SED Settles Lawsuit With Ex-CEO

The Tucker, Ga.-based distributor will also issue 200,000 shares into a trust for Diamond's children, according to the SEC filing. Insurance carriers will pay $325,000 of the $2.1 million, according to SED.

Meanwhile, a group of shareholders claiming to represent 15 percent of the company's stock has sent public letters to the board of directors requesting that the company add independent directors and form an independent internal audit committee to investigate potential ethical violations.

The settlement with Mark Diamond was negotiated on behalf of SED by three independent board members, who were not subject to the suits, according to the SED filing. A third lawsuit, between Diamond and his mother, Jean Diamond, chairman and CEO of SED, was included in the settlement.

The lawsuits were filed after Mark Diamond was fired by the company as its CEO in July 2005. Mark Diamond had alleged he was fired in retaliation for his actions to investigate a shareholder complaint. As part of the settlement, neither party admits to engaging in wrongdoing or has any liability to the other parties.

"Management and the board of directors believe that settlement of these litigations will enable the company to more effectively move forward with its business plans without the distraction and disruption of these litigations," the company said in the filing.

The settlement does not mark the end of SED's troubles, however. In March, an investment firm filed a public letter with the SEC on behalf of itself and other shareholders claiming that they are "extremely dissatisfied" with the direction of the company.

"We decided to send this letter publicly as a last resort since we believe that not only are our significant concerns as shareholders being ignored, but that management and the Board of Directors (the "Board") are taking actions that are anti-ethical and opposed to the best interests of shareholders," according the letter, signed by Samuel Kidston, managing member of North and Webster LLC, based in Cambridge, Mass.

The shareholders feel that the composition and operation of SED's board of directors has negatively impacted SED's stock price, which was trading at $1.60 per share on Wednesday. In the last 52 weeks, the stock price has ranged from $1.02 to $1.80 per share.

The stock traded for as little as 33 cents in late 2005 after Diamond was fired as CEO, but it had traded for more than $10 per share as recently as May 1998. In the March 14 letter, the shareholders request that the board appoint two independent shareholders as directors.

Kidston spells out several concerns the shareholders have, including:

-- A $1.1 million loss in fiscal 2007 and an $18.6 million loss since the beginning of fiscal 2003 in the United States.

-- An alleged increased reliance on its credit facility.

-- Alleged failure to comply with a Fixed Charge Coverage Ratio covenant of its Wachovia loan agreement.

On April 24, Kidston sent board members another letter on behalf of the group of shareholders, stating they are unhappy with only a "terse, non-specific" response from SED to the March 14 letter.

"That more than a month has passed without a substantive response from the board is entirely unacceptable and confirms what we have always believed to be the case " that this Board is unwilling to address the significant concerns of its shareholders and now, more than ever, needs 'new blood' to ensure all actions by the company are taken in the best interests of shareholders," Kidston wrote in the April 24 letter.

"Interactions between us and SED that have been counterproductive at best and, at worst, borderline confrontational, have only reaffirmed this belief in the underlying lack of respect on the part of the company for the significant concerns raised by shareholders," the letter continued.

Executives at SED and North and Webster declined to comment. Mark Diamond could not be reached for comment on the settlement.