Kodak shares surge on news of DFC loan investigation

Eastman Kodak Co. shares surged on Monday on news that regulators had found no wrongdoing in a loan process that would have had the company manufacturing chemicals for COVID-19 and generic drugs.

Following a report from the Wall Street Journal indicating that government officials had done nothing wrong in the days and weeks leading up to the announcement of a $765 million loan Kodak was expected to be awarded, shares of Kodak stock (NYSE: KODK) rallied more than 80 percent on Monday, closing the day up 60 percent at $12.04.

The Wall Street Journal on Sunday reported that the inspector general of the U.S. International Development Finance Corp., the agency that in July signed a letter of interest with Kodak to provide the loan, found no wrongdoing in the process that created the loan. That follows an internal investigation on behalf of Kodak that cleared the company in September.

In the DFC report, Inspector General Anthony Zakel said he found no evidence that employees of the agency had any conflicts of interest in the plans, according to the Wall Street Journal story. Zakel also said he did not find “any evidence of misconduct on the part of DFC officials.”

The DFC assessment also stated that it was reasonable for the agency to consider Kodak for the loan, noting other companies’ pivots to COVID-19 supply-chain manufacturing and Kodak’s experience providing materials to the pharmaceutical industry.

The Securities & Exchange Commission and Congress also launched investigations into the deal, neither of which have been concluded.

When Kodak and the DFC on July 28 announced details of the loan, which had not been finalized, Kodak shares soared from a July 27 close at $2.62 to more than $16. Within two days, shares had reached $43.45, and at one point the stock reached $60 per share.

A week later, the SEC and Congress said they would look into the possibility of misconduct on behalf of Kodak leaders. Kodak Executive Chairman James Continenza was issued 1.75 million stock options by the board the day before the loan announcement, triggering an outcry by investors and the public.

SEC filings showed that Continenza purchased 46,700 additional shares of Kodak stock, while board member Philippe Katz purchased 5,000 shares on the same day. In an interview with CNBC following the announcement, Continenza said Kodak had been working on the loan deal for a “few months” prior to the July 28 announcement.

The potential windfall from the $765 million loan would have allowed Kodak to reinvent itself with a new division, Kodak Pharmaceuticals, that would manufacture components of generic drugs and enable the U.S. to rely less on China for its pharmaceuticals. It is unclear whether the DFC loan is still on the table, but Kodak officials have repeatedly said the company will move ahead in making the drug ingredients, regardless of whether it receives government assistance.

While Kodak’s internal investigation by an independent law firm found that company executives and officers did not participate in insider trading, the report has no legal bearing on the SEC investigation, said an analyst with ASB Capital in a November Seeking Alpha article. Moreover, this week’s DFC report doesn’t specifically clear Kodak of wrongdoing either.

Shares of company stock midday Tuesday were trading down from Monday’s surge at $11.27.

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