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Independent review finds no evidence of insider trading from Kodak executives before US Government pharma deal

Published on 17/09/20 at 12:05pm
Photo by El Grafo

Kodak has been cleared of insider trading by an independent review after one of its top executives bought shares before a stock surge following the news of a loan from the US Government to produce pharmaceutical ingredients. 

In early August, the Trump administration approved a $765 million deal with Kodak, under the Defense Production Act, to produce drug ingredients. The terms of the deal would see Kodak make essential drug ingredients that are currently in short supply according to the FDA. This will include producing the ingredients of the drug hydroxychloroquine.

The controversy surrounds Jim Continenza, the company’s Executive Chairman, who was awarded 1.75 million stock options the day before the US Government announced the loan. The company defended this action, saying it was taken to protect his stocks against dilution which would lower the value of his and other outstanding equity holdings if the investors ever converted the debt into stock. The Board of Directors also said they gave him this option because it was the first meeting of the Board’s compensation committee after the company received shareholder approval to use more shares for executive compensation. Continenza himself defended the move, saying it had been planned two months prior. As of late March, he owned 5.8% of Kodak’s shares.

Phillipe Katz, a Board member, also came under scrutiny as he too bought shares in June. 

The US International Development Finance Corporation negotiated the loan but said last month that it would not be finalised until the company was cleared of wrongdoing. 

Kodak employed the law firm Akin Gump to carry out the independent review. The firm said it reviewed more than 60,000 online communications and conducted 44 interviews over six weeks and published an 88 page review. It found that both Continenza and Katz had been cleared to trade in June by Kodak’s general counsel and concluded that their purchases did not break insider trading laws because the loan application was given at an “uncertain stage.”

However, the report did suggest that Kodak change its executive compensation practices and insider trading policies. It also said they should keep information around upcoming deals more secure, after it was found that a junior public relations employee for the company shared news of the government deal a day before its announcement. 

Continenza commented on the findings, and said Kodak was “committed to the highest levels of governance and transparency, and it is clear from the review’s findings that we need to take action to strengthen our practices, policies and procedures.”

Speaking to Reuters, Rick Meckler, a partner at Cherry Lane Investments, spoke on the impact of the investigation: “Whether the US Government accepts this analysis and restores its business relationship with the company remains an open question. For now, investors seem to feel it is worth speculating on given how high the stock rose on the initial news of the loan.”    

Conor Kavanagh

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