Luna Innovations Inc. and three of its former executives have agreed to pay $7.3 million to shareholders who allege that they committed securities fraud.
In documents filed late Monday in a California federal court, Luna admitted no wrongdoing and denied all allegations in the class-action lawsuit, but agreed to settle it “solely to eliminate the uncertainty, burden, and expense of further protracted litigation” in a case that has stretched beyond a year.
For the plaintiffs listed in court documents — and any others who might still sign on to the class action — the possibility that the company’s financial situation could leave no funds available loomed over a judgment that could have been years away, according to their lawyer.
Luna shares were trading between $6 and $8 on the Nasdaq Stock Market before the company disclosed last year that accounting discrepancies led to multiple inaccurate quarterly financial statements and one incorrect annual report. Prices began a steady decline from there.
The fiber-optic sensing and monitoring company, recently delisted from Nasdaq, was trading Tuesday on the OTC Expert Market at 40 cents a share. Only broker-dealers and professional-level investors are allowed to view quotations there. With its departure from the tech-centric Nasdaq, it is no longer required to publicly disclose its finances.
“Luna has received a loan from its largest investor to keep it operating for the time being,” wrote plaintiffs’ attorney Lucas Gilmore. “If Lead Plaintiff were to continue litigating this case, and Luna became insolvent, then Lead Plaintiff faced the very real possibility that the Class would not recover anything.”
Monday’s unopposed motion asked the judge to preliminarily approve the settlement and the class, which would allow for a settlement notice to class members who wish to claim a portion of the settlement or object to it. A final hearing, likely to happen before year’s end, would end the matter.
Those who purchased Luna securities between May 16, 2022, and April 19, 2024, “suffered economic losses when the price of Luna securities declined as a result of a series of corrective disclosures between March 12, 2024, and April 25, 2024,” court filings allege. More than 30 million shares were outstanding at that time, the filing states.
Quarterly and annual statements released prior to March 2024 resulted in “artificially inflated” Luna share prices, the suit alleged.
The case centers on multiple company disclosures to the Securities and Exchange Commission that quarterly and annual financial reports were unreliable, with “material weaknesses in its [Luna’s] internal control.” Six quarterly reports and one annual report were never rewritten, and the company did not file any such statements with the SEC after fourth quarter 2023.
Luna’s SEC filings indicated that an investigation “identified accounting errors relating to revenue recognition” dating to 2022. Revenue recognition is an accounting principle that deals with determining precisely when revenue has been earned by a company. Federal law requires that revenue be recognized during the time period that products and services are delivered, not necessarily when payment is received.
Multiple lawsuits were consolidated into a class-action filing focusing on the company, its former chief executive and two former chief financial officers. The claim alleges that their incorrect financial statements illegally raised Luna’s stock price.
The suit identifies as defendants Luna’s then-president and CEO, Scott Graeff, and former financial officers Eugene Nestro and George Gomez-Quintero.
Graeff resigned in March 2024, shortly after the first SEC disclosures. A special committee of board members and outside legal and financial advisers, 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.
The plaintiffs alleged that Graeff, Nestro and Gomez-Quintero knew about the accounting issues or had “reckless disregard for the truth” at the time the plaintiffs purchased Luna stock, and that the company was responsible for its executives’ actions.
Documents that Gilmore filed late Monday include some of the Luna executives’ legal arguments in their own defense.
Gomez-Quintero argued that statements attributed to him, including certification of federal compliance and “general performance commentary,” were not proven to be false when he made them. Gomez-Quintero and Nestro argued that the suit presented no facts that they had “actual power or control over” anyone making “allegedly false statements” or “accounting decisions.”
Luna and Graeff contended that the complaint cited no confidential witnesses, insider stock sales or internal documents that would support “knowledge or recklessness,” nor did it allege that the executives “had access to information contradicting their public statements or that the nature of the misstatements was so obvious it would have been absurd for them to be unaware.”
Discovery had not been conducted yet, though plaintiffs’ investigators had interviewed six former Luna employees, according to the Monday filing.
Emailed messages left for a Luna spokeswoman and for Graeff were not returned by deadline Tuesday. Gilmore, the plaintiffs’ attorney, declined to comment.
A final order would also settle a related case that a Luna shareholder filed on the company’s behalf against certain board members and the former executives. The so-called derivative action contains claims found in the class-action lawsuit while asserting that the board failed to file its own claim on Luna’s behalf.
That suit, filed in September 2024, 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 fees related to the class action case. Meanwhile, Luna, under terms of a $15 million loan from investor White Hat Capital, continues to seek a sale or merger.