Roanoke's Luna Innovations accused in fraud lawsuit

A newly filed lawsuit accuses Roanoke technology company Luna Innovations and top executives of defrauding shareholders, who now seek compensation for paying what they describe as inflated prices for its stock.

A California federal court is handling the lawsuit amid a series of adverse events, including a stock selloff and the CEO's departure, to have disrupted Luna during the past month. Luna, once a corporate success story dating to Roanoke's courtship of high-tech businesses in the early 2000s, disclosed irregularities in its financial reporting March 12.

The company said on that date that a special board committee assisted by outside legal and financial advisers had decided to examine "certain transactions for which revenue was recognized in the second and third quarters of 2023 that did not qualify for revenue recognition under U.S. generally accepted accounting principles."

The lawsuit, dated April 1, accuses Luna, former CEO Scott Graeff, Chief Financial Officer George Gomez-Quintero and a former CFO of violating the anti-fraud provisions of the Securities and Exchange Act of 1934, which governs securities transactions between retail investors. It alleges that the fiber optic-based technology company filed false and misleading financial records for the second and third quarters of 2023 with the U.S. Securities and Exchange Commission on which hundreds, even thousands, of shareholders relied to their detriment when the share price tanked. They need to be made whole, the lawsuit said without specifying how much money they seek.

Each executive defendant "was aware of or recklessly disregarded the fact that the false and misleading statements were being issued concerning the company ... and/or ... approved or ratified these statements in violation of the federal securities laws," according to the lawsuit.

Luna joined the Roanoke business community in support of two major economic development initiatives, the Carilion Biomedical Institute, funded by Carilion Clinic, Virginia Tech and University of Virginia, and Riverside Centre for Research and Technology, a proposed business park, in 2005. The company, then led by founder Kent Murphy, committed to move its headquarters from Blacksburg to a new $8 million office and laboratory complex planned on South Jefferson Street. Luna's arrival gave credence to a vision formed by leaders in business, government, education and health care that Roanoke could create a cluster of high-tech employers in the Reserve Avenue area. That vision did not materialize as planned along Reserve, but the bonds that were formed later led to construction of the separate medical school and research institute there today.

Formed in 1990, Luna went public the next year, by which time Carilion was a significant shareholder. Luna later left the office tower for a downtown Roanoke address where it remains. It has reported yearly profits for at least the past five years, though 2023 numbers are not yet out. It employs 375 people in 14 locations, according to its website.

Describing its lines of business in a 2023 filing, it said it provided fiber-optic test, measurement and control products for the telecommunications and photonics industries, and furnished fiber-optic sensing solutions that measure and monitor materials and structures to such industries as aerospace, automotive, oil and gas, security and infrastructure.

On Dec. 21, the company reported the receipt of a $50 million investment by a New York private equity firm White Hat Capital Partners. Declaring the company was "thrilled" by the new funding, Graeff said in a press release that executives used part of the money to buy a UK-based firm in its industry, Silixa.

Then in mid-March, Luna announced through an SEC filing that it would need to revise financial statements issued last year and that it would miss a deadline to file new statements. Its board accepted Graeff's retirement decision March 25, but added in a public filing that it had considered terminating him "with or without cause."

Graeff, 57, earned a base salary of $450,000 in 2022, the latest year for which information has been released. In the wake of his retirement, he agreed to stay on to assist in resolution of the issues in return for severance and stock benefits. The company said it could claw back those benefits in the event it determines Graeff had breached his obligations to the company.

Soon after, Eyad Karzoun, who is identified in court papers only as a shareholder, sued Luna through a Los Angeles attorney. The suit is a proposed class action that could be opened to people who bought company stock between Aug. 11, 2023, and March 25, 2024, excluding Luna employees and their family members.

Shortly after the lawsuit reached the docket of the U.S. District Court for the central district of California, the NASDAQ warned Luna of the possibility it would remove its shares from the stock exchange for failing to file a timely annual report. It said no decision would occur before June.

Shares of company stock have fallen 56% since a month ago and closed Wednesday at $2.77. The shares were worth more than $10 apiece early last summer.

Jeff Sturgeon (540) [email protected]