A new federal lawsuit involving Roanoke-based tech company Luna Innovations has a new set of defendants: the company’s board of directors.
Previous lawsuits that have been consolidated into a class-action filing have focused on the company itself, its former chief executive and two former chief financial officers, accusing them of issuing incorrect financial statements that illegally raised Luna’s stock price. That number has fallen precipitously ever since the company announced accounting errors that prevented it from issuing quarterly and annual reports.
But a case filed Monday in California’s Central District Federal Court identifies six board members and one retired member, in addition to ex-CEO Scott Graeff and former financial officers Eugene J. Nestro and George Gomez-Quintero.
[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.]
The plaintiff is a Luna shareholder, Fred Hays. His suit accuses board members Warren Phelps, N. Leigh Anderson, David Chanley, Pamela Coe, Gary Spiegel and Mary Beth Vitale, as well as recently retired Richard Roedel and the three former executives, of colluding in a scheme that they either knew or should have known about.
Hays’ suit alleges that the executives and the board had the company repurchase 501,000 stock shares at “prices that were artificially inflated due to the Individual Defendants’ false and misleading statements” about their value.
Hays’ case is a so-called derivative action, which his lawyers filed on the company’s behalf. It alleges claims found in the class-action lawsuit, but it also asserts that the board failed to file its own claim on Luna’s behalf. The suit alleges that a built-in conflict of interest keeps the board from looking out for the company, and accuses it of wasting resources on expenditures including the stock buyback and legal expenses related to the previously filed cases.
“The Individual Defendants either benefited financially from the improper conduct, or received bonuses, stock options, or similar compensation from Luna that were tied to the performance or artificially inflated valuation of Luna, or received compensation that was unjust in light of the Individual Defendants’ bad faith conduct,” Hays says in his lawsuit.
Luna has reported in Securities and Exchange Commission filings and on its own website this year that financial statements dating to 2022 are unreliable, due to improper revenue recognition. Federal rules state that a company typically has to recognize its revenue when it has completed a service, not necessarily when it receives its payment.
The company failed three times this year to properly state its finances to the SEC, and noted in filings that its officers are unsure of when they will be able to do so. Its stock was trading at $2.11 a share at the end of business Wednesday, representing a drop of about 69% over the past year. It remains in danger of delisting on the Nasdaq Stock Market, due to its inability to produce financial statements.
An email asking for comment, sent to a Luna spokeswoman and a public relations firm that represents the company, was not answered Wednesday.
Luna develops and markets fiber-optic sensors and measuring tools for industries including infrastructure, aerospace, security, automotive, and oil and gas.
Graeff was president and CEO of the company for seven years, one-third of his career there. He resigned March 24. A special committee of board members and outside legal and financial advisors, formed at about the same time to investigate the company’s accounting issues, later found that Graeff had engaged in conduct that constituted “cause” under his contract, and the company canceled his severance payments and took back stock from him.
Graeff told Cardinal News in May that he strived at Luna to ensure that his decisions and conduct as a leader were consistent with his values.
Roedel, a longtime board member who became interim executive chairman and interim president after Graeff’s resignation, retired in July, citing health reasons, the company has reported. The company’s recently hired top executive, Kevin Ilcisin, is not a defendant in the new lawsuit.
Under Ilcisin, the company has taken out a line of credit with Chanley’s company, White Hat Capital Partners, that requires it to seek a sale, documents show. Chanley joined the board in December 2023, after White Hat invested $50 million in Luna.
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