Eastman Kodak says New York preparing insider-trading lawsuit (updated)

Eastman Kodak

17/05/2021 21:36

(Adds details)
    By Mike Spector
    NEW YORK, May 17 (Reuters) - The New York attorney general’s
office is preparing an insider-trading lawsuit against Eastman
Kodak Co  KODK.N  and its top executive, focusing on stock
purchases that preceded an ill-fated deal with the Trump
administration to finance a pharmaceutical venture during the
COVID-19 pandemic, according to the company and people familiar
with the matter.
    The emerging civil case centers on Executive Chairman Jim
Continenza’s June 23, 2020, purchase of nearly 47,000 Kodak
shares, Kodak said in a quarterly Securities and Exchange
Commission filing on Monday. Continenza, the company chairman
starting in September 2013 and executive chairman since February
2019, took on the additional role of CEO in July 2020.
    The trades occurred weeks before the Trump administration
unveiled a tentative agreement to lend the company $765 million
backing production of pharmaceutical components for help
fighting the pandemic. Kodak’s stock experienced a roller
coaster following the late-July announcement, skyrocketing more
than 1,000% before falling.
    A spokesman for New York Attorney General Letitia James did
not immediately respond to a request for comment.
    The investigators are seizing on Continenza’s alleged
knowledge of material nonpublic information surrounding
negotiations for the government loan when he purchased Kodak
shares, according to the company and people familiar with the
matter.
    In a statement provided to Reuters, Kodak said Continenza
did not possess material nonpublic information when he purchased
his shares and "did not engage in insider trading." Kodak
declined to make Continenza available for comment.
    Kodak pointed to an investigation conducted by its outside
law firm, which found Continenza’s purchases were approved by
the company's general counsel. The purchases, made at a weighted
average price of $2.22 per share, were in compliance with
Kodak’s insider-trading policies and did not violate securities
regulations or other relevant laws, the review found.
    Continenza has also regularly purchased stock during
internally approved time windows, which included the June 2020
trades, and has never sold his shares, the company said.

    STOCK SOARS  
    Kodak, a former blue-chip photography pioneer that failed to
keep pace with the digital revolution, emerged from bankruptcy
proceedings in 2013 and has faced financial challenges.
    Its shares closed around $2.62 July 27, the day before the
government announced it had signed a letter of interest to
provide the loan. By July 29, they had soared as high as $60
before closing at $33.20. Investigations from congressional
committees and securities regulators ensued. 
    The company's stock tumbled over the next several days and
the Trump administration halted Kodak’s loan application process
amid the frenzy. Kodak has since said it does not expect the
loan.        
    The investigation conducted by the outside law firm, Akin
Gump Strauss Hauer & Feld LLP, found Continenza viewed Kodak’s
chances of receiving the loan as uncertain when he bought
shares.     
    Kodak's general counsel, Roger Byrd, shared that view and
believed market reaction to the company taking on such a large
amount of debt was difficult to predict, leading him to conclude
Continenza did not possess material nonpublic information, the
Akin Gump review found. Kodak declined to make Byrd available
for comment.
    Investigators have built their case under the Martin Act,
Kodak's filing said. The state law empowers the attorney general
to investigate and bring financial fraud cases without proving
intent or knowledge of wrongdoing.
    Officials in the New York attorney general’s office have
emphasized that legal leeway in their probe, the company said.
Kodak views legal precedents as requiring a breach of fiduciary
duty to prove insider trading, which can’t exist without intent
or knowledge of wrongdoing on the trader’s part.
    Kodak, in its statement, called the attorney general’s
approach a "novel application of insider trading law that seeks
to impose liability in the absence of evidence of intent." The
Rochester, New York-based company said the contemplated lawsuit
would discourage executives from investing in good faith
alongside other shareholders due to fear that trades approved by
internal lawyers could be second-guessed as unlawful.
    In April 2020, Kodak held an initial discussion with White
House officials including trade adviser Peter Navarro about
leveraging its longstanding and lesser-known chemicals business
to produce pharmaceutical ingredients that can be sold to
drugmakers.
    In May 2020, then-President Donald Trump signed an executive
order authorizing the U.S. International Development Finance
Corporation (DFC) under the Defense Production Act to lend money
supporting domestic production and supply chains to help combat
the pandemic.
    Kodak was soon steered to the DFC, an agency that typically
provides money to the developing world. But the Akin Gump review
found that Kodak executives, including Continenza, became
pessimistic about obtaining financing when a follow-up call with
Navarro was canceled and a less senior DFC official became
Kodak's main contact.
    Nevertheless, the DFC, after some due diligence, decided to
enter into a nonbinding letter of interest with the company
regarding the loan, which it announced the morning of July 28.
Kodak’s stock rose. Trump called the tentative deal a
"breakthrough" that evening, and Kodak’s shares soared the
following day. 
    The DFC halted the loan application process amid scrutiny of
trading surrounding the announcement.

 (Reporting by Mike Spector; editing by Vanessa O'Connell and
Edward Tobin)
 ((mike.spector@thomsonreuters.com;))