Yannes v. SCWorx Corp.
| Decision Date | 21 June 2021 |
| Docket Number | 20-CV-03349 (JGK) |
| Parties | DANIEL YANNES, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. SCWORX CORP., and MARC S. SCHESSEL, Defendants. |
| Court | U.S. District Court — Southern District of New York |
This is a securities action brought on behalf of a putative class of all purchasers of publicly traded common stock of SCWorx Corporation ("SCWorx") between April 13, 2020 and April 17, 2020, inclusive (the "Class Period"). The lead plaintiff, Daniel Yannes, filed a Consolidated Class Action Complaint on October 19, 2020.
The plaintiff asserted violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, against SCWorx and Marc S. Schessel, the Chief Executive Officer of SCWorx, as well as a claim under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), against Schessel. The defendants now move to dismiss the complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons explained below, the defendants' motion is denied.
The following facts are drawn from the Consolidated Class Action Complaint ("CCAC") and documents referenced therein and are accepted as true for the purposes of this motion.
SCWorx a Delaware corporation with its headquarters in New York City, is a provider of supply chain management software and related data analytics for healthcare providers. CCAC ¶¶ 3, 22. Schessel is the Company's founder Chairman, and Chief Executive Officer ("CEO"), both throughout the Class Period and up to the present. Id. ¶ 24. SCWorx's shares trade publicly on the NASDAQ exchange under the symbol "WORX." Id. ¶5 22.
In early 2020, COVID-19 escalated to a global pandemic that "pushed hospital systems to the brink of collapse." Id. ¶ 33. In response to the urgent need for critical medical supplies, the defendants announced in a press release on March 20, 2020 the formation of a wholly-owned subsidiary, Direct-Worx LLC, to supply healthcare providers with critical personal protective equipment PPPE"). Id. ¶34.
On April 13, 2020, the defendants announced a deal, valued at $840 million, to sell COVID-19 rapid test kits to a virtual healthcare provider named Rethink My Healthcare ("RMH"). Id. ¶ 5. The defendants' press release stated that RMH had signed a committed purchase order for two million test kits in the first week, with provision for additional weekly orders of two million kits per week for twenty-three weeks (the "Purchase Order"), valued at $35 million per week. Id. ¶¶5, 39. On news of the deal, SCWorx's share price increased from $2.25 per share to $12.02 per share. Id. ¶40.
The following day, Utopia Capital Research, a securities analyst issued the "SCWorx Short Report" identifying "red flags" about SCWorx and raising doubts about its purported deal with RMH. Id. ¶50. The report referenced the SCWorx's "atrocious financials, dilution, [Schessel's] so-called 'dubious' past as an MMA (mixed martial arts) promot[er] that settled a securities violations class action lawsuit, a reverse merger involving thousands of cheap shares, press releases making hard to believe claims, terrible financials and ongoing dilution." Id. The report also noted that the committed purchase order from RMH for two million COVID-19 test kits, with provision for additional weekly orders of two million units for twenty-three weeks, was "very difficult to believe in light of the fact that the number of COVID-19 test[s] carried out in the USA amount[s] to only 298, 499 since January 21, 2020" and because RMH was a small company specializing in virtual healthcare services. Id. In response to this report, SCWorx's common stock closed down 30% at $8.45 per share on April 14, 2020, on over 18 million shares. Id. ¶ 8.
On April 15, 2020, the defendants discussed the COVID-19 rapid test kits deal on a conference call with analysts and investors, during which Schessel told investors that he had "spent weeks researching over 30 product different lines [sic], distributors, intermediaries until [he] found an actual manufacturer that had a kit that . . . had the proper FDA authorizations under the [E]mergency [A]uthorization [A]ct . . . and had enough capacity on [its] line where [he] could purchase 25% of [its] capacity with options to grow that over time." Id. ¶¶ 42-43. On April 16, 2020, the defendants filed a Form 8-K with the Securities Exchange Commission ("SEC"), which revealed for the first time the purported supplier of the COVID-19 rapid test kits was ProMedical Equipment Pty Ltd. ("ProMedical"). Id. ¶ 45. The Form 8-K stated that on April 10, 2020, concurrently with SCWorx's acceptance of a purchase order from RMH, SCWorx entered into a supply agreement with ProMedical (the "Supply Agreement"), pursuant to which SCWorx agreed to purchase and ProMedical "agreed to supply an aggregate of 52 million COVID-19 Rapid Testing Units over a six month period, comprised of 2 million units per week, at a per unit price of $13.00, commencing April 24, 2020." Id.
