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Law360 (August 14, 2020, 6:32 PM EDT ) Eastman Kodak Co. is facing a proposed securities class action one week after the government paused its $765 million COVID-19 drug development loan to the company over "recent allegations of wrongdoing" related to its CEO's stock trading in the days surrounding the deal's announcement.
Shareholder Tiandong Tang alleges that while Kodak executives touted the company's U.S. International Development Finance Corporation-funded plan to manufacture "starter materials" and "active pharmaceutical ingredients" for generic drugs in response to the coronavirus pandemic, they were cashing in on stock and options acquired shortly before the deal was made public.
Kodak awarded CEO James V. Continenza 1.75 million stock options on July 27 — one day before the government contract was announced, Tang says. The options were in addition to the 46,737 shares Continenza bought on June 23. Kodak is believed to have filed its application for the loan in mid-June, the suit says.
Following the July 28 announcement, Kodak's share price jumped by 200% and another 300% the next day, bringing it from $2.62 to $33.20 per share, Tang says.
"This massive stock price increase allowed defendant Continenza and other Kodak insiders to enrich themselves spectacularly from the compensation scheme, as their stock options were now very much 'in the money,'" Tang said. "Continenza alone saw the value of his options go from zero to $50 million in just 48 hours."
His options deal and "astronomical" profits raised the suspicions of media outlets and politicians, as well as the U.S. Securities and Exchange Commission, which is reportedly investigating the matter, according to the complaint.
The publication of a news article about the "unusual" option grant that "occurred because of an understanding" marked the start of a series of stock drops between Aug. 1 and Aug. 10, Tang says.
U.S. Sen. Elizabeth Warren's request for an SEC probe into the options deal, a letter from several House congressional committees asking Continenza to provide information, and the DFC's subsequent decision to freeze the funding on Aug. 7 pushed Kodak's share price down to $10.73 per share on Aug. 10, the suit says.
Tang seeks to represent a class of shareholders who purchased Kodak stock between July 27 and Aug. 7. He brings securities fraud claims against Kodak, Continenza and Chief Operating Officer David Bullwinkle, who was given 45,000 stock options on July 27, according to the complaint.
Tang also alleges Kodak board member George Karfunkel, who is not a defendant in the suit, recently disclosed a donation of 3 million shares — worth $116.3 million — to an Orthodox Jewish synagogue in Brooklyn for which Karfunkel is allegedly the president and chief financial officer. According to Karfunkel's SEC disclosure, the donation took place on July 29, "the day Kodak's stock peaked," Tang said.
A news report on the donation said the synagogue was incorporated in 2018, had no website, and seemed to consist of "a small space attached to a three-story apartment building on a quiet side street," according to Tang.
"The article also reported that the donation represented the single largest gift recorded to a religious group, and would generate tens of millions of dollars in income-tax benefits for Karfunkel," he said. "Karfunkel's gift is now the subject of an internal review by the company's outside counsel."
In a press release posted on its website on Aug. 7, Kodak said it had hired Akin Gump Strauss Hauer & Feld LLP to conduct an "internal review of recent activity by the company and related parties in connection with the announcement of a potential loan" by the DFC.
Representatives for Kodak and counsel for Tang did not immediately respond Friday to requests for comment.
Tang is represented by Maya Saxena, Joseph E. White III, Lester R. Hooker and Steven B. Singer of Saxena White PA and James E. Cecchi and Donald A. Ecklund of Carella Byrne Cecchi Olstein Brody & Agnello PC.
Counsel information for the Kodak defendants was not immediately available.
The case is Tang v. Eastman Kodak Co. et al., case number 3:20-cv-10462, in the U.S. District Court for the District of New Jersey.
--Additional reporting by Dean Seal. Editing by Janice Carter Brown.
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