Insider Trading
Eastman Kodak
Senior Thesis
Presented to
The Faculty of the School of Arts and Sciences Brandeis University
Undergraduate Program in Business
In partial fulfillment of the requirements for the degree of Bachelor of Arts
by Thibault Padiou
April 2021
Copyright by Thibault Padiou
Committee members (if applicable):
Name: Daniel Bergstresser Signature:
Name: Debarshi Nandy Signature:
Name: Hagits Weigh Signature:
Thibault Padiou Brandeis University April 23rd 2021 -1-
This thesis draws on data from public sources and financial market data from Bloomberg
Thibault Padiou Brandeis University April 23rd 2021 -2- Acknowledgements
I want to extend my deepest gratitude to my advisors Professor Daniel Bergstresser and
Professor Debarshi Nandy. I want to thank them for their time and their invaluable insights. It was an absolute pleasure working with both of you. I want to thank Hagits Weigh for coordinating this entire program. I am grateful to Zine Sekfali, who has been a tremendous help during this project with his precious advice. I am also grateful to my family for their support.
Thibault Padiou Brandeis University April 23rd 2021 -3- Abstract
This paper describes the context for and explores the claims of insider trading against
Eastman Kodak using a mix of quantitative and qualitative analysis. This paper is divided into three different chapters. The first chapter is a general overview of Eastman Kodak in July and the critical information surrounding the US international development finance corporation loan announcement. This chapter includes but is not limited to investments reports, legal reports,
Eastman Kodak's press release, and a closer look at the loan application's DFC guidelines. That information will help us establish a range of times where insider trading could have occurred.
Knowing the context surrounding the DFC Loan announcement will be useful when explaining our results. The second chapter explores the potential value of Eastman Kodak using the Altman
Z score to assess the likelihood of Eastman Kodak going bankrupt in the two following years.
We will analyze the hard-to-borrow1 implications of Eastman Kodak stock and what it meant in terms of market movements. In the third chapter, we will use a toolkit of financial econometrics that draws from Kenneth Ahern's recent works to look for potential informed trading in Kodak trading data.
1 Hard to borrow is limited supply of a stock for short selling Thibault Padiou Brandeis University April 23rd 2021 -4- Table of Content
Chapter One. Critical Events Surrounding the DFC Loan Announcement
I. Background
II. Akin Gump Report
III. DFC Loan Criteria
IV. Insider Giving
V. Results
Chapter Two. Financial Solvency Measure and Market Movements
I. Altman Z score
II. Market Movements Surrounding DFC Loan Announcement
III. Results
Chapter Three. Statistical Analysis
I. Data
II. Limitations
III. Variables
IV. Summary Statistics
Conclusions.
Thibault Padiou Brandeis University April 23rd 2021 -5- Chapter One.
Critical Events Surrounding the DFC Loan Announcement
I. Background
Eastman Kodak was founded in 1888 by George Eastman and Henry A. Strong. Eastman
Kodak became one of the most dominant players in the photographic industry, led by its star product, the Kodak camera. In the late 1990's Eastman Kodak started having financial difficulties with lower sales and no more technological advantage. This economic situation resulted in
Eastman Kodak declaring bankruptcy in 2011. After the bankruptcy, Eastman Kodak started focusing on the digital imagery market. On July 28th, 2020, Eastman Kodak Company announced that they received a 765 million loan from the U.S International Development
Financial Corporation to produce pharmaceutical ingredients that would help against the COVID
19 crisis and strengthen the supply chain for pharmaceutical ingredients. Hours after the announcement, Kodak's share price rose by 500 percent intraday. On July 29th,2020, after the announcement, the CEO asserted they are more of a chemical company and concentrate on making a film instead of cameras. He also stated that investors should capitalize on the DFC
Loan, and as a result, on the same day, the stock rose even further.
Exhibit A shows a timeline of the critical events surrounding the announcement of the
DFC Loan to Eastman Kodak on July 28th, 2020. Based on Exhibit A, the trading volume of
1.64 million on July 27th was 2116 percent higher than the trading volume of 74,900 on July
24th, and the closing price was also higher with 2.62 dollars compared to 2.10 on July 24th.
Thibault Padiou Brandeis University April 23rd 2021 -6- Eastman Kodak, as a result of this unusual activity, had to send a press release explaining the
abnormal trading activity surrounding the event. In this press release, Eastman Kodak explained
that a particular internal investigation had been ordered by the Board to look at the allegations of
wrongdoing. Kodak's Board of directors engaged the law firm Akin Gump to handle the
investigation.
Based on the Akin Gump report, on July 27th, Eastman Kodak officials justified that at
11:25 AM, a relatively junior Kodak public relations employee (the "PR Employee") emailed a version of the Media Advisory to multiple reporters in the Rochester area. The email circulating the advisory stated that Kodak's new manufacturing initiative "could change the course of history for Rochester and the American people." Based on the Akin Gump report, the information leaked in at least two tweets. After the news was potentially leaked, Exhibit A noted that there was unusual trading activity on July 27th, 2020.
