Class Action Alleges Luna Duped Investors With False Quarterly Revenue Reports

Plaintiff Lee Thompson seeks to recover “compensable damages” caused by Luna Innovations’ violations of the Securities Exchange Act on behalf of himself and others who owned Luna stock between May 2022 and April 19, said his securities fraud class action Wednesday (docket 2:24-cv-04068) in U.S. District Court for Central California in Los Angeles. Thompson alleges that the fiber-optic company, former CEO Scott Graeff and former Chief Financial Officers Eugene Nestro and George Gomez-Quintero made “materially false and misleading statements” about the company’s performance during the class period. The financial statements that Luna and its top executives issued for the first three quarters of 2022 and for Q1 of 2023 failed to disclose that they contained “unearned revenues that should not have been recognized,” and that the company would need to restate those financial statements, said the complaint. The reports also failed to mention that Luna’s disclosure controls and procedures didn’t provide “reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,” it said. The statements also omitted mention that Luna’s disclosure controls and procedures weren’t effective, and that as a result, the company’s statements about its business, operations, and prospects “were materially false and misleading and/or lacked a reasonable basis at all times,” it said. The truth began to emerge March 12, after the markets closed, when Luna filed an 8-K with the SEC announcing that it would need to restate its financial statements for the second and third quarters of 2023 because the company “improperly recognized” revenue during those periods, the complaint said. The same day, Luna also filed notice that its annual 10-K report would be delayed so that a special committee of its board could investigate the circumstances under which the faulty quarterly financial statements were released to the investing public in the first place, it said. The notice of the late 10-K disclosed that the company anticipated reporting “material weaknesses in internal controls related to evaluating customer arrangements for proper revenue recognition and other controls,” and that the company would be “working to remediate these issues.” The news sent Luna shares plummeting nearly 36% the next trading day, March 13, said the complaint. Then on March 25, after the markets closed, Luna filed another 8-K with the SEC disclosing that CEO Graeff had retired, effective immediately, said the complaint. Upon information and belief, it said, defendant Graeff “retired as a result of the misconduct detailed in this complaint.” In early May came the termination, for cause, of Chief Technology Officer Brian Soller and the resignation of CFO Gomez-Quintero, it said. Luna also disclosed that CEO Graeff’s misconduct had triggered clawback provisions in his separation agreement, including the cancellation of all future severance payments, it said.