According to a Reuters’ article, the New York Attorney General is preparing to file an insider trading lawsuit against Eastman Kodak and its CEO. The allegations arose out of last summer’s debacle surrounding insider transactions in Kodak stock in advance of the announcement of a potentially transformational new loan from the federal government. Here’s an excerpt from the Reuters’ piece:
The New York attorney general’s office is preparing an insider-trading lawsuit against Eastman Kodak Co 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.
As Lynn blogged last September, a report by independent counsel retained by a Kodak special committee concluded that the company’s CEO did not trade while in possession of MNPI (see the discussion beginning at pg. 36). Among other things, the report noted that the CEO traded during an open window, and pre-cleared his trades with the company’s GC, who indicated that he didn’t believe that discussions about the potential loan had risen to the level of MNPI at the time of the CEO’s transactions.
That combination of factors would appear to make it difficult to satisfy Rule 10b-5’s scienter requirement, but that’s not a problem for NY AG Letitia James. She has the Martin Act at her disposal — and there’s no need to prove scienter for civil or even misdemeanor criminal securities fraud claims under that nightmare of a statute.
As I’ve mentioned before, I grew up in Rochester, NY, and the parade of negative news about our fallen giant over the past several decades depresses me more than anybody who didn’t grow up there can begin to imagine. I remember how things used to be with Kodak, and it’s fair to say that I have a sentimental attachment to this company. As somebody once put it, “nostalgia – it’s delicate, but potent.”
Update: Here’s a statement on the matter I received from a spokesperson for Kodak:
“The Attorney General has threatened to file a lawsuit premised on an unprecedented and novel application of insider trading law that seeks to impose liability in the absence of evidence of intent. The threatened litigation would not be supported by legal precedent or the facts. Mr. Continenza did not engage in insider trading. He was not in possession of material non-public information when he made the trade at issue, and his small stock purchase fully complied with Kodak’s insider trading policies, was pre-approved by Kodak’s General Counsel, and was subsequently found to be compliant by outside counsel in an independent investigation. Importantly, Mr. Continenza has bought Kodak stock in virtually every open window period – and has never sold a single share. As we understand the Attorney General’s theory, the contemplated lawsuit would have a chilling effect on directors and executives of every public company, who could never invest in their own companies without fear of having good-faith decisions, pre-approved by counsel, second-guessed by regulators and charged as violations of law.”
-John Jenkins, TheCorporateCounsel.net May 19, 2021
