Assessing Investment Risks Amid Regulatory Scrutiny: The Case of Semler Scientific

Investment risk is not merely a function of market volatility or earnings reports—it is increasingly shaped by the interplay of corporate governance failures and regulatory scrutiny. The case of Semler Scientific, Inc. (NASDAQ: SMLR) offers a stark illustration of how opaque governance and delayed disclosures can trigger cascading investor losses and litigation. Between March 2021 and April 2025, Semler Scientific faced a class-action lawsuit alleging that it concealed a Department of Justice (DOJ) investigation into potential False Claims Act violations, misleading investors who purchased its stock during this period [1]. The company’s stock price plummeted nearly 9.38% in February 2025 after disclosing the existence of a 2017 DOJ civil investigative demand (CID) and subsequent settlement discussions [2]. A second 9.88% drop followed in April 2025 when the $29.75 million settlement was announced [3]. These events underscore the critical role of transparency in maintaining investor trust and avoiding legal fallout.

Corporate Governance and the Semler Case

Semler Scientific’s governance structure, while formally robust, appears to have failed in practice. The company’s board underwent restructuring in 2023 under a governance agreement with investors Eric Semler and William H.C. Chang, which included expanding the board and appointing Semler as Chairman [4]. However, the delayed disclosure of the DOJ investigation suggests a disconnect between governance policies and executive accountability. The lawsuit alleges that the company discussed hypothetical False Claims Act risks while concealing the real, ongoing DOJ inquiry—a failure that highlights the limitations of procedural compliance without cultural integrity [1]. This case aligns with broader trends in investor litigation, where firms with strong governance frameworks still face lawsuits when leadership prioritizes short-term optics over long-term transparency.

Broader Litigation Trends and Regulatory Risks

The Semler case is emblematic of a larger shift in investor litigation. From 2023 to 2025, regulatory scrutiny has intensified across sectors, with a particular focus on ESG compliance, anti-corruption measures, and the management of insider information [5]. Private funds and public companies alike now face heightened risks from geopolitical volatility and evolving compliance standards. For instance, the rise of private credit markets has introduced new disputes over earn-outs and portfolio company valuations, while ESG-related litigation has surged as investors demand proof of sustainable practices [5]. These trends suggest that firms must not only adhere to legal requirements but also proactively communicate risks to avoid the reputational and financial damage seen in cases like Semler’s.

Lessons for Investors

For investors, the Semler Scientific case serves as a cautionary tale. Even companies with formal governance structures can falter when leadership fails to act ethically. Key takeaways include:
1. Due Diligence on Governance Culture: Assess whether a company’s governance policies are enforced at the executive level, not just documented in boardroom materials.
2. Monitor Regulatory Signals: Pay attention to indirect indicators of regulatory risk, such as unusual delays in disclosures or sudden shifts in stock price.
3. Litigation Preparedness: Understand the legal landscape—class-action lawsuits often follow material disclosures, and lead plaintiff motions (due October 28, 2025, in Semler’s case) can signal prolonged legal battles [1].

In an era where regulatory scrutiny is both a sword and a shield, investors must balance optimism with skepticism. Semler Scientific’s trajectory—from delayed disclosures to a $29.75 million settlement—demonstrates that the cost of governance lapses is rarely confined to a single quarter. As litigation trends evolve, the ability to distinguish between procedural compliance and genuine ethical leadership will become a defining factor in risk assessment.

Source:
[1] Semler Scientific Class Action Lawsuit - Law Offices [https://classactionlawyertn.com/semler-scientific-class-action-lawsuit-765/]
[2] Investor Alert: Robbins LLP Informs Investors that a Class Action Lawsuit Has Been Filed Against Semler Scientific, Inc. [https://www.easternprogress.com/investor-alert-robbins-llp-informs-investors-that-a-class-action-lawsuit-has-been-filed-against-semler-scientific-inc-302542298.html]
[3] Semler Scientific, Inc. Class Action [https://robbinsllp.com/semler-scientific-inc/]
[4] Board Composition and Governance Agreement between ... [https://contracts.justia.com/companies/semler-scientific-inc-4281/contract/827267/]
[5] Top Ten Regulatory and Litigation Risks for Private Funds in 2025 [https://www.privateequitylitigation.com/2025/05/top-ten-regulatory-and-litigation-risks-for-private-funds-in-2025/]