a recent post, Tupperware was hit with a securities lawsuit after it announced financial results that disappointed investors. In its earnings release, Tupperware blamed the disappointing results, in part, on COVID. However, COVID was only one of several factors to which Tupperware attributed the declines. The company also cited the war in Ukraine, the impact in inflation, as well as internal operating performance. Because COVID was only one of several factors, but not a factor that was emphasized either by the company in its earnings disclosure or in the plaintiff’s complaint, I did not classify the Tupperware lawsuit as COVID-related – even though I recognize that reasonable minds could differ on this determination and I can certainly imagine that others might well classify the Tupperware case as COVID-related.
Regardless of how you classify this case or the Tupperware case, the two cases do illustrate how as time has gone by it has become increasingly difficult to make the COVID-related determination. With the passage of time, COVID is now for most companies only one of several complicating factors in the companies’ operating environments. These changing circumstances raise the question of how significant of a factor in a company’s operation or financial results COVID has to be in order for a subsequent securities suit to be COVID-related. The corollary question is how peripheral can COVID be as a factor in a company’s operations and financial results in order for a subsequent securities suit to be classified as not COVID-related. These two recent cases suggest that these kinds of determinations are likely to be increasingly difficult going forward.