VirnetX CEO Gets Morgan Stanley Margin Call on Apple Case

For Kendall Larsen, the chief executive officer of VirnetX Holding Corp., the court decision on a patent dispute with Apple Inc. that erased 65 percent of his company’s market value last week also had a personal cost.

Larsen, VirnetX’s largest stockholder, disclosed in a regulatory filing yesterday that Morgan Stanley forced a sale of 1.75 million shares he had pledged to secure a personal loan.

The sale underscores the risks executives take when they use company shares as collateral to borrow money. VirnetX, which gets all its revenue from patent licensing, is subject to wide price swings of its stock, with some 280 occasions in the past five years in which the shares moved up or down by 4.5 percent or more in a day, according to data compiled by Bloomberg.

When shares fall, banks will request additional collateral for the secured loan, and, if the price decline continues, will sell the pledged stock to recoup their loan.

VirnetX plunged 44 percent on Sept. 16, after a U.S. appeals court threw out a $368.2 million patent-infringement damage award the company won against Apple over virtual private networks. On the same day, Larsen pledged “additional shares” to Morgan Stanley “as additional security with respect to the credit line,” according to a Schedule 13D filed yesterday with the U.S. Securities and Exchange Commission.

Stock Pledge

As the shares continued to drop over the next two days, Morgan Stanley on Sept. 18 sold 1.75 million shares at an average price of $4.46 each, for a total of $7.8 million. The shares reached a 52-week intraday low that day of $4.18, down from a $25.48 high in March.

Following the sale by Morgan Stanley, there was no remaining balance on Larsen’s credit line and the borrowing facility was terminated, according to yesterday’s filing.

When asked for further information, Greg Wood, a spokesman for Zephyr Cove, Nevada-based VirnetX, referred to the SEC filing.

Larsen ranked as VirnetX’s largest shareholder with about an 18.6 percent stake as of March 20, comprising about 9.9 million shares and options, according to the company’s most recent proxy statement. He had pledged about 1.4 million shares with a market value of about $20.2 million as security for a personal line of credit, the filing shows.

Apple Decision

Larsen originally reported in September 2012 that he had pledged 1 million company shares to Morgan Stanley Smith Barney to secure a personal line of credit of as much as $5 million.

VirnetX was founded almost a decade ago by former workers at Science Applications International Corp., a government contractor. VirnetX has said the technology was developed for the U.S. Central Intelligence Agency, which was seeking new ways of secure communications during the first Gulf War.

VirnetX had been seeking to collect the damage award from Apple since a jury in 2012 found Apple’s products infringed four patents related to secure communications. While the U.S. Court of Appeals for the Federal Circuit upheld infringement claims last week against Apple’s VPN on demand, the three-member panel rejected how the damage award was calculated.

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