On Tuesday July 28, Eastman Kodak, Co. in conjunction with the Trump Administration publicly announced that Kodak would receive a $765 million loan for purposes of manufacturing generic drug ingredients. Just a few days later, Senator Elizabeth Warren (D-Mass.) penned a letter to Securities and Exchange Commission Chairman Jay Clayton demanding an investigation into the timing of Kodak’s announcement, suspicious trading activity that preceded announcement, and the timing of certain trades by Kodak executives and options awards. And now Kodak faces an SEC investigation that will focus directly on how it went about disclosing the government loan.
Public companies announce market moving information all the time and rarely face the ire of public officials or the scrutiny of an SEC investigation. This begs the question – what happened with Kodak and what can other issuers learn from it?
According to Kodak’s official statements, the shift in focus to drug ingredient manufacturing coupled with the government loan had been in negotiations for several months prior to the announcement. During that time, Kodak executives made several purchases of Kodak securities pursuant to company insider trading plans. While this is not unusual in itself, Kodak will now face serious scrutiny because of the manner in which the loan was subsequently disclosed to the public.
Like most public companies, Kodak prepared press releases touting the loan and distributed them to various media outlets prior to the public announcement. But, critically, Kodak did not include so-called “embargo” language that restricted dissemination or use of the information until Kodak itself made a public announcement. Several news outlets in the Rochester, New York area – where Kodak is headquartered – published the information on July 27, including through Twitter and television broadcasts. In response, Kodak apparently requested the publications be removed but took no other action. Kodak shares traded aggressively on July 27, reaching trading volumes nearly eight times the yearly average.
SEC Regulation FD permits public companies to disseminate material non-public information prior to a public announcement to certain individuals, such as analysts or the press, where it is not reasonably likely the recipient will trade based on the information. To accomplish these “selective disclosures,” issuers typically include restrictive embargo language prohibiting early distribution of the information and obtain assurances that no trading will occur prior to the full public disclosure.
In situations like Kodak’s, where the embargoed information is inadvertently or improperly disclosed prior to a public announcement, Rule 100 of Regulation FD requires an issuer to take immediate action to make a full public disclosure if it knows or is reckless in not knowing about the premature disclosure. Failure to do so can invite regulatory investigations, enforcement actions, and substantial penalties.
Issuers can learn a great deal from the Kodak disclosures. First, it should serve as a general reminder that selective disclosure of material non-public information must be carefully vetted before it goes out the door. There is no excuse for not including appropriate embargo language or failing to obtain assurances, consistent with Regulation FD, that a recipient will not trade based on the information. And, on the back end, issuers should have a program in place to move rapidly where non-intentional disclosure, like Kodak’s, occurs.
Moreover, issuers should carefully approach any disclosure of information concerning their involvement in government initiatives and ensure that their insider trading policies properly limit access to such information before it is made public. This concern is even more acute amid the global pandemic, which has seen governments around the world undertake extraordinary measures to avoid economic disaster, stimulate growth, and identify a vaccine for COVID-19. Issuers may be involved in negotiations to develop vaccines or vaccine components, to obtain funding to build out domestic manufacturing, or to partner with government agencies for other purposes. Any of these can represent substantial value to the issuer in the form of funding, reputational gains, or future earning potential and, in turn, likely constitute material non-public information.
Issuers should also consider how its possession of such information may impact other aspects of their insider trading policies. Regularly scheduled trading periods for company insiders may need to be altered and plans to provide stock-based compensation might need to be delayed.
Ultimately, public companies must always contend with the possession of material non-public information in some form. The question is whether their compliance practices are sufficiently flexible to reasonably and adequately address unique situations or whether they should brace for their Kodak moment.