Ex-CEO Indicted for COVID-Related Fraud

What happens when, in the early, uncertain days of a burgeoning global pandemic, you tell investors that you have recurring orders for millions of rapid test kits for $35 million a week for the next six months?  Well, your stock price surges, of course.

But what if, before you made that announcement, you had reason to believe that you couldn’t actually obtain the tests after all?  Well, then the SEC halts trading of your stock due to “questions and concerns regarding the adequacy and of publicly available information” about your company.  And it only goes downhill from there.

SCWorx Corporation and its now ex-CEO Marc Schessel learned this lesson the hard way.  On Tuesday, May 31, 2022, the DOJ announced an indictment against Schessel for two counts of securities fraud.  According to the Government, in March of 2020, SCWorx’s price per share dropped from $2.11 to $1.56, and Schessel was under pressure to turn things around.  At the time, demand for COVID-19 testing kits was sky high, and there was a mad rush to source them wherever possible.  Through a broker identified only as Individual-1, SCWorx was connected with a “Supply Company” based in Australia that claimed it had access to COVID-19 testing kits from a manufacturer based in China identified only as “Manufacturer-1.”  The plan was for SCWorx to purchase and provide the testing kits to a “Purchasing Company” in New Jersey.  On April 9, 2020, Individual-1 sent an executed Supply Agreement to the Supply Company on behalf of SCWorx.  The same day, Schessel received a Purchase Order from the Purchasing Company for an initial order of two million tests totaling $35 million and a revolving order for two million tests per week over the next six months.

However, two days later, Schessel received information from Individual-1 that a dispute had arisen between the Supply Company and the Chinese manufacturer that meant SCWorx might not be able to obtain the testing kits to fulfill its purchase order.  Despite this knowledge, Schessel issued a press release on April 13, 2020, announcing that SCWorx had a committed purchase order and “anticipates receiving the first 2 million [COVID-19 Tests] within approximately two weeks.”  As the indictment explains, “[t]hese statement were false and misleading because at the time Schessel did not know – in light of the Supply Company’s Dispute with Manufacturer 1 – whether the Supply Company had any COVID-19 Tests permitted to be sold in the United States, let alone COVID-19 Tests that could be provided within two weeks.”  The indictment further alleges that Schessel made similar misrepresentations on an April 15 call with investors, in an April 16 8-K, and in an April 17 press release titled “SCWorx Confirms Plans for Distribution of COVID-19 Rapid Testing Units.”

In response to the April 13 press release, SCWorx’s price per share jumped from $2.25 to $12.02, an increase of 434%.  On April 21, the SEC halted trading in the company’s shares.

In addition to the indictment, the SEC has unveiled a parallel securities fraud action against Schessel and the company, which follows an earlier lawsuit brought by investors in April of 2020 that was settled in February of this year for $3.3 million.  In the SEC action, SCWorx will disgorge $471,000, plus prejudgment interest, and pay a penalty of $125,000.

This case demonstrates the Government’s ongoing commitment to combatting COVID-related fraud.  It also proves the ageless adage:  if it sounds too good to be true, it probably is.

As noted in nearly every DOJ press release, an indictment is merely an allegation, and the defendant is presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

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