A shareholder is suing Utah-based Zagg Inc., alleging the company failed to disclose that CEO Robert G. Pedersen II used 50 percent of his shares as collateral and that the company had a “secret succession plan” to replace him prior to his Aug. 17 resignation.
The proposed class-action suit alleges that shareholders bought Zagg shares at artificially high prices because the company failed to reveal Pedersen had put at risk of margin calls millions of dollars worth of his shares of the successful Utah company, which makes accessories for cellphones and other electronic devices.
Pedersen resigned after he sold shares twice in response to margin calls, which are common when the price of shares pledged as collateral fall below a certain level. The company’s shares declined 13 percent immediately after Pedersen’s resignation, harming shareholders, the suit says.
Prior to that, the company failed to disclose information about Pedersen’s shares and a succession plan, even as it offered financial information in reports and press releases that was “materially false and misleading,” according to the complaint filed Thursday in U.S. District Court for Utah.
Jeff Jones, attorney for Zagg, said Friday that “the claims are without any factual or legal basis, and the company will defend them very vigorously.” Attorneys for the single shareholder named in the lawsuit, James H. Apple of Brainerd, Minn., declined to comment.
The suit says Zagg should pay shareholders for their losses, as well as interest, attorney fees and other costs.
Pedersen resigned from the company he co-founded in the wake of a second margin call that required him to sell 515,000 shares of common stock for $4.2 million, which followed a sale in December of $2.6 million worth of shares. Subjecting such a high number of shares to a possible margin call could possibly lower the share price if they were dumped on the market at one time.
“Realizing that Pederson had recklessly put his position as CEO at risk at the expense of investors, the company began a succession plan beginning in December of 2011 to remove Pedersen as CEO,” the lawsuit says.
The company hired Randall Hales in December as president and chief operating officer. He subsequently took over many day-to-day duties of Pedersen and was named interim CEO when Pedersen resigned.
The lawsuit says the information on the stock pledges should have been disclosed before a vote that re-elected Pedersen to the board, and should have been included in company financial statements.
In August, Zagg’s shares dropped 22 percent after the company reported financial results and guidance that disappointed some analysts.
The lawsuit seeks to include as plaintiffs anyone who bought or received Zagg shares from Feb. 28 to Aug. 17.
Named in the lawsuit in addition to Zagg, Pedersen and Hales, are CFO Brandon T. O’Brien and directors Edward D. Ekstrom, Shuichiro Ueyama and Cheryl A. Larabee.
Zagg’s shares rose 8 cents to close Friday at $8.39 on the Nasdaq exchange. Its 52 week high was $14.57.