Cardinal Sues Former Bank CEO for Collaborating with Activist

Cardinal Bankshares has filed a lawsuit against a former CEO of its bank on claims that he violated his contract by trying to sell the company without the board's blessing.

Cardinal alleges that Henry Logue also shared confidential information with Douglas Schaller, an activist investor who earlier this year embarked on a proxy battle against the Floyd, Va., company, according to a lawsuit filed late last month in the U.S. District Court for the Western District of Virginia.

The lawsuit alleges that Logue approached a potential acquirer during the 2011 American Bankers Association government without the board's permission.

Logue, who joined Cardinal in April 2010, was reportedly being groomed to replace Leon Moore, the company's chairman, president and chief executive. Logue abruptly resigned in May 2011 for undisclosed reasons. In the lawsuit, Cardinal claims that it terminated Logue's contract once it discovered that he had "breached his fiduciary duties," including an attempt to sell the company. Logue denied those claims before the board last year, according to the lawsuit.

"Logue's actions in discussing possible mergers, acquisitions and takeovers with the potential acquirer were detrimental to" Cardinal and Bank of Floyd, the lawsuit said. Cardinal has accused Logue of continuing to collaborate with Schaller, who runs Schaller Equity Partners in Winston-Salem, N.C., by providing confidential information about the company and management. The company is seeking more than $383,000 in damages, plus interest.

The proxy battle began brewing soon after Logue left the bank and has generated enough filings to form a novella of bickering between Cardinal's management and Schaller. The parties are divided by two different color proxies: a "white" proxy for shareholders to re-elect Cardinal's existing board or a "gold" proxy to elect three nominees by the Schaller-backed Coalition to Improve the Bank of Floyd. All of the coalition's nominees are residents of Floyd, the small western Virginia town that Cardinal serves.

In Cardinal's "white" proxy, the board repeatedly asks shareholders to throw away the "gold" proxy, providing a tree diagram to show how the coalition leads back to Schaller, calling it "the Schaller Coalition's spaghetti bowl." The color scheme has become a heated debate in all filings from both parties. Cardinal's annual meeting is May 22.

An assistant for Logue, who is now the president and chief operating officer at Merchants & Planters Bank in Raymond, Miss., said he was not available for comment.