Less than a week after a big-money deal with the federal government was put on ice over concerns of potential insider trading, Eastman Kodak Company and its CEO and CFO face a proposed class action centered on stock trades that took place just prior to the news that Kodak won a $765 million loan to produce pharmaceutical materials for COVID-19 drugs.
The lawsuit, filed in New Jersey federal court, looks to represent persons or entities who bought or otherwise acquired Kodak common stock between July 27 and August 7, 2020.
On July 27, 2020, Kodak indicated to Rochester, New York-based media outlets that an announcement was imminent regarding a “new manufacturing initiative” involving the U.S. International Development Finance Corporation (DFC) agency and the response to the COVID-19 crisis, the 31-page lawsuit begins. In the wake of Kodak’s initial statement about the deal, however, the company claimed this information got out “inadvertently” and was for “background only,” the suit mentions.
On the same day, and in an alleged attempt to “further a scheme to profit from the use of material non-public information,” Kodak granted CEO and Executive Chairman Jim Continenza, a defendant in the suit, 1.75 million stock options at a conversion price of between $3.03 and $12 per share, the lawsuit says. Further, Kodak awarded 45,000 stock options each to CFO David Bullwinkle, also a defendant, Vice President Randy Vadagriff and General Counsel Roger Byrd, according to the complaint.
Per the suit, Kodak’s stock price closed at $2.62 per share, well below the lowest conversion price, on the day the options were awarded, meaning the options were “out of the money” when they were issued.
On the following day, July 28, Kodak share prices skyrocketed 200 percent, up to $7.94 per share, upon news that the company had secured a $765 million government loan from the DFC under the Defense Production Act to produce pharmaceutical materials for COVID-19 drugs, the lawsuit says. According to the case, share prices continued to surge, rising more than 300 percent, the following day, closing at $33.20 per share on July 29.
With the massive stock price jumps, the defendants and other Kodak insiders were able to “enrich themselves spectacularly” as their stock options were now very much “in the money,” the complaint says, noting Continenza alone saw the value of his stock shoot from zero to $50 million in only 48 hours.
As the smoke cleared from the announcement of the $765 million government loan, details began to emerge with regard to the defendants’ compensation scheme, the suit claims, citing an August 1 Reuters report detailing the “unusual” 1.75 million option awarded to Continenza in the run-up to the news.
“The article emphasized that the options award ‘occurred because of an understanding’ between Continenza and Kodak’s Board of Directors ‘that had previously neither been listed in his employment contract nor made public,” the complaint reads.
Upon news of the potential understanding between Continenza and Kodak’s board, company share prices fell 32 percent, closing at $14.94 per share on August 3, the lawsuit says.
On August 4, Senator Elizabeth Warren submitted a letter to the Securities Exchange Commission requesting an investigation of both the deal and Kodak for apparent violations of federal securities law and SEC regulations, the case continues. According to the suit, Senator Warren’s letter stated Continenza bought on June 23 46,737 shares, with another board member buying up 5,000 shares—trades that raised plenty of questions concerning who knew what and when while Kodak was in closed-door talks with the government. From the complaint:
“According to the letter, each purchase ‘made while the company was involved in secret negotiations with the government over a lucrative contract raises questions about whether these executives potentially made investment decisions based on material, non-public information derived from their positions,’ in violation of the Securities Exchange Act of 1934.”
Moreover, Senator Warren’s letter cited as cause for investigation Kodak’s initial July 27 announcement of its deal with the government to some media outlets and the trading frenzy—a one-day volume of more than 1.6 million shares—that followed, the case says.
Also on August 4, the Wall Street Journal revealed the SEC had begun an investigation into Kodak’s control over the disclosure of the DFC loan, the suit relays, with the publication writing the commission is expected to look into the stock options granted to execs on July 27 that “instantly became profitable” upon the announcement of the loan.
Amid the August 4 developments, it was revealed Kodak Board Member George Karfunkel and his wife disclosed to the SEC a July 29 donation of three million of their 6.3 million Kodak shares to a Brooklyn religious institute, a gift valued at $11.6 million, the lawsuit says. Per the case, this “charitable” donation was gifted one day after the announcement of the Defense Production Act loan, the same day Kodak’s stock price peaked, to a website-less congregation “that had only been incorporated since 2018” and for which Karfunkel himself served as the president and chief financial officer. As the lawsuit tells it, there existed more questions than answers concerning that exchange:
After the August 4 dust settled, Kodak stock prices sank another four percent, to $14.40 per share, the case says.
With August 5 came news that several Congressional committees sent a joint letter to Continenza in search of documents related to the COVID-19 materials loan, insider trading and stock options as part of their review of the DFC’s call to award so much money to a company with negligible pharmaceutical experience, according to the lawsuit. Per the complaint, the committees also issued a documents request to the DFC’s chief executive officer, centering on the Kodak loan, in a letter that highlighted the company was “on the brink of failure” as recently as 2012 and had fallen short with its previous venture into pharmaceuticals.
Shortly thereafter, the DFC paused its deal with Kodak, citing “[r]ecent allegations of wrongdoing” raising serious concerns. Upon this news, Kodak stock prices dropped 28 percent, to $10.73 per share on August 10, the case says.
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