Last week, the WSJ reported that the SEC is investigating the circumstances around Eastman Kodak’s announcement of a $765 million government loan to make COVID-19 pharmaceuticals at its US factories (which is now apparently on hold due to the probe). As a case study in “what not to do,” this is a pretty good one. Don’t:
Grant options the day before a positive announcement – especially if the options can be immediately exercised, and even if the recipients say they won’t sell the shares
Allow insiders to buy or sell shares while in discussions about a material deal
Share unembargoed press releases with media outlets before the company’s official announcement
As we see time and time again with insider trading allegations around big corporate news events, even if trading activity is consistent with prior transactions, the optics are terrible. Several members of Congress sent a letter to SEC Chair Jay Clayton to request an investigation into the Kodak transactions — as did Senator Elizabeth Warren (D-Mass.) in her own letter.
Senator Warren’s letter also calls attention to the Reg FD implications of non-intentional disclosure of material nonpublic information. The alleged problem here was that Kodak sent a news advisory to media outlets a day before its official announcement. The WSJ confirmed that the company didn’t provide any embargo instructions to prevent the press from sharing the info.
I don’t think that you could call what happened a “leak,” given the info was intentionally released — but at any rate, shares spiked as the news trickled out, and arguably not everyone had access to the same information. For example, investment firm “bots” had a big advantage as they crawled the web. Instead of immediately making its own announcement, Kodak asked the reporters to remove their articles. However, that may have been an incomplete solution since some stories had already been captured by screenshots, social posts and search engines.
Don’t let this happen to you. Read our “Reg FD Handbook” for more guidance on how embargoes can protect you from a violation. And if you’re a “Reg FD junkie” – as many of us are – check out the podcast series that our very own Dave Lynn has been curating for the SEC Historical Society, to celebrate the 20th anniversary of its adoption.
-Liz Dunshee, TheCorporateCounsel.net August 10, 2020
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