May 19, 2021

Insider Trading: New York AG to Point & Shoot at Kodak?

According to this Reuters article, the NY AG 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, among other things, that the company’s CEO did not trade while in possession of MNPI (see the discussion beginning at p. 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.”

PPP Fraud: Down the Shore, Everything’s Not Alright

Another place to which I have a pretty deep attachment is New Jersey. I was born there, still have lots of family there, and have been going “down the shore” for summer vacations on Long Beach Island for as long as I can remember.  But it turns out  – with apologies to Tom Waits – that down the shore, everything’s not alright. In fact, according to this ProPublica article, my favorite vacation spot is a target of opportunity for PPP fraudsters:

The shoreline communities of Ocean County, New Jersey, are a summertime getaway for throngs of urbanites, lined with vacation homes and ice cream parlors. Not exactly pastoral — which is odd, considering dozens of Paycheck Protection Program loans to supposed farms that flowed into the beach towns last year.

As the first round of the federal government’s relief program for small businesses wound down last summer, “Ritter Wheat Club” and “Deely Nuts,” ostensibly a wheat farm and a tree nut farm, each got $20,833, the maximum amount available for sole proprietorships. “Tomato Cramber,” up the coast in Brielle, got $12,739, while “Seaweed Bleiman” in Manahawkin got $19,957.

None of these entities exist in New Jersey’s business records, and the owners of the homes at which they are purportedly located expressed surprise when contacted by ProPublica. One entity categorized as a cattle ranch, “Beefy King,” was registered in PPP records to the home address of Joe Mancini, the mayor of Long Beach Township.

“There’s no farming here: We’re a sandbar, for Christ’s sake,” said Mancini, reached by telephone. Mancini said that he had no cows at his home, just three dogs.

Anyway, much of the problems arose out of loans initiated by an online lender, Kabbage, and the article says that they’re in large part the result of the program’s efforts to shove money out the door as quickly as possible during the height of the pandemic’s economic impact.  The bottom line is that this is yet another data point indicating that there’s going to be quite a mess to clean up over the next several years.

More on “Corporate Governance Gaming”: ESG Crusaders or Gritty Gadflies?

Last Friday, Liz blogged about the potential shareholder voting implications of the “gamification” of the stock market. She noted a forthcoming study that suggests the new Gen Z & Millennial investors who’ve recently entered the market might coalesce around ESG issues and drive greater corporate accountability. Liz expressed some skepticism about this potential outcome. Given what usually happens when the Internet gets its hands on anything, I’m downright dubious.

For example, remember when the British government decided to let the Internet name a new research ship, and ended up – hilariously – with “Boaty McBoatface”? How about when PepsiCo decided to hold an online “Dub the Dew” contest to let the Internet come up with a name for a new flavor of Mountain Dew? The top choices were “Hitler Did Nothing Wrong” and “Diabeetus.”

The bottom line is that “gamers gonna game,” and that on the Internet, the anarchy is the point. My guess is that with the meme stocks crowd, we’re more likely to see a push to elect Gritty to GameStop’s board than we are to see a push for a socially conscious ESG agenda.

John Jenkins