On July 27th, before the DFC Loan announcement, four management board members were allocated convertible shares. James V. Continenza, CEO of the company, was awarded 1.75 million stock options at a conversion price between 3.03 to 12 dollars per share. David
Bullwinkle, CFO of Kodak, Randy D. Vandagriff, and Roger Byrd were awarded 45000 stock options. The Akin Gump report mentions that the decision to grand those stock options had been made before applying to the DFC Loan, and we're given as a form of compensation to the management board. James V. Continenza mentioned that this was a way to show his trust in
Eastman Kodak and its future.
One should note that on August 3rd, 2020, George Karfunkel, the biggest shareholder of
Eastman Kodak, reported to the SEC a gift of 3.3 million shares valued at 38.75 per shares on
July 29th to a religious institution. This gift was reported at the highest possible price for the
Thibault Padiou Brandeis University April 23rd 2021 -7- stock of Kodak and would result in healthy tax benefits for Karfunkel. Looking more closely at
those specific events will give us more knowledge about the context surrounding the DFC Loan
announcement. Knowing the context surrounding those events will be useful when explaining
the different trends seen in the data provided by the third chapter of this analysis.
II. Akin Gump report
The first element that will be thoroughly analyzed is the Akin Gump report to the special
committee. The Akin Gump report to the special committee gives a different outlook on Eastman
Kodak's application for the DFC Loan. Eastman Kodak's first contact with the DFC was
supposed to be on May 31st, based on the report information. No specific mention on who tried
to contact whom. Most of the people involved in the process did not believe the project would
come to fruition, and considered it was unlikely that the DFC would give the loan to Eastman
Kodak. Some anonymous employees questioned the DFC's interest in Eastman Kodak, primarily
since Eastman Kodak wasn't known as a pharmaceutical company and was in a completely
different industry based on their information.
The first application for the DFC Loan was missing several critical pieces of information and was only supposed to get Eastman Kodak into the queue to be granted the loan. Many different companies were also applying for the DFC Loan, which could explain why Eastman
Kodak employees thought their chances were slim. However, there aren't any mentions of the other companies applying for the DFC Loan in the report as they chose to remain anonymous. As a result, Eastman Kodak was assuming very high competitiveness to get that DFC Loan.
Eastman Kodak filed its final application with all the necessary documents on July 26th, 2020.
Thibault Padiou Brandeis University April 23rd 2021 -8- Now that we know how Eastman Kodak applied for the DFC Loan and the doubts surrounding
Eastman Kodak's ability to get that loan. We will take a closer look at the DFC and the criteria to
get the loan. This will help us get a better sense of Eastman Kodak's chances to get the loan
based on the required criteria available on the DFC website. However, there could have been
information not publicly released that would have made Eastman Kodak a better candidate or an
agreement between Eastman Kodak and the DFC that was not made publicly available.
III. DFC Loan Criteria
The DFC (International development finance corporation) is an independent agency created in October 2018 originally with the sole purpose of providing and helping in the financing of private development in middle to lower-income countries. The DFC's current director is Adam Boehler, and it has a budget estimated to be about 60 billion. Previous loan or insurance-related supports that the DFC has given before Kodak includes: Connect Africa- 1 billion investment in transportation in central Africa, 2X Women's initiative- 1 billion in support of projects led by women. In 2020, the DFC's role changed and was granted with President
Donald J. Trump's executive order access to the Defense Production Act to make more loans to create, restore, or expand domestic industrial base capabilities. The budget was supposed to be about 100 million at the beginning of the project but could go higher. After President Trump's executive order, the DFC took the first action to grant Eastman Kodak the 765-million-dollar loan to change its operation and business into a pharmaceutical company. The DFC underwent a similar internal investigation process as Eastman Kodak did, and no evidence of wrongdoing was found. However, the document was not made publicly available, and only the results were
Thibault Padiou Brandeis University April 23rd 2021 -9- communicated. The DFC inspector general stated he found no evidence of misconduct during the process and no potential conflict of interest. We selected some specific criteria from the DFC website regarding the loan to analyze and evaluate Eastman Kodak's capacity to meet those criteria. The criteria chosen were based on our ability to test it.
The first criterion includes the management team's previous track record managing certain investments and the team's experience in relevant sectors. The second criterion mentions the management team's expertise in servicing debt obligations and following the reporting requirements. The third is about the management team's ability to mobilize additional capital within a reasonable time.
Publicly available information reveals that the management team has no record of experience in any pharmaceutical company or any chemical company. The company's ability to fully repay the debt in time is unlikely, especially given its current financial state and the time it would take for Eastman Kodak to be profitable as a pharmaceutical company. This will be further explored in chapter two with a financial solvency test.
