June 28, 2024 Poor Governance Tanked Genomic Co.’s Stock, Investor Says
By Rae Ann Varona
Law360 (June 27, 2024, 4:13 PM EDT)– Poor corporate governance led to Sema4 Holdings Corp., now named GeneDx Holdings Corp., nixing hundreds of jobs and failing the NasdaQ requirement for common stock to close above $1 per share for 30 consecutive trading days, a derivative shareholder suit filed Tuesday against the genomics company’s top brass alleges.
In a 64-page complaint filed in a Connecticut federal court, investor Steven Scinto accused current and former company directors of painting an “unrealistic picture” as early as March 2022 that Sema4 was experiencing impressive growth in its core operations. He said that directors, for instance, touted in a press release on March 14 of that year, a 37% growth in its quarterly test volume for the fourth quarter of fiscal year 2021 compared to the same period the year prior.
Scinto said the claims turned out to be “far from true” as Sema4, on Aug. 15, 2022, announced it had to reverse $30.1 million of revenue due to a dispute with one of its commercial payors over potential recoupments of services, that its founder and then-CEO Eric Schadt was resigning, and that it was eliminating roughly 13% of its workforce.
“This unexpected news caused Sema4’s stock price to plummet by 33.3%, to close at $1.60 per share on August 16, 2022, damaging investors,” Scinto said in the complaint.
The suit – which asserts fiduciary duty breaches, unjust enrichment, and securities law violations between March 14, 2022, and Aug. 15, 2022 – alleges that it only got worse for the Stamford, Connecticut-based company, which Scinto said derived most of its revenue from women’s health and oncology diagnostic solutions.
He said directors announced on Nov. 14, 2022, that they were getting rid of the company’s reproductive health testing market by the end of that year, as well as its somatic oncology testing operations, reasoning that they were costing the company about $35 million per quarter. They also announced the closure of their Stamford lab, he said.
In January 2023, Sema4, which traded under the ticker symbol SMFR, came out with a press release announcing its name change to GeneDx, which trades under the symbol WGS.
The press release followed a “turbulent end to 2022,” which ended with the company receiving a notice of noncompliance from the Nasdaq Global Select Market on Dec. 28 after its stock failed to meet the minimum bid price of $1 per share for 30 consecutive business days, according to Scinto.
The company also conceded financial reporting weaknesses as recently as February, Scinto asserted. He pointed to its 2023 Form 10-K, which stated that the company “identified material weaknesses” in its “internal control over financial reporting” when preparing its legacy Sema4 financial statements as of December 31, 2020. The form stated that material weaknesses “remain unmediated as of December 31, 2023.”
Several of the defendants – Schadt, current CEO Katherine Stueland, and two of the company’s former chief financial officers, Isaac Ro and Richard Miao – are also defendants in a securities class action lodged in September 2022 accusing the company of making materially false or misleading statements during the same March to August 2022 period.
Scinto said that despite the class action, the current and former directors “have yet to remediate the material weaknesses in the Company’s internal controls creating continued opportunities to misreport and provide misleading information to investors in breach of fiduciary duties.”
Scinto’s lawsuit alleges breaches of fiduciary duties, unjust enrichment, waste of corporate assets, and violations of Section 14( a) and Section 1 0(b) of the Securities Exchange Act of 1934 and seeks compensatory damages, among other relief.
Sema4 was mentioned but not named as a defendant in a February 2023 lawsuit lodged in Delaware’s Court of Chancery by investors in special purpose acquisition company CM Life Sciences Holdings, who said they were misled before its take-public merger with Sema4. The investors said Sema4’s stock price tanked to under $0.50 per share since the deal’s completion in mid-2021, “reflecting the horrific deal solicited by defendants.”
Counsel for Scinto did not immediately respond to a request for comment. A representative for GeneDx declined to comment.
Scinto is represented by Fletcher Moore of Moore Law PLLC and Lee Squitieri of Sguitieri & Fearon LLP.
Counsel information for GeneDx was not immediately available.
The case is Scinto v. Schadt et al., case number 2:24-cv-01100, in the U.S. District Court for the District of Connecticut.
–Additional reporting by Jeff Montgomery. Editing by Vagas Asghar.