A former CEO of Cognition Therapeutics Inc., a biotech firm based in Purchase, is suing the company he helped grow for $4 million for alleged failure to honor a stock option plan.
Harold T. Safferstein, of Mount Lebanon, Pennsylvania, claims that mismanagement and negligence by company officials resulted in a less remunerative payout on his stock options.
Safferstein served Cognition for more than 12 years, the complaint states, only to see the company fail “to honor its contractual obligation to provide for the cashless exercise of his stock options.”
Cognition spokeswoman Aline Sherwood said the company does not comment on ongoing litigation.
Cognition was formed in 2007 as a  fledgling startup. Now it is in the clinical stage of developing treatments for degenerative diseases such as Alzheimer’s and macular degeneration.
Safferstein says he worked without compensation and served as the de facto CEO when he joined the company in 2007. In 2010, he was formally named CEO.
He says he accepted a “comparatively low salary” in exchange for stock options, a common practice in the industry, with the understanding that “if Cognition succeeded financially, so would he.”
In 2016, he was moved down to senior vice president, with the primary task of transitioning a new CEO. In 2019, he agreed to step down as an employee and work as an outside consultant. Last year, the consulting contract was terminated.
He had been awarded options for 547,563 shares, according to the complaint.
About six months after Safferstein stopped consulting, Cognition had its initial public offering of stock, listing shares on the Nasdaq Global Market at $12 per share.
There are typically two ways to exercise stock options, the complaint states.
The option holder can pay the company for shares at a previously set price. The holder must also pay fees and commissions on the transaction, according to the complaint, and taxes on the difference, or profit, between the set price and the current price.
The “cashless” method allows the holder to sell a portion of the shares though a broker to cover the set price and taxes.
Both methods yield the same result but the cashless method is more beneficial, the complaint states, because the holder does not have to acquire a large amount of cash upfront to make the deal work.
Cognition had to offer the cashless method, according to the complaint, but it had not set up a system and allegedly delayed doing so.
Safferstein was running out of time. He had to exercise his options by March 2021, a year after his termination, the complaint states, “or risk having them expire and be declared void by Cognition.”
He took out a line of credit on his home to pay for the shares and he redeemed them in 17 transactions over a four month period.
Meanwhile, the share price had fallen.
Safferstein claims that he would have owned nearly $7 million in Cognition stock if he had been allowed to use the cashless method around the time of the initial public offering. Instead, the delays resulted in stock worth less than $2.5 million.
Safferstein accuses his former company of breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence.
He is represented by Manhattan attorneys Tibor L. Nagy Jr., William H. LaGrange and Gregory L. Tuttle.