As for the ability to mobilize additional capital, it is hard to test. However, it would be difficult for Eastman Kodak, who is highly indebted at the moment and had a credit rating of
CCC+. The rest of the criteria that weren't picked repose solely on the proposal's quality, which is hard to assess without having access to it. Although, Akin Gump does provide this paper with some information about the quality of the proposal.
Based on the Akin Gump report, the DFC also required 20 percent of the loan balance as security as a form of an equity cushion, which Eastman Kodak did not have, and proposed some of their assets as collateral. There was a concern that the DCF would not believe Kodak could make profits to repay the loan due to the loan application being supported only by an off-take
Thibault Padiou Brandeis University April 23rd 2021 -10 - agreement. A witness in the Akin Gump report mentioned that the DCF would not believe Kodak
could make sufficient profits to repay the loan due to the loan application being supported by only an off-take agreement. The report also mentions that most of the witnesses believed that those issues persisted throughout June and July. Based on the witness's statements, one can consider that Kodak's ability to pay back the interest on the loan faced some limitations and doubts. It is difficult to assess the overall quality of the proposal based on those pieces of information, but it is clear that Eastman Kodak faced some difficulties.
IV. Insider Giving
Another event that raised suspicions following the DFC Loan announcement was a stock donation made by Eastman Kodak's biggest shareholder at that time. George Karfunkel was the biggest shareholder with 6.3 million shares of Eastman Kodak. On August 3rd George Karfunkel reported to the SEC that he made a donation of 3.3 million shares valued at 38.75 on July 29th
(taking the high and low of that day) to a religious institution where Karfunkel is the acting director. The donation would be valued at 116.4 million and would be the most significant donation ever made to a religious group. This would allow George Karfunkel to benefit from millions of tax benefits and take him under the 5 percent shares-owned threshold requiring him to report his stock transaction. However, on January 13th, 2021, a new SEC filing stated the change of ownership. It shows that George Karfunkel only gave 2 million shares to charity instead of the 3.3 million reported before. This would result in the donation being valued a 77.5 million dollars instead of 116.4 million. The reasons behind this change are currently unknown.
Two problems here could indicate potential insider trading/giving. The timing of the donation
Thibault Padiou Brandeis University April 23rd 2021 -11 - allowed Karfunkel to grant his charitable donation at the highest possible value of 38.75 dollars
instead of suffering the gradual decline of stock price following the investigation's
announcement on August 4th.
Based on the paper Insider Giving by Avci, Schipani, Seyun, and Verstein (2021), there
is a subsequent correlation between a stock donation by a shareholder at the high stock price and
a gradual decline in the price of the stock following that donation. The paper found that
analyzing all charitable gifts of stock made by the most significant shareholders from 1986 to
2020 indicates that most of those gifts were almost perfectly timed. The stocks were reported at
their highest value before any decline in the stock price. Based on their analysis, there are two
ways for a shareholder with potential insider information to capitalize on it. The first option is to sell the shares using insider information before it becomes public, which would be insider trading. The second option is giving those stocks as a charitable gift at the highest closing price before the insider information becomes public to get a healthy tax cut which would then be called insider giving. Insider trading is the most dangerous option from the shareholder point of view, given that the SEC regulations are pretty clear on the subject. The rules concerning insider giving are less specific, and thus a shareholder is less at risk of being investigated by the SEC.
V. Results
As our research has demonstrated, there are many events that could have had an impact on the trading activity of Eastman Kodak stock. Based on the information found in the Akin
Gump report and the Wall Street Journal, it appears that some information about Eastman Kodak and the DFC Loan leaked on the morning of July 27th, which could in part explain the higher
Thibault Padiou Brandeis University April 23rd 2021 -12 - trading activity during that day. The Akin Gump report, which Eastman Kodak's Board
introduced, made it explicit that they found no evidence of insider trading based on their internal
investigation. The Akin Gump report did not look at any market data before claiming no
wrongdoing. The article that leaked the information on July 27th and the tweets reporting it could not be found using publicly available resources. The Akin Gump report only partly explained the different stock options given to some members of the senior management members, and no proof supporting it was given. The somewhat questionable timing of those options wasn't fully explained and needs to be considered when looking at the potential for insider trading.
Even though this internal report requested by the board members found no evidence of insider trading, the lawsuits are still pending. The SEC is still reviewing the insider trading claims. Based on the witness's account on the Akin Gump report, it appears that Eastman Kodak would have had difficulties complying with the first criterion found on the DFC guidelines.
Employees of Eastman Kodak didn't have much faith in the company's ability to secure that loan and knew that many other companies were in the queue to be granted the DFC Loan. It's almost as if the loan application wasn't treated seriously, and this lack of composure could have resulted in the leak of information on July 27th. Eastman Kodak showed signs that they were or might not have fully appreciated the constraints around the DFC loan nor accordingly have taken the precautions needed to keep the information from leaking. This raises questions about the reasons behind the DFC choosing Eastman Kodak as the beneficiary of the loan. The DFC also conducted its internal investigation and found no concrete evidence of wrongdoing, but the
Eastman Kodak internal review's same limitations apply here.
