Last month, under an agreement aimed at reducing U.S. reliance on China, the U.S. International Development Finance Corporation (DFC) announced that it would give the photography pioneer a $765 million loan to retrofit its factories to make pharmaceutical ingredients.
News of the deal — the first of its kind under the Defense Production Act — sent Kodak stock soaring. But last Tuesday, Sen. Elizabeth Warren (D-Mass.) asked the Securities and Exchange Commission to launch an insider trading inquiry, citing an unusually high volume of trading activity. On July 27, a day before the loan was officially announced, more than 1 million shares of Kodak stock exchanged hands, roughly quadruple its daily average, she said in a letter to SEC Chairman Jay Clayton. The stock jumped 20 percent that day, she wrote, and more than 200 percent on July 28, when the loan was announced.
Warren also noted that shortly before the announcement, Kodak Executive Chairman James Continenza bought about 46,700 shares. The purchase “while the company was involved in secret negotiations with the government over a lucrative contract raises questions about whether these executives potentially made investment decisions based on material, non-public information derived from their positions,” Warren said. Continenza has regularly purchased Kodak stock since joining the company in 2013, the company said, and has not sold any of it.
On Tuesday, the Wall Street Journal reported that the SEC had opened an investigation of the circumstances surrounding the loan announcement. The SEC declined to comment on Warren’s letter or the Journal report. Kodak said in a statement that it intends to fully cooperate with any inquiries.
The DFC hit pause Friday, announcing in a tweet that it would “not proceed any further unless these allegations are cleared.”
“It’s very reassuring to me that the SEC is going to take a hard look,” said James Cox, a professor and securities law expert at Duke University. The agency should particularly scrutinize who was buying the stock before the news got out and as it began to circulate, he said.
In a Monday afternoon briefing, White House press secretary Kayleigh McEnany said the administration takes the allegations seriously and that President Trump had “strong faith” in the process.
White House trade adviser Peter Navarro called the DFC decision the “absolutely RIGHT move” in a tweet.
Rep. James E. Clyburn (D-S.C.), the chairman of the House select subcommittee on the coronavirus crisis, and six other congressional committee leaders wrote to Kodak’s executive chairman on Tuesday asking for loan documents, records of company trading activity and details of meetings with federal officials by Aug. 18. Clyburn commended the decision to pause the loan in a statement Monday.
“Now, we need answers about why they planned to give a taxpayer-funded loan to manufacture drug ingredients to a company without pharmaceutical experience, and how Kodak executives acquired millions of dollars worth of stock and options at the same time they were negotiating this loan in secret,” he said. “Given that the Administration admitted there are ‘serious concerns’ with the loan and said they ‘will not proceed any further unless these allegations are cleared,’ I expect both the Administration and the company will fully comply with the Committees’ document requests without delay.”
The DFC normally funds infrastructure and other projects in the developing world. But in an executive order signed in May, President Trump gave the DFC new powers under the Defense Production Act to finance domestic health-care manufacturing needed to respond to the coronavirus crisis.
Shortages of masks and other protective equipment for doctors and nurses have raised concerns in recent months about U.S. reliance on China and India for pharmaceutical ingredients and finished medicines. About 40 percent of the world’s supply of drug ingredients is used to produce generic medicines for Americans, but only 10 percent of these materials are manufactured in the United States, the DFC says.
Kodak, founded by George Eastman, began selling some of the first cameras to consumers in 1888. But the shift to digital and the rise of smartphones took a toll, forcing Kodak to file for bankruptcy in 2012. It emerged from Chapter 11 protection with a concentration on printing machines and specialty film for motion pictures and other industries.
Jeanne Whalen contributed to this report.