A Kodak Moment Memorable for the Wrong Reasons

Five ex-Kodak executives collected millions of dollars selling stock options they didn’t own. Then the story gets worse.

(Under)statement from Mr. Know-It-All

In a press (under)statement, Kodak Finance Chief David Bullwinkle (yes, Bullwinkle) said that the company had discovered deficiencies in its controls that had failed to prevent the unauthorized issuance of the company’s stock.

This time for sure…

Graduates of Wossamotta U?

Kodak has egg on its face. But what about the former executives who sold the shares? It’s one thing to land on Community Chest and to keep $200 from a bank error in your favor. Don’t we expect more of holders of executive stock options?

Most, if not nearly all, stock-option owners know the time of vesting to the day, and the conversion price to the penny. What must the ex-Kodak executives have thought when the options landed in their accounts, or they gave the orders to exercise and sell?

It’s possible, of course, that these executives held a block of options already and gave the exercise-and-sell order thinking about the options they already held, not the ones they had just inadvertently received.

Possible, but perhaps not probable. We’re talking about 300,000 stock options. These executives must have known their options had been canceled. How could they give such orders knowing the options did not rightfully belong to them?

Whether the exercise and sale were witting or unwitting, in legal terms, the executives have been unjustly enriched. Kodak will try to recoup the proceeds from the sale. The law will likely deem the executives to be holding the proceeds in constructive trust for the company. Kodak will file for a refund of taxes paid.

A Fractured Fairy Tale

Bullwinkle also stated that the error did not result in material financial mis-statements, that Kodak expected to fix its controls by the end of the month, and that the company would outsource the reconciliation process to avoid a repeat of this mistake. This translates as “We didn’t do anything wrong enough to get sued for, we’ll repair the damage, and we’ll hire someone to make sure we don’t do it again.”

Our Next Episode: Passing Scandals, or Kodak’s Ethical Laxatives

The stock-option-issuance fiasco actually just represents the icing on the cake.

Back in July 2020, Kodak’s Board approved a block of executive-stock-option grants the day before the company announced a $765 million loan from the U.S. Government. The loan would finance production of drugs needed to combat the COVID pandemic, among other things.

The announcement boosted Kodak’s share price, creating a windfall for option holders. The circumstances of the announcement also caused a halt in the deal and two investigations, one by the SEC and one by the agency negotiating the deal.

Kodak’s stock price has fallen from about $60 in July amid news of the loan to about $6.75 in recent trading.

Not a pretty picture.


PS — Headers may only make sense to those familiar with The Adventures of Rocky and Bullwinkle.

1 Comment

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