Thibault Padiou Brandeis University April 23rd 2021 -13 - The paper Insider Giving by Avci, Schipani, Seyun, and Verstein (2021) showed a different method of looking at insider trading and perfectly timed donation. Using the example of
George Karfunkel's donation, the paper showed a strong correlation between shareholders giving their stocks at the highest possible price and a significant decline in the price of the stock following the release of new information not yet available to the public soon afterward. This would give a different option, instead of insider trading, for shareholders who would want to capitalize on the stock's high price before it starts to decline because of information not yet public. Since George Karfunkel did not directly trade the stocks and gave them to a religious institution, it will likely not be reflected on the trading data.
This pattern of events provides the context behind our analysis of insider trading using trading data. It will give us a more precise timestamp to assess potential anomalies and abnormal trading activities that could indicate insider trading. In a sense, this paper will be continuing the work of the Akin Gump law firm and using the relevant information to analyze the market data to come up with a similar or different conclusion based on the results.
Thibault Padiou Brandeis University April 23rd 2021 -14 - Chapter Two. Financial Solvency Measure and Market Movements
surrounding the DFC Loan
I. Altman Z score
The second chapter's purpose is to test Eastman Kodak's liquidity, financial health and
analyze the market movements surrounding the DFC loan announcement. This will allow this
paper to either confirm or deny the claims that the employees of Eastman Kodak made in the
Akin Gump report. This financial solvency test will give more insight into the status of Eastman
Kodak before the loan compared to its competitors. This information will help determine
whether or not Eastman Kodak could have respected the DFC rules about financial solvency.
This will give us a better insight into what an investor might perceive when looking at Eastman
Kodak's financial profile. Is Eastman Kodak a good investment based on its financial results, or
is the company likely to go bankrupt in the next two years? Understanding the result of this
solvency test will give us more information about Kodak's stock value before the DFC Loan
announcement.
The last part of the chapter will look more closely at the different market movements
surrounding the announcement of the DFC Loan. This will prove particularly useful in chapter
three when analyzing the market trends in the days following the loan announcement.
Our measure of financial solvency for Eastman Kodak is the Altman Z score. The Altman
Z score was created by Edward Altman in 1968, and its main purpose is to predict the probability
Thibault Padiou Brandeis University April 23rd 2021 -15 - that a company will go bankrupt in the next two years. The equation that this analysis will be
using for the Altman Z score is
(1) = 1.2 × + 1.4 × + 3.3 × + 0.6 × + 1 ×
1 2 3 4 5 𝑍𝑍 • = working𝑋𝑋 capital𝑋𝑋 / total assets𝑋𝑋 𝑋𝑋 𝑋𝑋
1 • 𝑋𝑋 = retained earnings / total assets
2 • 𝑋𝑋 = earnings before interest and taxes / total assets
3 • 𝑋𝑋 = market value of equity / total liabilities
4 • 𝑋𝑋 = sales / total assets
5 Zone of Discrimination:𝑋𝑋
• > 2.99 – “ ”
• 𝑍𝑍1.88 < < 2𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆.99 – 𝑍𝑍𝑍𝑍𝑍𝑍“ 𝑍𝑍 ”
• < 1.88𝑍𝑍 – “ 𝐺𝐺𝐺𝐺” 𝐺𝐺𝐺𝐺 𝑍𝑍𝑍𝑍𝑍𝑍 𝑍𝑍
𝑍𝑍 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍
Based on the Z score analysis provided in Exhibit B, Eastman Kodak stands in the
distress zone, suggesting bankruptcy in the next two to three years. The peer firms were chosen
based on Eastman Kodak 10k's annual report for the year 2020 and who they thought their main
competitors were. The peer firms appear to be between the grey zone, and only one of them is in
the safe zone. Altman's Z score is an excellent indicator of a company's financial health.
Altman's findings found the Z scores to be within 80% to 90% accurate in predicting bankruptcy
in the next two years. Here there are three distinct zones, namely, the safe zone, the grey zone,
and the distress zone. Eastman Kodak Z score of 1.29 is well below the threshold of 1.88, the
grey zone. Compared to its peers, Eastman Kodak is the most likely to go bankrupt in the next
two years. Eastman Kodak is not in a good position and is currently positioned in a struggling
Thibault Padiou Brandeis University April 23rd 2021 -16 - industry. Eastman Kodak has yet to produce positive cash flows in 10 years based on information
found on Eastman Kodak 10'k. Eastman Kodak is heavily indebted and doesn't have much
available cash, and thus doesn't have much liquidity. The high Altman Z score is consistent with
financial distress, and thus Eastman Kodak would have had difficulties respecting the financial
solvency rule of the DFC. This situation of financial distress is concordant with the Akin Gump
report findings of Eastman Kodak's potential problems paying back the interest on the loan.
