The Financial Markets Authority has filed civil proceedings against Brian Peter Henry for alleged involvement in the manipulation of Diligent Board Member Services shares.
It is the first case of its kind in New Zealand.
The FMA's proceedings contain six claims alleging certain orders and trades Henry made in 2010 breached the market manipulation provisions of the Securities Markets Act.
Henry was one of Diligent's founders and he resigned as chief executive just two days after it listed on the NZX.
The FMA says Henry left the company in 2009.
In a statement distributed by PR veteran Michelle Boag, Henry said he would be "responding vigorously to the civil proceedings".
Henry was disappointed the FMA was pursuing this matter and said he raised the issue with its predecessor, the Securities Commission, in 2010 when he "realised he had made the errors."
The Securities Commission discussed the matter thoroughly with Henry and took no action and he "was taken aback" when the FMA requested an interview about the issue , said the statement.
"The trading I brought to the attention of the Securities Commission in 2010 had a minimal effect on the market, inadvertently lowering and then raising the price of the stock by a matter of cents. The net effect of these trades at the time was about $1,500".
Asked today if the company had known about the issue in 2010, a Diligent spokesman said it would not be making any comment "because this is a legal issue between the FMA and Mr Henry so it would be inappropriate for Diligent to comment on a matter that it has nothing to do with."
Dilgent's 2007 listing was marred when Henry admitted he had failed to be open about his past and that of his convicted fraudster brother, Gerald.
Gerald Henry floated Energycorp in the 1980s and after it crashed was bankrupted in 1989, owing $55 million. He fled to the United States where he was jailed for four years in 1996 after he was found guilty of fraud charges.
Brian Henry was also a director of Energycorp.
FMA Head of Enforcement, Belinda Moffat, said this is the first market manipulation case to be taken in New Zealand.
"Market manipulation interferes with the integrity of New Zealand's financial markets and harms the function of open, transparent and efficient capital markets," said Moffat.
The maximum fine for breaching the market manipulation provisions of the Securities Markets Act is $1,000,000 for each contravention.
The next step will be for Henry to file his statement of defence, the FMA said in a statement.