Tuesday, August 18, 2020

Amid calls for SEC probe, Kodak and its chairman are hit with class action suit

By John Filar Atwood

Eastman Kodak, which is already under pressure for suspicious option grants and trading around the time of the announcement of a lucrative government COVID-19 contract, has been sued by a class of shareholders who believe the company engaged in a fraudulent scheme to artificially inflate its stock price in violation of 1934 Act Sections 10(b) and 20(a). The plaintiffs claim that the company issued misleading statements about Kodak’s prospects that inflated the stock’s value, and that they suffered losses when the share price subsequently fell after the misrepresentations became known to the market (Tang v. Eastman Kodak Co., August 13, 2020).

Media statement. On July 27, 2020, Kodak issued a statement to media about the imminent public announcement of a new $765 million manufacturing loan from the U.S. International Development Finance Corp. (DFC) to produce pharmaceutical materials, including ingredients for COVID-19 drugs. Following publication of the company’s statement, Kodak claimed that the information was released inadvertently.

On the same day of the media statement, Kodak granted its CEO and Executive Chairman Jim Continenza 1.75 million stock options at a conversion price of between $3.03 and $12 per share. Kodak also issued 45,000 stock options to its CFO David Bullwinkle and two other executives.

On the day the options were awarded, they were out of the money since the company’s shares closed at $2.62 per share. However, after news of the DFC project broke, Kodak’s shares climbed 200 percent on July 28 and another 300 percent to close at $33.20 on July 29. The plaintiffs noted that Continenza’s options went from having no value on July 27 to a value of $50 million two days later.

Warren letter. Things began to unravel for Kodak thereafter when it was reported that the option grant to Continenza was not part of his employment contract and had not been publicly disclosed. Thereafter, it came to light that Senator Elizabeth Warren (D-Mass) had written a letter to SEC Chairman Jay Clayton asking for an investigation of the deal and Kodak for apparent violations of the securities laws and SEC regulations.

Sen. Warren’s letter also revealed that in June Continenza and another board member purchased Kodak shares in trades that raised insider trading concerns since they were made while Kodak was in secret negotiations with the government over the COVID-19 contract. The letter also pointed to possible violations of Regulation FD due to Kodak’s handling of the unintentional disclosure of material nonpublic information, which caused a dramatic spike in trading volume in the company’s shares.

Problems continued to mount for Kodak as a company board member disclosed a July 29 donation of three million Kodak shares to a New York Jewish synagogue that was later found to be nothing more than a space attached to three-story Brooklyn apartment. The donation, which is under review by Kodak’s outside counsel, was reported to have a tax deduction value for the board member of $52.5 million and $180 million, according to the lawsuit.

In the end, the DFC paused the Kodak deal given the Congressional and regulatory scrutiny of Kodak’s activities surrounding the agreement. The DFC said that it will not proceed unless the allegations of wrongdoing are cleared. On that news, Kodak’s shares continued their descent and closed at $10.73 per share on August 10.

Plaintiffs’ claims. The plaintiffs state that because of the wrongful acts and omission of Kodak, Continenza, and the company’s CFO, they suffered significant losses due the drop in stock price. In their view, the material misstatements and omissions caused an unrealistically positive assessment of the company and a resulting overvaluation of its shares.

The shareholder class, which is all shareholders that bought Kodak shares between July 27 and August 7, 2020, claims that it purchased shares based on the artificially inflated view of the company’s prospects. Plaintiffs then suffered losses, they allege, because of the deliberate scheme to deceive the market about Kodak’s well-being.

The case is No. 3:20-cv-10462-FLW-ZNQ.