II. Market Movements Surrounding DFC Loan Announcement
Before the DFC Loan announcement, Eastman Kodak could have been considered a
penny stock with an average daily closing price oscillating between 1$ to 3$ dollars. The trading
volume was not that high, although some days peaked at about 1 million and sometimes also fell
at about 40000. Strangely the trading volume in the days before the announcement was relatively
low compared to the months prior.
The stocks similar to Eastman Kodak are usually targets of “pump and dump”2 schemes and market manipulation due to their low prices. When the news broke out that Eastman Kodak was about to receive the DFC Loan, the stock's cost and the volume soared with a high price of about 60 dollars and a book of 284 million on July 28th. This price rise can be partly explained by the retail investor who thought that a stock as cheap as Eastman Kodak would be a good opportunity to profit from it. The combination of no interest fee and stimulus checks gave more liquidity to the retail investors and gave them more buying power.
2 Boosting the price of the stock based on misleading statements Thibault Padiou Brandeis University April 23rd 2021 -17 - The trading activity that Kodak's stock had on July 28th shares some similarities with
GameStop's stock's more recent movements. Both stocks were subject to shorting by institutional investors, and both stocks were targets of the retail investor's new buying power. Although, the aftermath was quite different for the two companies. With the GameStop short squeeze, the retail investors could push the short sellers to their limits, making them lose significant profits. For
Eastman Kodak, many investors started taking a temporary shorting position when the stock rose significantly, making the stock subsequently hard to borrow. A few days later, the stock price began to fall with the announcement related to the potential leak of information on July
27th,2020, and the SEC opened an investigation at the beginning of August. On the contrary, the
GameStop stock was already heavily shorted before the stock price rose. Some retail investors interpreted it as a reason to make the short squeeze and "punish" the institutional investors who shorted the stock.
The Altman Z score findings confirm Kodak employees' claim that the company would have had difficulties paying back the loan. Eastman Kodak's chances of falling into bankruptcy are high based on the low Z score found in the distress zone. Our peer comparison with the Z scores shows that Eastman Kodak was currently below the competition. This leads us to question the conditions surrounding the DFC Loan process, observing that the investigation conducted did not reveal any wrongdoing. Comparing Eastman Kodak and GameStop gave us more insight into individuals and institutional impact on the stock prices and how to interpret specific movements that could be later reflected in the trading data.
Thibault Padiou Brandeis University April 23rd 2021 -18 - Chapter Three. Statistical Analysis
The goal of this statistical analysis will be to apply some of the metrics used in Kenneth
R Ahern's "Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal
Insider Trades "to Eastman Kodak trading data. In his paper, Kenneth R Ahern found that by
controlling for unobserved cross-sectional and time-series variation, sampling bias, and strategic
timing of insider trades, when information is short-lived, Absolute Order imbalance and effective spread are the most robust predictors of insider trading. The statistical analysis will be based on the positive relationship between insider trading and market illiquidity. For the statistical analysis, this paper will change some of the metrics used by Kenneth R Ahern based on the limited data available to use. This paper will not use control omitted variables and sampling bias.
It will only be looking at the trade data of one specific firm, and the data available doesn't allow the possibility of using those proxies effectively. The main question that this paper will try to answer will be "what do we find when we use the toolkit of financial econometrics to look for insider trading around a recent high-profile corporate event alleged to be suspicious?". Prior research in chapters one and two of this paper will give a better sense of the range of time when informed trading could have happened. Chapter two provides a better understanding of Eastman
Kodak stock value and the different market movements surrounding the DFC Loan announcement, and what could have been affecting them.
Thibault Padiou Brandeis University April 23rd 2021 -19 - I. Data
This statistical analysis is using Bloomberg intraday trade data from April 1st to
December 30th,2020. These data include: Trade, Bid, Ask with open, close, high, low, value,
volume, and ticks. These data are real-time trade data, with increments of time going from 5 to 2 seconds. In total, there are 243,278 observations with 43 variables. The main variables that will be used are Absolute Order Imbalance3, Order Imbalance, Bid Ask Raw Spread4, and Quoted
Spread5. Other variables were needed to sort the data in a comprehensive way. One of the
variables created matches the best bid, and the best ask to the latest trade, given that the trade bid
and ask sometimes differ because of the random time increments. The data was primarily sorted
by dates starting from April 1st,2020, to December 30th, 2020. This comprehensive time range
allows us to better understand the different market movements surrounding Eastman Kodak
before and after the announcement. We will also pinpoint suspicious market activities
surrounding the announcement of the DFC Loan with more precision. The different exhibits have
monthly and daily statistics, which gives both a more general and then detailed overview of the
various trends.
