Potential Implications of the COVID-19 Pandemic for Securities and Derivative Litigation May 14, 2020 Agenda 1 Will Securities Lawsuits Come? 2 COVID-19 Bear Market 3 Disclosure Issues 4 Accounting Issues 5 Issues in Potential Economic Analysis for Loss Causation and Damages 6 Fiduciary Duties and Best Practices 7 Professional Profiles COVID-19: Implications for Securities Litigation – 5/14/20 – Page 2 Will Securities 1 Lawsuits Come? COVID-19: Implications for Securities Litigation – 5/14/20 – Page 3 Will This Time Be Different? “The underpinnings of the COVID-19 crisis are fundamentally different, the lawyers said, than those of the 2008 crash.…Shareholders sued to prove that banks and other defendants deliberately misrepresented not just the quality of the securities but also the risk they faced from exposure to toxic mortgage-backed certificates and more complex instruments referencing them. This time, said Toll, Leviton, Bleichmar and Darren Robbins of Robbins Geller Rudman & Dowd, there’s no analogous systemic deception. Fraud claims will be idiosyncratic….” Alison Frankel, “Shareholders’ class action lawyers: We’re not rushing to bring COVID-19 cases,” Reuters, 3/17/20 COVID-19: Implications for Securities Litigation – 5/14/20 – Page 4 Will This Time Be Different? “…[P]laintiffs’ lawyers I spoke to said they have no intention of filing reflexive class actions alleging that companies slammed by the pandemic failed to provide adequate risk warnings to shareholders. ‘Trying to take advantage of a worldwide tragic epidemic disaster?’ said Steven Toll of Cohen Milstein Sellers & Toll. ‘I just hope those suits aren’t brought.’” Robbins and Leviton said they do expect companies to disclose bad news in the midst of stock market volatility, just as they did in the 2008 crisis, in order to use broad declines in stock indexes to camouflage investor reaction to their disclosures. More than 90% of the companies whose shares drop in a marketwide sell-off haven’t engaged in fraud, Robbins said. But the end of a bull market may expose executives who have relied on misrepresentations to buoy their share prices.” Alison Frankel, “Shareholders' class action lawyers: We’re not rushing to bring COVID-19 cases,” Reuters, 3/17/20 COVID-19: Implications for Securities Litigation – 5/14/20 – Page 5 Will This Time Be Different? “While there may be more volatility during a global crisis, companies revealing corrective disclosures will see their stocks continuing to move downward ‘net of market- or industry related volatility,’ according to Bernstein Litowitz Berger & Grossmann LLP partner Salvatore Graziano. ‘We saw this in the 2008 crisis on a company-by-company basis where we had no issue demonstrating loss causation… Bottom line, if you are committing fraud, you should be more worried now than ever,’ Grazinao said. ‘There will be no place to hide in market volatility.’” Dean Seal, “As Investor Suits Tick Up, Loss Causation May Be A Hard Sell,” Law360, 5/4/20 COVID-19: Implications for Securities Litigation – 5/14/20 – Page 6 Annual Federal and State Securities Class Action Filings 2005–2020 Credit Crisis Filings 268 Other Core Federal Filings 238 224 214 204 182 177 183 101 157 152 158 39 146 142 135 120 50 12 268 238 204 214 182 183 152 158 138 143 142 123 123 54 120 107 54 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 - Q1 Note: Cornerstone Research began tracking state filings in 2010. Filing counts before 2010 include only federal filings. Credit crisis filings refer to filings with claims related to the 2008 credit crisis. COVID-19: Implications for Securities Litigation – 5/14/20 – Page 7 Securities Lawsuits Have Nevertheless Been Filed • Douglas v. Norwegian Cruise Lines, No. 20-cv-21107 (S.D. Fla. Mar. 12, 2020) (accusing company and two executives of falsely downplaying seriousness of COVID-19 in public filings and communications with prospective customers) • McDermid v. Inovio Pharm. Inc., No. 20-cv-1402 (E.D. Pa. Mar. 12, 2020) (alleging that Inovio’s CEO made false and misleading statements about a potential vaccine for COVID-19) • Drieu v. Zoom Video Communications, Inc., No. 20-cv-02353 (N.D. Ca. April 7, 2020) (asserting claims under Sections 10(b) and 20(a) against Zoom, its CEO and CFO for allegedly false and misleading statements about the Company’s privacy and security measures) • Wandel v. Gao, No. 20-cv-03259 (S.D.N.Y. Apr. 24, 2020) (accusing Phoenix Tree, a company that leases and operates residential properties in China, of misleading investors about risk of impact of COVID-19) • Yannes v. SCWorx Corp., No. 1:20-cv-03349 (S.D.N.Y. Apr. 29, 2020) (claiming SCWorx misled investors by announcing it was able to sell millions of COVID-19 rapid testing kits when its supplier had misrepresented its operations and the buyer it was working with was unable to support the purported volume of orders) COVID-19: Implications for Securities Litigation – 5/14/20 – Page 8 The Wave of Litigation May Be Delayed Number of Days 110 102 100 90 80 70 60 49 50 2005–2019 Median Filing Lag 40 36 (21 Days) 28 30 30 27 25 19 21 19 20 15 11 12 11 12 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 COVID-19: Implications for Securities Litigation – 5/14/20 – Page 9 COVID-19 Bear Market: Parallels with and 2 Differences from the Credit Crisis COVID-19: Implications for Securities Litigation – 5/14/20 – Page 10 The VIX Index Measures Expected Volatility VIX Index: 1/1/00 – 5/8/20 VIX Index 90 80 The United States 70 declares a State of Emergency due to coronavirus concerns 60 50 Lehman Brothers files for 40 bankruptcy 30 20 10 0 1/1/00 1/13/02 1/26/04 2/7/06 2/21/08 3/5/10 3/17/12 3/31/14 4/12/16 4/25/18 5/8/20 Source: Thomson Reuters Note: The "VIX Index" axis reflects the daily close prices of the CBOE Market Volatility Index. COVID-19: Implications for Securities Litigation – 5/14/20 – Page 11 Extreme Volatility Is Driven by Public Health Uncertainty Number of Cases VIX Index 1,500,000 90 VIX 80 US 70 1,000,000 60 50 40 500,000 30 New York 20 Italy China 10 South Korea 0 00 1/22/201/22/20 2/1/20 2/12/20 2/23/20 3/4/20 3/15/20 3/26/20 4/5/20 4/16/20 4/27/20 5/8/205/8/20 Timeline -10 1/23/20 1/30/20 2/21/20 3/8/20 3/11/20 3/13/20 3/16/20 3/29/20 -20 Wuhan, WHO Italy places Italy places WHO US US US social -500,000China declares a 10 towns all 60 million declares a declares announces distancing -30 placed public health under residents on pandemic national social guidelines under emergency of quarantine lockdown emergency distancing extended to quarantine international guidelines April 30 -40 concern -50 Source: Johns Hopkins University Center for Systems Science and Engineering; The New York Times; Business Insider; Yahoo News COVID-19: Implications for Securities Litigation – 5/14/20 – Page 12 Uncertainty •Then: Who holds “toxic” assets? How many homeowners will default? How low will housing prices go? •Now: When and how will economic life start returning to normal? How will various sectors be affected? •Now and Then (before the stimulus was passed): Uncertainty over government policy responses and availability of bank financing compounds uncertainty as to who can weather the storm. •Now and Then (after the stimulus was passed): How will the trillions of fiscal and monetary stimulus impact the economy and particular issuers? COVID-19: Implications for Securities Litigation – 5/14/20 – Page 13 Liquidity Crunch •Then: Credit dried up as financial institutions at the center of the crisis stopped lending. •Now: Revenues dried up in the aftermath of public health policy decisions and consumer fears. •Now: Will some financial institutions scale back lending in response to rising uncertainty and credit losses? •Now: To what extent did various systematic trading strategies and other trading disruptions contribute to market illiquidity? COVID-19: Implications for Securities Litigation – 5/14/20 – Page 14 Industries Have Been Affected Differently S&P 1500 and Select Industry Indices 2/19/20 – 5/8/20 10% 0% Retailing Healthcare -10% S&P 1500 -20% Real Estate Hotels, Restaurants & Leisure -30% Energy -40% -50% Airlines -60% -70% 2/19/20 2/26/20 3/5/20 3/13/20 3/21/20 3/29/20 4/6/20 4/14/20 4/22/20 4/30/20 5/8/20 Source: Refinitiv Note: All sector indices, are pegged to 0% on 2/19/20, which is the day that the S&P 1500 reached its maximum value. COVID-19: Implications for Securities Litigation – 5/14/20 – Page 15 3 Disclosure Issues COVID-19: Implications for Securities Litigation – 5/14/20 – Page 16 A. Forward-Looking Statements The Private Securities Litigation Reform Act (“PSLRA”) provides for a “safe harbor” from liability for certain forward- looking statements: Identified as forward-looking and accompanied by “meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement”; or They are “immaterial”; or Where plaintiff fails to prove that the statements were made with actual knowledge that they were false or misleading. The “bespeaks caution” doctrine is a judicially created doctrine that protects issuers from securities fraud claims based on forward-looking statements if those statements contain adequate risk disclosures to caution readers about specific risks that may materially impact the forecasts.