A lawsuit filed in a California federal court alleges that Roanoke-based Luna Innovations Inc., its former chief executive and others violated federal securities laws with false and misleading statements to investors about company transactions.
Meanwhile, multiple law firms have announced that they are looking for clients to join the proposed class action that plaintiff Eyad Karzoun brought through his Los Angeles-based attorney.
The case adds to the multiple issues that Luna is facing after it announced on March 12 that it was indefinitely delaying its fourth quarter and annual reports, having discovered transaction discrepancies that render its second- and third-quarter reports unreliable. The company’s president and CEO, Scott Graeff, retired 12 days later
[Disclosure: Quinn Graeff, who is married to Scott Graeff, is a member of the Cardinal Productions Inc. board of directors. The Graeffs are also contributors to Cardinal News. Neither board members nor donors have any influence or say in news decisions; see our policy.]
Luna, a fiber-optic sensing and monitoring company trading on the Nasdaq Stock Market, announced this week that Nasdaq had informed the company that it is out of compliance with its reporting rules and that it could be delisted later this year.
Graeff was a 21-year Luna employee who spent the last seven as president and CEO. The suit also identifies two chief financial officers — former CFO Eugene J. Nestro and current CFO George Gomez-Quintero — as defendants.
A woman answering the phone at the Rosen Law Firm, which is representing Karzoun, said the firm would not comment. A message sent to a personal email of Graeff’s was not returned. A Luna Innovations spokeswoman said the company cannot comment on legal matters, nor could it comment on the Nasdaq letter.
In a case filed April 1 in the Central District of California, Karzoun alleges that he acquired publicly traded Luna securities between Aug. 11, 2023, and March 25, 2024.
According to the lawsuit:
The company on Aug. 10, 2023, filed its second quarter report, and on Nov. 14, 2023, filed its third quarter report. Both Graeff and Nestro signed federally required certifications vouching for their accuracy, along with disclosures about changes to Luna’s internal control over financial reporting, and fraud disclosure.
In both reports, the CEO and CFO “concluded that … our disclosure controls and procedures were effective,” according to the suit.
Both statements, however, were “materially false and misleading at the time [they were] made because the Company lacked effective internal controls, as a result of improper revenue recognition,” the suit alleges.
In a March 12 filing with the federal Securities and Exchange Commission, Luna reported that an audit committee from its board of directors found that those statements were unreliable, and that it had found “material weaknesses in its internal control over financial reporting.” In a separate filing, it informed the SEC of its fourth quarter and annual report delays.
Karzoun’s suit alleges that Graeff, Nestro and Gomez-Quintero were:
- directly or indirectly involved in oversight or implementation of Luna’s internal controls;
- aware of or “recklessly disregarded” the false and misleading statements issued about the company, and/or
- approved or ratified those statements, violating federal securities laws.
The company itself was responsible for the three officers’ actions, the lawsuit states.
The defendants “had actual knowledge of the material omissions and/or the falsity of the material statements set forth above, and intended to deceive … or, in the alternative, acted with reckless disregard for the truth when they failed to ascertain and disclose the true facts in the statements made by them or any other of [Luna’s] personnel to members of the investing public,” the suit states.
The result was “artificially inflated” Luna share prices, the suit alleges.
The stock was trading at $7.73 a share on Aug. 11, and between $6 and $8 this year. It was at $6.44 a share on March 11 and dropped to $4.02 the next day, with a steady downward trend since. It traded at $2.81 a share at close of business Wednesday.
Karzoun’s suit asks for damages to be determined later. The plaintiff, through his lawyer, said he “believes that there are hundreds, if not thousands” of potential class members.
Luna on March 25 selected Richard Roedel, its board chairman since 2010, as interim executive chairman and interim president.
Comments are closed.