II. Variables:
The four main variables: Absolute Order Imbalance, Order Imbalance, Quoted Spread,
and Bid-Ask Raw Spread, were chosen based on Ahern's findings. However, some of those
3 Order Imbalance is an event when buy and sell orders cannot be matched due to an excess of either buy or sell 4 Bid Ask Raw Spread is the difference between bid and ask price 5 Quoted Spread is the difference between the bid and ask spread and midpoint Thibault Padiou Brandeis University April 23rd 2021 -20 - variables were changed based on the data at the current disposal. Other variables are needed to
calculate Absolute Order Imbalance, Order Imbalance, Quoted Spread, and Bid-Ask Raw
Spread. As a result, we will have to find a midpoint of the best bid and best ask. This will allow us to use the Lee and Ready Algorithm, which will enable us to determine which trade can be considered a buy trade can be considered a sell.
To calculate the Midpoint, this paper will be using the latest closing prices of bids and asks to match the trade. The formula would be 0.5 ( + ). Which will be
called MP. ∗ 𝑎𝑎𝑎𝑎𝑎𝑎 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑒𝑒
The Lee and Ready Algorithm (1991 algorithm can be found using the Midpoint and the
latest closing price. The trade will be considered a buy if the closing price is higher than the
Midpoint. It will be considered a sell if lower than the Midpoint.
The Quoted Bid Ask Spread is calculated using the Midpoint and the last bid and ask
price. The spread between the bid and the ask will be divided by Midpoint, which will give the
Quoted Bid Ask Spread.
= ( )/
The Bid Ask Raw𝑄𝑄𝑄𝑄 Spread𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 will𝑄𝑄𝑄𝑄𝑄𝑄 be used𝑎𝑎𝑎𝑎 𝑎𝑎as𝑐𝑐𝑐𝑐 an𝑐𝑐𝑐𝑐𝑐𝑐 alternative− 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑐𝑐𝑐𝑐measure𝑐𝑐𝑐𝑐𝑐𝑐 𝑀𝑀𝑀𝑀 to the Effective Spread.
Due to the limitations of the data and the inability to match the latest trade with the right quote
Effective Spread cannot be used in this study. Instead, the Bid Ask Raw Spread is defined as
= ( )
The last step will𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 be finding𝐵𝐵𝐵𝐵𝐵𝐵 𝐵𝐵the𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 Absolute𝑎𝑎𝑎𝑎 Order𝑎𝑎 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 Imbalance− 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 as𝑐𝑐𝑙𝑙 𝑜𝑜𝑜𝑜𝑜𝑜found in Holden and
Jacobsen (2014). Absolute Order Imbalance can be used as a daily estimate of PIN based on the
findings of Aktas et al. (2007) and Easley, Hvidkjaer, and O'Hara (2002).
Thibault Padiou Brandeis University April 23rd 2021 -21 - Absolute Order Imbalance can be found using Buys and Sells are the number of Buys and Sells
per day and Buys and Sells are identified using the Lee and Ready Algorithm (1991)
| / + |
This paper will also use Order𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 Imbalance− 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵which would𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 be the same as Absolute Order
Imbalance but without the Absolute value.
( )/( + )
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 − 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆
III. Limitations:
The limitations to this paper include the same restrictions as Ahern's faced and some other constraints due to the quality of the data. A good addition to this study would have been a benchmark with companies in the same industry as Eastman Kodak to compare the different patterns and see if there are any similarities. The lack of this benchmark makes this paper subject to more speculation when analyzing the results and weakening our analysis. The measure would also help us find and exclude market movements resulting in illiquidity that are not correlated to insider trading. The trade data that we obtained from Bloomberg is another limitation of this analysis. The intraday trade data that this paper is using is given in increments of 1 to 5 seconds instead of being consistent. Due to this difference in time increments, some variables were altered, such as Bid-Ask Effective spread, and change it to Bid-Ask Raw Spread.
The same limitation that applied to Kenneth R Ahern's research also applies to this paper.
Kenneth R Ahern states that "When information is long-lived, none of the illiquidity measures correctly detect insider trading. These results show that proxies for informed trading are ubiquitous in finance research; they may not be informative in many situations”. If information is
Thibault Padiou Brandeis University April 23rd 2021 -22 - long-lived informed, traders might time their trade so that it doesn't show any signs of illiquidity when trading. The informed traders might use outside events that triggered market movements to conceal their trade and cannot be detected. In this case, The Akin Gump report showed that
Eastman Kodak's first contact with the DFC was on May 31st, 2020 and that they knew about the positive approval for the loan at the latest on July 27th, 2020. If any information about the support of the DFC Loan or the application itself leaked to a potential investor, they could have timed their trade following the principle cited above. This paper would be facing a similar problem if the information about the loan being retracted leaked and got to potential insiders' ears before the general public. The only difference in the latter is that the trading volume was relatively high due to the retail investors and short-sellers impact. The insider trades would potentially go unnoticed as the timing would be perfect to avoid detection.
