A Medical Device Daily

Robert “Skip” Cummins, former CEO of Cyberonics (Houston), filed a defamation lawsuit Friday against SunTrust Banks (Atlanta) and two analysts for comments related to a stock option grant he received a day before the device maker’s shares soared 78%.

Cummins — who resigned last November following a company probe into stock option grants (Medical Device Daily, Nov. 21, 2006) — filed his lawsuit in Manhattan federal court against SunTrust and two analysts, Jonathan Block and Amit Hazan. He claims the analysts defamed him by suggesting a June 15, 2004 grant of 150,000 stock options may have been illegal.

The grant was awarded the same day an FDA advisory panel recommended approval of Cyberonics’ implantable VNS Therapy device for the application of treatment-resistant depression. The device already was approved to treat epilepsy.

Cyberonics shares jumped $15.23 to $34.81 the following day — Cummins reaping an overnight profit of about $2.3 million.

Hazan alleged that Cyberonics timed its stock option grants to coincide with positive news that would likely boost the share price. The Securities and Exchange Commission began looking into the matter in June (Medical Device Daily, June 12, 2006).

Judson Graves, a partner at Alston & Bird in Atlanta, representing SunTrust and the analysts, said they will defend against the lawsuit.

“Amit Hazan and Jonathan Block have been two of SunTrust’s most talented and trusted analysts,” Graves said. “We’re confident their work will hold up under this or any other scrutiny... [W]e will focus on truth in our defense. We met with Mr. Cummins and his lawyers and nothing they said changed our minds.”

Block still works for SunTrust Robinson Humphrey (New York), a unit of SunTrust Capital Markets, while Hazan now works at CIBC World Markets, according to the complaint.

The complaint alleges that improper statements appeared in two June 2006 research reports and comments appearing in The New York Times and Houston Chronicle newspapers and on Bloomberg News.

Cyberonics’ compensation committee had unanimously recommended the grant in question May 28, and the board had postponed consideration of it on June 1, the complaint said.

“The June 15, 2004 options were not ‘backdated,” the complaint stated. “Defendants’ allegations falsely portrayed what really happened ... falsely described the nature of the options granted and as a result were severely damaging to Mr. Cummins professionally and personally.”

Cummins is seeking a jury trial and actual and punitive damages.

Cummins and CFO Pamela Westbrook resigned last November, when Cyberonics said it would restate six years of results after discovering errors in its accounting for option grants between 1999 and 2003 (MDD, Nov. 21, 2006).

A board shake-up earlier this year saw the election of dissident shareholders backed by billionaire investor Carl Icahn, who held a 9.8% stake in the company (MDD, Jan. 25, 2007).

In February, a class-action shareholders’ suit was filed against Cyberonics by law firm Goldman Scarlato & Karon in Conschohocken, Pennsylvania, on behalf of those who acquired Cyberonics’ publicly traded securities between Feb. 5, 2004, and Aug. 1, 2006. That complaint alleged that Cyberonics failed to disclose and misrepresented material information regarding FDA review and approval of a new use for the VNS device to treat depression, the marketability of the device and medical insurance payers’ coverage decisions for the device (MDD, Feb. 12, 2007).

Cyberonics shares surged $2.59, or 12%, to $24.17 the day Cummins’ resignation was reported. They have since fallen 24%, closing Friday down 33 cents at $18.45 on the NASDAQ.