In re Chembio Diagnostics, Inc. Sec. Litig.

• Decision Date: 23 February 2022
• Docket Number: 20-CV-2706 (ARR) (PK) (Consolidated)
• Citation: 586 F.Supp.3d 199
• Parties: IN RE CHEMBIO DIAGNOSTICS, INC. SECURITIES LITIGATION This Document Relates to: All Actions
• Court: U.S. District Court — Eastern District of New York

586 F.Supp.3d 199

IN RE CHEMBIO DIAGNOSTICS, INC. SECURITIES LITIGATION This Document Relates to: All Actions

20-CV-2706 (ARR) (PK) (Consolidated)

United States District Court, E.D. New York.

Signed February 23, 2022

OPINION & ORDER

ROSS, United States District Judge:

During the summer of 2020, four putative class actions were brought against Chembio Diagnostics, Inc. ("Chembio") and several of Chembio's senior executives and directors (collectively "Chembio defendants"), as well as Robert W. Baird & Co. Inc. ("Baird") and Dougherty & Company LLC ("Dougherty"), the underwriters of Chembio's May 7, 2020 secondary stock offering ("May Offering") (together, the "underwriter defendants"). These actions claimed violations of the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act") arising out of the May Offering and Chembio's then-flagship product, a COVID-19 antibody test. On December 29, 2020, these actions were consolidated into this current putative class action. Defendants now move to dismiss the Consolidated Amended Complaint ("Complaint") in its entirety for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).¹ For the reasons set forth below, the motion is granted in part and denied only as to the Securities Act Sections 11 and 12(a)(2) claims against the underwriter defendants.

BACKGROUND

A. Factual Background²

Lead plaintiffs represent two proposed classes of investors in Chembio, a Nevada corporation headquartered in Hauppauge, New York that develops and sells diagnostic solutions and products for the treatment, detection, and diagnosis of infectious diseases. Consolidated Am. Compl. ¶¶ 1, 4, 34–36 ("CAC"), ECF No. 64. Chembio's diagnostic technology relies primarily on its Dual Path Platform® ("DPP") technology, which the company advertises as "mak[ing] testing faster, more accurate, and more cost effective." Id. ¶ 4.

On February 4, 2020, the Secretary of the Department of Health and Human Services determined, pursuant to Section 564 of the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 360bbb-3, that the COVID-19 outbreak in the United States was a public health emergency with significant potential to affect national security or the health and security of United States citizens living abroad. CAC ¶ 141. Pursuant to this declaration, the Food and Drug Administration ("FDA") began granting emergency use authorizations ("EUAs") for COVID-19 diagnostic and antibody tests. See id. ¶¶ 145–46. 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. See id. ¶¶ 147–48. While regular FDA approval is granted only once the Agency has determined that there is "substantial evidence," based on adequate and well-controlled investigations, that the product will have the effect it is intended to have, an EUA can be issued if "it is reasonable to believe that ... the product may be effective." Id. ¶ 148 (alteration and emphasis in original). The FDA assesses the potential effectiveness of possible EUA products on a case-by-case basis using a risk-benefit analysis. Id. The EUA will then last as long as the public health emergency declaration persists and, if sought by the FDA, additional testing confirms that the product meets the FDA's criteria. See id. ¶¶ 147–48.

On March 12, 2020, Chembio announced that it would leverage its DPP technology to create a COVID-19 antibody test. Id. ¶ 6. On March 31, 2020, Chembio announced the launch of its DPP COVID-19 IgM/IgG³ System (the "Test"). Id. ¶¶ 6, 198. The Test is a single-use test of a blood, serum, or plasma sample to determine whether the person who provided that sample is infected—or has previously been infected—with COVID-19. Id. ¶¶ 172, 198.

Chembio applied to the FDA for an EUA for the Test. See id. ¶¶ 6, 198. Regarding the Test's ability to positively identify the presence of COVID-19 antibodies, Chembio represented to the FDA that the Test had a 77.4% rate for Immunoglobulin M (IgM), an 87.1% rate for Immunoglobulin G (IgG), and a 93.5% rate for combined IgM/IgG. Id. ¶ 174. Chembio further represented that the Test was 94.4% likely to correctly identify the absence of COVID-19 antibodies.⁴ See id. ¶¶ 165, 174. On April 14, 2020, the FDA issued an EUA to use the Test solely in laboratory settings. Id. ¶¶ 10, 73. Chembio was one of the first companies to earn an EUA for a COVID-19 test. Id. ¶ 10. Chembio's stock rose from a closing price of $3.10 per share on March 11, 2020 to $15.54 per share on April 24, 2020. Id. ¶ 13.