IV. Summary Statistics:
Exhibit D statistics include count, mean, min, max, and the standard deviation of the six variables. The results are summarized monthly. Starting with the number of buys and sells from
April to December, we see the number of orders gradually increased with the peak being in
September. The number of sells was higher on average than the number of buys except for April,
May, October and December. The higher number of buys for April and May can be partly explained by the low price of the stock, which made it attractive to day traders and retail investors. The higher number of sells in the following months except June can be explained by the surge in the stock price in July and investors cashing on their positions. Number of buy and sell orders gradually increase starting from July 27th . The month of June is somewhat of an
Thibault Padiou Brandeis University April 23rd 2021 -23 - enigma since no significant news happened that would have triggered potential investors to buy
and sell at an almost equal amount. The standard deviation for both measures in June was
significantly higher than in previous months. Still, insiders of Eastman Kodak were already
aware of the application for the DFC Loan. Based on this fact, they could have traded in
consequence to avoid detection.
Bid-Ask Raw Spread and Quoted Spread follow a similar pattern as buys and sells. The
spread was higher during April, May, June, and July, with an average spread of 0.2 for the three
first months. The month of July is quite particular since it's the month of the announcement and
needs to be thoroughly looked at. The max and minimum values for the spreads are at the highest
and the lowest of the entire time range in July. The standard deviation is relatively high, with
0.67 for Bid-Ask Raw Spread and 2.33 for the Quoted Spread.
Eastman Kodak's stock shuffled between high and low market liquidity during July,
which can be explained by the retail investors and the short-seller’s effects during and after the
DFC Loan announcement. It is interesting to notice that after July, the stock appeared to become more liquid with a Bid Ask Raw spread relatively small of .01. Absolute Order Imbalance and
Order Imbalance follow a similar pattern as the other variables described above and show more liquidity after the announcement. When looking at Absolute Order Imbalance, it's important to remember that this study uses a PIN substitute and assumes that the probability of an informed even is equal to 1. Both the Absolute and Normal Order Imbalance starts with a higher mean in
April, and then it slowly decreases to a more stable position from September to December. The
standard deviations of both of those metrics seem to be more volatile in the months before the
DFC Loan announcement. From those results, we assume that illiquidity was higher in the month
Thibault Padiou Brandeis University April 23rd 2021 -24 - preceding the announcement. The events that occurred around the DFC announcement brought some stability and higher liquidity to Kodak's stock.
Exhibit E and F show us Absolute Order Imbalance and Bid-Ask Raw Spread daily instead of a monthly level. The monthly summary statistics gave us a good overview of the major trends the data is showing us. The daily statistics help us potentially pinpoint specific moments where insider trading was likely. The two-measure that will be used are Bid-Ask Raw
Spread and Absolute Order Imbalance.
When analyzing the daily chart of Bid-Ask Raw Spread in exhibit E, one observation point in the chart is skewing the line-up, and that is July 29th. The spread was at its maximum value one day after the DFC Loan announcement. The hard-to-borrow scenario explained in chapter two of this paper could explicate that upward trend. Although hard to see, there are more fluctuations in the Bid-Ask Raw Spread in the month before this announcement, especially in April, May, and
June. The rest of the fluctuations in the spread, after July 29th around the beginning of August, could be explained by the different announcements related to the SEC investigation and the DFC
Loan being put on hold. The rest of the daily data is consistent with the monthly results with a stable line after July.
The Absolute Order Imbalance graph in Exhibit F shows a similar trend as the one seen in Bid-Ask Raw Spread. The Order Imbalance appears to be way more volatile in the month preceding the announcement. The maximum was reached on June 19th, and it seems that no specific events before or during that particular day could explain such a high number of .59, given that the overall mean was .1 for the entire time series. Our daily data shows that there was a large amount of buy orders on June 19th with a little bit less than three standard deviations higher than the mean of the month. Absolute Order Imbalance after the announcement appears to
Thibault Padiou Brandeis University April 23rd 2021 -25 - stabilize with the majority of means between .1 and .2. It is interesting to notice that the most significant change in standard deviations for Absolute Order Imbalance seemed to be before the announcement and not during or after the announcement, which we saw earlier in the monthly data set. It is important to remember that Eastman Kodak was working on applying for the DFC
Loan during June. No apparent market effect could be responsible for such a high Absolute
Order Imbalance. Due to the limitations mentioned before in the chapter, this analysis cannot nullify the possibility of market effects unrelated to insider trading skewing the data.
Thibault Padiou Brandeis University April 23rd 2021 -26 - Conclusions.
If illiquidity measures are indeed successful in predicting insider trading, our results show that Eastman Kodak's insiders could have committed insider trading in the months preceding the DFC Loan. It is particularly interesting to see the high spread and order imbalance in June and the beginning of July. The Akin Gump report did show that Eastman Kodak was secretly working on the DFC Loan during that period. If the information leaked to insiders, some could have capitalized on it during that period. The stock movement of July 27th is indeed consequent with a potential leak, especially when looking at the higher number of buys and sells.
Another trend shown by this analysis was the Kodak stock becoming more liquid from August to
December after stabilizing the noise trading resulting from the loan announcement.
