Letter to the Hon. Jay Clayton, Chairman of the Securities and Exchange Commission - Waters, Gottheimer, Sherman, Foster, and Lynch Lead Call For SEC Investigation into Kodak; Cite Concern Over Insider Trading Related to Defense Production Act Deal

Letter

Dear Chair Clayton:

We are writing to express our growing concern regarding insider trading, during the coronavirus disease 2019 (COVID-19) pandemic. As Americans navigate through the COVID-19 pandemic, information about which publicly traded companies are affected by the pandemic; how they are affected; information about aid, loans or grants provided to these companies; and other nonpublic information, is more likely to be considered material, particularly when it comes to investors making investment decisions. Further, some bad actors may take advantage of these difficult times and unlawfully trade on this material, nonpublic information, harming market stability and the investing public. The US Securities and Exchange Commission (SEC or Commission) must remain vigilant in enforcing laws against insider trading.

Our concerns regarding insider trading during the COVID-19 pandemic have only been heightened by our serious concerns arising from a series of securities transactions engaged in by Eastman Kodak Company (Kodak), its executive officers and its board members. These transactions seem to have taken place at, or around, the time Kodak learned it could be eligible to receive a $765 million loan under the Defense Production Act of 1950 (DPA). Notably, the loan was awarded to Kodak to manufacture generic drugs in the United States, despite Kodak's limited experience in the pharmaceutical industry.

In its 2019 annual report, Kodak explained that: "If Kodak is unable to generate positive cash flow from operations in the future or to adequately supplement such cash flow from operations with proceeds from monetization transactions, its ability to continue as a going concern could be impaired or limited."[1] On May 1, 2020, the adjusted closing price for Kodak stock was $2.20. The Trump administration's announcement that Kodak would receive the DPA loan caused the, then-failing, manufacturing company's share price to increase to $33.20, on July 29, 2020 - the day after President Trump announced the DPA loan.[2] That amount is over fifteen times the stock's May 1, 2020 value and provides a tremendous incentive for those who knew about the DPA loan to capitalize on that information before it became public.

Along those lines, around the same time the DPA loan was announced to the public, Kodak's board, reportedly, issued 1.75 million in stock options to Jim Continenza, the company's Executive Chairman and Chief Executive Officer.[3] Those options allow Continenza to purchase Kodak shares at prices ranging from $3.03 to $12[4] which, according to media reports, could net Continenza a $50 million profit.[5] Further, the options were issued under unusual circumstances in terms of the timing in that they were, reportedly, based on some peculiar and unwritten "understanding" between Continenza and the company.[6] Media reports, and SEC filings, further indicate that Continenza and Philippe Katz, a Kodak board member, bought 46,737 and 5,000 Kodak shares, respectively, on June 23, 2020.[7] At the time of these purchases, Kodak's stock price was $2.22[8] but, as indicated above, would significantly increase in value after the DPA was announced. Most concerningly, it appears these purchases were made prior to the DPA loan becoming public information, but while Kodak was in discussions regarding the loan.

We urge the SEC to investigate these transactions and, during the course of that investigation, encourage it to consider the following:
1. The facts, circumstances and terms under which Kodak issued, or re-issued, stock options to its executive officers or other company personnel between January 1, 2020 and August 1, 2020.
2. Whether Kodak's issuance, or re-issuance, of stock options to any executive officer or company personnel, violated Kodak's polices, including its Executive Compensation Committee Board of Directors Eastman Kodak Company Policy on Equity Awards. The policy, among other things, prohibits manipulating the timing of any public release of "material information or of any Equity Award with the intent of benefiting a grantee under an Equity Award."[9]
3. The date on which discussions, whether formal or informal, regarding the DPA loan commenced.
4. The identities of all Kodak executives, officers and major shareholders who were aware that Kodak may receive the DPA loan, and the dates on which they became aware of this information.
5. Steps, if any, taken by Kodak to prohibit and/or monitor trading of Kodak stock by Kodak's executives, directors and major shareholders.
6. Transactions engaged in by Kodak executives, officers or major shareholders between the date the DPA loan discussions first commenced and the date the DPA loan was publicly announced (Transactions).
7. Profit, if any, derived from the Transactions.

The capital markets are at their best when transactions are entered into by and between informed buyers and informed sellers. Insider trading undermines public trust in our capital markets and cannot be tolerated, particularly at a time when trust and confidence in the markets are vital to our economy's future recovery.