Democrats in the US House of Representatives have launched an investigation into a $765m government loan to Eastman Kodak last week that drove the company’s stock up nearly 1,500 per cent in a matter of days.
Several committees in the Democratic-led House sought documents on Wednesday from Kodak and the US International Development Finance Corporation, the agency that made the loan so the former photography giant could develop ingredients for generic drugs to treat Covid-19.
Shares in Kodak rose 25 per cent on the day before the deal was announced on July 28. The gains came after Kodak sent a media advisory on July 27 to television stations in its hometown of Rochester, New York, which said it was going to make an announcement the next day related to Covid-19. It later asked those outlets to remove published stories.
Kodak stock eventually soared 1,481 per cent from the start of last week to the intraday high of $60 on July 29. It has since fallen to $14.92 at midday Wednesday in New York. Retail investors on the trading app Robinhood were heavily involved on the way up — and on the way down.
The House probe came after Elizabeth Warren, the Democratic senator, called on the Securities and Exchange Commission to examine the deal. The Wall Street Journal reported on Tuesday the securities regulator had opened a probe. A SEC spokeswoman declined to comment.
In a letter to Kodak’s executive chairman, James Continenza, House Democrats said the “decision to award this loan to Kodak despite your company’s lack of pharmaceutical experience and the windfall gained by you and other company executives as a result of this loan raise questions that must be thoroughly examined.”
Democrats in Congress have drawn attention to stock purchases made in June by Mr Continenza and Philippe Katz, a board member. Ms Warren said the purchases occurred “while the company was involved in secret negotiations with the government over a lucrative contract”, which “raises questions about whether these executives potentially made investment decisions based on material, non-public information.”
Mr Continenza bought $103,756 worth of Kodak stock on June 23, shares that were worth over $2.8m at the peak last week. Mr Katz purchased $23,500 in stock across two transactions in June, and those shares were valued at around $600,000 at the stock’s intraday high on Wednesday.
“Companies and individuals that receive federal funds in response to the coronavirus crisis must follow the law and not engage in abusive practices,” James Clyburn, Carolyn Maloney, and Maxine Waters, the chairs of the House coronavirus subcommittee, oversight committee, and financial services committee, respectively, said in their letter on Wednesday.
Kodak said it “intends to fully co-operate” with House investigators.
A separate letter to DFC’s chief executive, Adam Boehler, was also signed by the chairman of the House foreign affairs committee, Eliot Engel, and the chair of a House financial services subcommittee, Al Green.
Mr Continenza took over as Kodak chairman after it emerged from bankruptcy in 2013, and attempted to cut costs and remake its business.
“Mr Continenza has regularly purchased Kodak shares with his own money since joining the company in 2013 . . . because he strongly believes in the long-term success of the company,” Kodak said.
Mr Katz did not respond to a request for comment.
The company also disclosed on July 29 that it had granted stock options to four executives on July 27, a day before announcing the government loan. Mr Continenza was awarded 1.75m of stock options with strike prices between $3.03 and $12. Three other executives, including its general counsel, were each awarded 45,000 stock options.
Kodak said in its July 29 filing that the options grant to Mr Continenza was “generally designed to put Mr Continenza in the same economic position he would have been” before creditors were able to convert debt into common stock, potentially diluting his holdings.
The company said on Monday it had received a conversion notice on July 29 from holders of $95m of debt, who were able to convert it into 29.9m shares priced at $3.17 each, representing about 40 per cent of its stock.
The company had borrowed $100m from three funds managed by Southeastern Asset Management last year through a convertible bond. Southeastern declined to comment.