Both the Bid-Ask Raw Spread and the Absolute Order Imbalance showed fewer signs of illiquidity during that period. However, it is hard to say whether Eastman Kodak insiders conducted insider trading with absolute certainty because of the limitations mentioned before.
The lack of a market benchmark to compare our results takes away some of our investigation's credibility. Without it, this analysis cannot say whether another event instead of insider trading created this illiquidity. The period before the loan announcement was particularly volatile due to the COVID 19 impact and various governmental economic responses. It is also important to stress that some of the metrics used in this paper have proven to be somewhat inadequate when certain conditions, such as insiders timing their trades to avoid illiquidity, are present.
Thibault Padiou Brandeis University April 23rd 2021 -27 - Exhibits.
Exhibit A. Timeline of events
● May 31st Eastman Kodak’s first contact with the DFC offices about the loan
● July 24th Eastman Kodak’s trading volume was 74,900 and with a closing price of 2.10
● July 26th Eastman Kodak officially applied for the DFC Loan
● July 27th Eastman Kodak ‘s press release with a Rochester journalist about the DFC Loan
(non-official)
● July 27th Eastman Kodak’s management board are granted stock options
● July 27th Eastman Kodak’s trading volume was 1.64 million and a closing price of 2.62
● July 28th The company officially announced it was selected to receive a 765-million-dollar
loan
● July 29th George Garfunkel gift to a religious institution of 3 million shares valued at a
price of 116.3 million given the stock high and low of 38.75 $ per share.
● July 31th Following news of a potential leak on July 27th the stock fell by 27 % to a closing
price of 21.85 dollars per shares
● August 4th first news of potential SEC investigation into insider trading begins to emerge
stock price 14.40 $ at closing.
Thibault Padiou Brandeis University April 23rd 2021 -28 - Exhibit B. Altman Z score
This table shows the Altman Z scores of Eastman Kodak, Canon, HP and Ricoh.
(2) = 1.2 × + 1.4 × + 3.3 × + 0.6 × + 1 ×
1 2 3 4 5 𝑍𝑍 • = working𝑋𝑋 capital𝑋𝑋 / total assets𝑋𝑋 𝑋𝑋 𝑋𝑋
1 • 𝑋𝑋 = retained earnings / total assets
2 • 𝑋𝑋 = earnings before interest and taxes / total assets
3 • 𝑋𝑋 = market value of equity / total liabilities
4 • 𝑋𝑋 = sales / total assets
5 Zone of Discrimination:𝑋𝑋
• > 2.99 – “ ”
• 𝑍𝑍1.88 < < 2𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆.99 – 𝑍𝑍𝑍𝑍𝑍𝑍“ 𝑍𝑍 ”
• < 1.88𝑍𝑍 – “ 𝐺𝐺𝐺𝐺” 𝐺𝐺𝐺𝐺 𝑍𝑍𝑍𝑍𝑍𝑍 𝑍𝑍
𝑍𝑍 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍
Thibault Padiou Brandeis University April 23rd 2021 -29 - Exhibit C. Kodak and GameStop stock comparison
• GME is GameStop stock ticker
• KODK is Eastman Kodak stock ticker
Thibault Padiou Brandeis University April 23rd 2021 -30 - Exhibit D. Monthly Summary Statistics
This tables includes the monthly summary statistics of Eastman Kodak trading data. The variables being used are Absolute Order Imbalance, Order Imbalance, Number of buys, Number of sells, Bid Ask Raw Spread and Quoted Spread. The definitions for each variable are as follows:
• Order Imbalance is an event when buy and sell orders cannot be matched due to an
excess of either buy or sell
• Bid Ask Raw Spread is the difference between bid and ask price
• Quoted Spread is the difference between the bid and ask spread and midpoint
• Number of buys is the number of buys orders
• Number of sells is the number of sells orders
The statistics includes the count, the mean, the minimum, the maximum and the standard deviation.
Thibault Padiou Brandeis University April 23rd 2021 -31 -
Thibault Padiou Brandeis University April 23rd 2021 -32 - Exhibit E. Daily Bid Ask Raw Spread
This table shows the daily statistics from April 1st 2020 to January 1st 2021. The variable used in
the exhibit is Bid Ask Raw Spread. The red dotted line shows the day the DFC loan was
announced July October 28th, 2020
• Bid Ask Raw Spread is the difference between bid and ask price
The data is summarized on a daily level instead of monthly.
Thibault Padiou Brandeis University April 23rd 2021 -33 - Exhibit F. Daily Absolute Order Imbalance
This table shows the daily statistics from April 1st 2020 to January 1st 2021. The variable used in
the exhibit is Absolute Order Imbalance. The red dotted line shows the day the DFC loan was announced July October 28th, 2020:
• Absolute Order Imbalance is an event when buy and sell orders cannot be matched due to
an excess of either buy or sell. The result is in absolute value.
The data is summarized on a daily level instead of monthly.
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