On April 17, 2020, given the new information about the purported test kit supplier, Hindenburg Research issued a report entitled "SCWorx: Evidence Points to its Massive COVTD-19 Test Deal Being Completely Bogus, Price Target Back to $2.25 Or Lower" (the "Hindenburg Report"). The Hindenburg Report concluded that, based on certain red flags, the deal was "completely bogus" and a "scam." Id. ¶¶52, 55. The Hindenburg Report stated that: (1) Schessel, the Company's CEO had "a checkered past," including pleading guilty to felony tax evasion charges and paying a judgement in a lawsuit alleging he submitted fraudulent expense reports; (2) ProMedical, the purported supplier of the tests, was "laden with red flags," including its CEO's being a convicted rapist who formerly ran another business accused of defrauding its investors and customers and the company was accused of "fraudulently mispresent[ing] itself" as an authorized seller of COVID-19 tests manufactured by a Chinese company Wondfo; and (3) RMH, as a "relatively unknown company . . . founded less than 2 years ago," did not appear capable of "com[ing] up with the upwards of the $35 million per week it has committed to purchasing from SCWorx." Id. ¶¶ 52-54.
In response to the Hindenburg Report, SCWorx's share price fell by almost 14% from its opening price on April 17, 2020 of $7.77 to close at $6.72. Id. ¶ 56. The stock price continued to fall in the coming trading days by $0.97 or about 15% from the closing price on April 17, 2020, to close at $5.75 per share on April 21, 2020, on unusually heavy trading volume. Id.
On April 21, 2020, the SEC ordered the suspension of trading in SCWorx securities, effective April 22, due to "questions and concerns regarding the adequacy and accuracy of publicly available information in the marketplace concerning SCWorx including (1) press releases and other publicly disseminated statements, since at least April 13, 2020, about SCWorx's agreement to sell COVID-19 tests, and (2) SCWorx's current report on Form 8-K filed on April 16, 2020, concerning SCWorx's agreement to sell COVID-19 tests." Id. ¶¶ 14, 57.
On April 30, 2020, the defendants filed a Form 8-K with the SEC, in which the defendants admitted that ProMedical could not supply the required tests, and consequently, the purchase order and supply agreements were terminated. Id. ¶¶ 15, 58. The Form 8-K also disclosed that a board member, Robert Christie, had resigned from the board of directors on April 23, 2020. Id. ¶ 59. In a subsequent Form 8-K, on May 5, 2020, SCWorx announced that on April 29, 2020, the employment of James (Tad) Schweikert at the Chief Operating Officer was terminated by mutual agreement. Id. ¶ 60.
The first complaint in this action was filed on April 29, 2020, and after appointment of the lead plaintiff, the CCAC was filed on October 19, 2020. See ECF Nos. 1, 45. The plaintiff alleges that between April 13, 2020 and April 17, 2020, inclusive, the defendants' statements about its COVID-19 rapid test kits deal were materially false and misleading, causing the plaintiff and other class members to suffer significant losses, because the defendants knew or recklessly disregarded that: (i) SCWorx's customer, RMH, was "unlikely to be able to pay for or handle the hundreds -of millions of dollars in test kit orders provided for in the purchase order; and (ii) SCWorx's COVID-19 test kit supplier, ProMedical, could not supply the quantity or quality of tests described in the purchase order or supply agreement." Id. ¶¶ 16-17.
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiff's favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007).[1]The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). The Court should not dismiss the complaint if the plaintiff has stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While the Court should construe the factual allegations in the light most favorable to the plaintiff, "the tenet that a court must accept as true all of the...
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