Class Action Claims Clover Health Investments Misled Shareholders, Violated Exchange Act

A class-action complaint was filed Friday in the Middle District of Tennessee against Medicare Advantage insurer Clover Health Investments and three Clover officials over allegedly representing their company in ways that inflated its common stock share price, only to deflate after a report claimed to reveal that such representations were misleading.

After a merger was completed Jan. 7 between Clover and Social Capital Hedosophia Holdings Corp. III (SCH), which is traded on the New York Stock Exchange under ticker symbol “IPOC,” Clover became a publicly traded company under “CLOV.” The IPOC/CLOV common stock traded at up to $17.45 per share during the class period (beginning Oct. 6, 2020, when the companies announced their merger), according to the complaint.

Less than one month later, Hindenburg Research published a report that claimed to “reveal how Clover Health and its Wall Street celebrity promoter, Chamath Palihapitiya, misled investors about critical aspects of Clover’s business in the run-up to the company’s SPAC go-public transaction last month.” Such purportedly “critical aspects” included failing to disclose that the Department of Justice actively is investigating Clover’s business model and software product, the Clover Assistant, concerning “at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals,” according to a Civil Investigative Demand obtained by Hindenburg, of which a partially redacted version was included in the report.

The complaint, via the Hindenburg report, argued further that Clover, along with SCH/Clover senior officials Palihapitiya, Vivek Garipalli, and Andrew Toy, misrepresented or failed to disclose that “much of Clover’s sales are driven by a major related party deal that Clover not only failed to disclose but took active steps to conceal” — referring to an alleged relationship between a third-party brokerage firm “controlled by” Hiram Bermudez, Clover’s head of sales. A former Clover employee reportedly told Hindenburg that it was estimated that about 68% of Clover’s total sales were driven by Bermudez. Bermudez actively tried to hide this relationship and quietly used his wife’s name in insurance filings, another former employee allegedly told Hindenburg.

The report detailed other findings, including that physicians interviewed by Hindenburg who have used Clover’s technology called the software were less than impressed, one even describing it as “embarrassingly rudimentary,” with a former employee reportedly stating that the doctors simply enjoy the payment of $200 per visit by Clover in exchange for using its software.

After the report, Clover common stock shares fell 12.3% between Feb. 3 and 4, which, according to the complaint, illustrates a loss of about $700 million in market capitalization.

The complaint included the individual defendants because they purportedly had the influence “and opportunity to prevent the issuance of these false statements or to cause them to be corrected.”

Plaintiff and Clover shareholder Timothy Bond claimed he was “damaged by the revelation of the Company’s material misrepresentations and material omissions” and that neither he nor any other putative class members would not have purchased the common stock at its price, or in the first place, had they known about the alleged misrepresentations “artificially and falsely” inflating the stock price.

The complaint specifically alleged violations of the Securities Exchange Act of 1934 and requested class certification and compensatory and punitive damages, among other monetary relief.

The plaintiff is represented by Branstetter, Stranch & Jennings and Block & Leviton.