On The Case

Akin Gump’s Kodak investigation casts doubt on shareholder claims – which Akin Gump is defending

(Reuters) - On July 29, just a day after the U.S. International Development Finance Corporation announced a prospective $765 million loan to Kodak to develop pharmaceuticals, the company hired Akin Gump Strauss Hauer & Feld to deal with a flood of demands for documents on the deal. Kodak’s share price had shot up after word of the loan leaked, and, as media reports raised questions about trading by Kodak directors and stock options grants to Kodak executives, the company, as Akin Gump explained in a Sept. 15 report to Kodak’s board, needed help responding to the Securities and Exchange Commission, the Financial Industry Regulatory Authority and various Congressional committees.

Kodak’s board subsequently formed a special committee of two independent directors to determine whether company insiders had violated securities laws or breached their duties to shareholders in connection with the options grants and stock trading as the loan was being negotiated and after it was announced. The special committee engaged Akin Gump – which had not previously served as Kodak’s corporate or securities counsel – to conduct an internal investigation.

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Akin Gump’s assignment was to conduct interviews and examine documents to answer five questions. Did Kodak CEO Jim Continenza and board member Philippe Katz engage in insider trading when they purchased Kodak shares a month before the DFC loan announcement, as Kodak executives pushed for a government deal? Did Kodak’s board members breach their duties when they approved stock options grants to Continenza the day before the DFC loan announcement? Did the company violate the SEC’s Regulation Fair Disclosure in a July 27 email advising media outlets in its hometown of Rochester of upcoming big news involving government officials? Did two major Kodak shareholders sell Kodak stock after the DFC announcement based on confidential information? And did Kodak board member George Karfunkel illegally donate 3 million Kodak shares to a charity he had founded when the share price shot up?

Those questions are of considerable interest to the plaintiffs’ bar. The U.S. government ended up canceling the proposed Kodak loan, which led to a plunge in the company’s share price. The Akin Gump report points out that Kodak is a closely-held company, with a majority of shares in the hands of the asset management firm Southeastern and a few major shareholders with seats on the Kodak board or close ties to Kodak board members.

But as I told you last month, Kodak is facing a shareholder securities fraud class action in New Jersey federal court over the DFC flap. A second prospective class action has been filed in Manhattan federal court. And other plaintiffs' firms have indicated that they’re contemplating shareholder derivative actions alleging that board members breached their duties to shareholders.

Akin Gump, as I’ll explain, concluded that Kodak executives, board members and shareholders violated no laws and breached no duties. Its investigative materials and analysis should be a big help to Kodak in litigation with shareholders – particularly because the company is represented in that litigation by none other than Akin Gump.

The firm declined to provide a statement responding to my query about representing both the Kodak special board committee in an internal investigation and the company in shareholder litigation. I also emailed plaintiffs’ lawyers Steven Singer of Saxena White and James Cecchi of Carella Byrne Cecchi Olstein Brody & Agnello about the Akin Gump report and the firm’s dual role but didn’t hear back.

It’s worth noting that there is precedent for simultaneously conducting an internal investigation and defending a company in civil litigation. King & Spalding, for instance, assisted Jenner & Block in its internal investigation of GM’s handling of defective ignition switches after years of representing the company against plaintiffs’ ignition-switch suits.

So how will Akin Gump’s report help in the shareholder litigation? For one thing, I suspect it will sharpen the plaintiffs’ focus. The complaint in the New Jersey case, for instance, raises allegations about most of the issues Akin Gump investigated for the Kodak board. The report, however, suggests that several are dead ends. The June stock purchases by the CEO and a board member, for instance, took place before Kodak insiders had any confidence they’d score a DFC loan and were reviewed approved by the general counsel. It will not be easy to prove fraudulent intent for those trades. The report also said the early leak of news of the DFC loan was simply a mistake by a junior Kodak public relations employee who changed an email to delete an embargo on the upcoming DFC announcement. That doesn’t seem like much of a basis for a securities fraud claim.

Akin Gump was more equivocal about board member Karfunkel’s gift to Congregation Chemdas Yisroel, which was worth nearly $100 million at the moment of the donation. The firm concluded that the gift did not appear to violate securities laws or Kodak policy but hedged that finding by pointing out that it was “based on limited legal precedent and hinges on the facts being as they have been described to us.” The gift, Akin Gump said, “was not advisable from a corporate governance perspective.” The firm recommended changes to Kodak’s policies and procedures on such donations “to avoid putting the company in a position where its officers and directors could be perceived to have potentially committed insider trading.”

The report dedicated its deepest analysis to potential liability for the grant of options to CEO Continenza and other Kodak executives, perhaps a hint that Akin Gump foresees claims about the options as the shareholders’ probable focus. Akin Gump looked both at whether Kodak statements about executive compensation, encompassing the options grant, could be construed as false under the securities laws as well as the board’s potential exposure for approving the options grants a day before the announcement of the DFC loan.

The defense firm determined that the options were promised well before the DFC loan was in the works as part of a long-term compensation plan. And the timing of the board’s approval of the options was not related to the announcement of the prospective DFC loan, according to Akin Gump.

“The evidence demonstrates overwhelmingly that, well before the onset of the pandemic and related relief efforts, Kodak intended to issue options to ‘true up’ Continenza and rationalize its executive compensation generally,” the report said. So, Akin Gump said, it’s unlikely that breach of duty claims against the Kodak board would survive, considering the legitimate business purpose for the grants, the approval of the awards by Kodak’s general counsel and the application of the business judgment rule.

If nothing else, the report provides shareholders with a preview of the arguments they are likely to see in a future motion to dismiss their suits. Akin Gump has made its case for Kodak in the internal board report. We can expect the same case in shareholder litigation.