* Lawsuit arose after test data mishandled
* Sequenom shares fell 75.7 pct after initial disclosure
* Sequenom to issue shares; insurance proceeds fund accord
* Shares of Sequenom rise (Adds Sequenom comment, updates share movement)
By Jonathan Stempel
NEW YORK, Jan 15 (Reuters) - Sequenom Inc SQNM.O, a diagnostics testing and genetic analysis company, said it would pay $14 million to settle an investor class-action lawsuit arising from mistakes in the development of a prenatal test for Down Syndrome.
The lawsuit followed a 75.7 percent plunge in Sequenom shares last April 30, after the company said it would delay the launch of the SEQureDx prenatal test, citing "mishandling" of research and development test data by employees.
The U.S. Securities and Exchange Commission later opened a probe into the matter, and the San Diego-based company has held talks with federal prosecutors in California and the FBI in connection with their respective investigations.
Spokesman Ian Clements said these probes are continuing, and the company will cooperate with any government agency.
Sequenom said insurance proceeds will fund the settlement, and that it will issue shares equal to 9.95 percent of the number outstanding to the plaintiffs. It did not admit liability. The lead plaintiff is the Los Angeles City Employees' Retirement System pension fund.
Shares of Sequenom were up 20 cents, or 4.8 percent, at $4.35 in morning trading on the Nasdaq. They closed at $14.91 last April 29, before problems with the test were revealed.
"We view this as a clear positive for the stock," Barclays Capital analyst C. Anthony Butler wrote. "This has been a major overhang and an impediment to raising capital, which the company needs to do this year."
Clements agreed that Sequenom needs to raise capital "at some point in 2010," and that settling the lawsuit will make it easier to raise equity if the company chooses to do so.
Down Syndrome is a chromosomal disorder that can result in impaired cognitive ability and abnormal facial features.
In September, following an independent investigation, Sequenom said it had determined that test data "included inadequately substantiated claims, inconsistencies and errors," some of which were reported publicly "due to the deficiencies in our disclosure controls and procedures."
At the time, the company did not say whether it believed data was defective because of carelessness or because it was fabricated.
It fired Chief Executive Harry Stylli, senior research official Elizabeth Dragon and three others, and the company's chief financial officer resigned.
Stylli and Dragon are among the defendants who agreed to settle with the plaintiffs, a regulatory filing shows.
The case is In re Sequenom Inc Securities Litigation, U.S. District Court, Southern District of California, No. 09-00921. (Reporting by Jonathan Stempel; Editing by Lisa Von Ahn, Matthew Lewis, Dave Zimmerman)