After granting the EUA for laboratory settings, the FDA ordered further evaluations of the Test. See Sigismondi Decl. in Supp. of Mot. to Dismiss ("Sigismondi Decl."), Ex. B ("May 22 Email"), ECF No. 84-1. The Test was independently evaluated by the Department of Health and Human Services, the National Institutes of Health, and the National Cancer Institute (together referred to as "NCI evaluation"). CAC ¶ 17. Sometime between April 14 and May 15, 2020, Chembio also submitted a request to amend its EUA to allow use of the Test in point-of-care settings. May 22 Email. During a call on April 29, 2020 (the "April 29 call"), the FDA informed Chembio that the NCI evaluation demonstrated higher false negative and false positive rates than the data Chembio had submitted. CAC ¶ 181. According to a summary later sent by the FDA to Chembio, the Agency informed Chembio on the call that it "had concerns regarding the results of the NCI evaluation" and, because of these concerns, "would not be moving forward, at that time," with Chembio's amendment request. May 22 Email. The summary also states that the FDA provided Chembio with the complete NCI evaluation results on April 30, 2020, one day after the call. Id. Between April 29, 2020 and May 15, 2020, Chembio submitted to the FDA the results from additional studies of the Test.⁵ Id. ; see CAC ¶ 184.

After the April 29 call, Chembio held a series of events to promote the May Offering. On May 4, 2020, Chembio conducted a conference call with investors in which Richard L. Eberly, Chembio's Chief Executive Officer ("CEO") and President since March 16, 2020, and Gail S. Page, Chembio's Executive Chair of the Board and former interim CEO, participated. CAC ¶¶ 37, 39, 206. On the call, Mr. Eberly stated, "[t]he accuracy of the [Test] after [eleven] days post the onset of symptoms is 100% for total antibodies. This is based on our data that was submitted to and reviewed by the FDA for the EUA." Id. ¶ 206. Mr. Eberly also stated, "we expect [the Test] to drive significant incremental revenue in the future and will be a main driver in the infectious disease vertical.... We are ... confident in our ability to take [a] significant share in this market and sustain a leadership position for the long term." Id. In response to a question about future revenue, Mr. Eberly replied, "We're hopeful that demand will continue to grow. So ... as our capacity expands, we'll be able to sell everything we make." Id. ¶ 208. In response to a question about Chembio's antibody testing competitors, Ms. Page said, since Chembio was "the only one with [a] finger-stick [test]," it was "very well positioned," and she thought a lot of other companies would "fall out." See id. ¶¶ 211–12. Ms. Page added, "[s]o I think that's really going to change and get rid of a lot of the noise that's in the market" and "that's very beneficial for people like us that we may not necessarily be first, but we intend to be the best in the market." Id. ¶ 211. In a press release issued the same day, Mr. Eberly was quoted:

[T]he skill and hard work of this team has enabled a successful strategic pivot as we prioritize manufacturing and commercialization of our [Test]. Through efficient use of our resources and technical ability, we are scaling production of these tests due to the strong demand we are experiencing. We believe the features and benefits offered by our [Test] will make it a preferred solution.

Id. ¶ 215.

Chembio also engaged underwriter defendants Baird and Dougherty, both financial services firms, to assist with the May Offering. Id. ¶¶ 48–49, 90–99. Baird acted as "book-running manager" for the offering and Dougherty as "co-manager." Id. ¶ 90. Both served as underwriters of the May Offering and shared more than one million dollars in fees for their services. Id. ¶ 92. These underwriter defendants also assisted Chembio in planning the May Offering and allegedly participated in several meetings leading up to the May Offering, where, inter alia , the language to be used and disclosures to be made in the Prospectus (incorporated into the Registration Statement) were discussed. Id. ¶¶ 95–96, 110.

The Prospectus Supplement, dated May 7, 2020, updated the Prospectus and Registration Statement for the offering. Goldman Decl. in Supp. of Mot. to Dismiss ("Goldman Decl."), Ex. E, ECF No. 84-2 ; Goldman Decl. ¶ 3; CAC ¶ 110. The updated Registration Statement stated that in February 2020, Chembio had shifted its focus to developing COVID-19 testing, designating its other infectious disease products as "legacy products" from which Chembio "expect[ed] to generate [only] an immaterial amount of revenue" while the company continued to "focus on the manufacture and commercialization" of the Test. CAC ¶ 70. The Registration Statement warned that Chembio's finances could be negatively impacted by its focus on the Test: the virus was unpredictable, the health threat could dissipate, new regulations might hinder production, Chembio might be unable to meet demand, or the FDA could "revoke the EUA under which our [Test] is sold if it determines that the underlying health emergency no longer exists or warrants such authorization." Id. ¶¶ 73, 75. The Registration Statement also noted that the EUA permitted Chembio to sell the Test only to certified laboratories. Id. ¶¶ 73, 80. It...