August 10, 2020

Reg FD Gets a “Kodak Moment”

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:

1. 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

2. Allow insiders to buy or sell shares while in discussions about a material deal

3. 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 this 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 screen shots, 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.

Remote Work: Questions Audit Committee Chairs Are Asking

The risks of remote work are top of mind for audit committee chairs right now, according to this PCAOB memo. Here are some questions they’re discussing with their auditors (also see this Cooley blog – and my blog last month about disclosure controls):

1. Will additional time be needed to get the audit work done remotely?

2. What complexity does working remotely add to the audit?

3. Will working remotely affect productivity of audit engagement team members?

4. If so, does the audit plan need to be updated, and do fees need to be revisited?

5. Has remote work affected the company’s ICFR? If so:

– Is the auditor including new controls in their assessment, or evaluating changes to existing ones?

– Has the auditor identified any concerns with respect to segregation of duties?

6. If a review of the issuer’s interim financial information has been completed already, are there any lessons learned that can be applied to the year-end audit?

7. Are there any technology enhancements or collaborative tools that should be considered to support longer-term remote work?Has the auditor assessed potential risks of material misstatement related to cybersecurity, and how does the auditor plan to respond to those risks?

Transcript: “Coronavirus: Next Steps For Disclosure & Governance”

We have posted the transcript for our recent webcast: “Coronavirus: Next Steps For Disclosure & Governance.”

Liz Dunshee