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Timothy A. Hutchinson, Individually and On Behalf of A Class of v. Antonio M. Perez

November 8, 2012


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge:


Before the Court is a motion to dismiss brought by Defendants Antonio M. Perez, Philip J. Faraci, Antoinette McCorvey, and Pradeep Jotwani (collectively, "Defendants") against Lead Plaintiff Bret S. Jones ("Plaintiff"). The Amended Complaint, filed by Plaintiff on behalf of all persons who acquired Eastman Kodak Company ("Kodak") securities between January 26, 2011 and January 19, 2012 ("Class Period"), alleges that Defendants,*fn1 who are current executives of Kodak, made false and misleading statements about Kodak's financial conditions in the one-year period leading up to its bankruptcy filing in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b--5. For the reasons set forth below, Defendants' motion is GRANTED. Plaintiffs' motion to strike Appendix B of Defendants' motion to dismiss is DENIED.*fn2


Once a global and commercial giant commanding 90% of film and 85% of camera sales in the United States, Kodak failed in its effort to transform its film-based business into a profitable alternative in the age of digital photography. Am. Compl. ¶ 13. Having spent the 1990s trying to catch up and restructure itself, Kodak launched a new strategy of digital transformation in 2004 under the leadership of Defendant Perez. Id. ¶¶ 14-15. This strategy was initiated in response to Wall Street's criticism of its dwindling cash reserves and profitability. Id. Kodak's transformation was to be partly funded by "patent monetization," i.e. income generated by intellectual property ("IP") licensing and sales. Id. ¶ 15. Defendant Perez has been Kodak's Chairman of the Board and CEO since April 2003. Defendant Faraci has been Kodak's President and COO since September 2007. Defendant McCorvey has been Kodak's CFO and Senior Vice President since November 2010. Defendant Jotwani has been Kodak's President of Consumer Digital Imaging Group, Chief Marketing Officer, and Senior Vice President since September 2010. Id. ¶¶ 8-11.

On January 24, 2011, two days before the Class Period began, an administrative law judge found against Kodak on a "highly anticipated" patent case.*fn3 Id. ¶ 15. Plaintiff alleges that Kodak, in response, "immediately embarked on a campaign to convince investors of the imminence of Kodak's transformation to a digital, profitable, sustainable company," an effort that continued until its bankruptcy filing a year later. Id. ¶¶ 16, 19-20. To support his position, Plaintiff points to various statements made by Kodak and Defendants Perez, McCorvey, and Jotwani in January and February of 2011, which affirmed the company's "ongoing digital transformation" and anticipated positive results in 2011 based on the 2010 results, and assured shareholders that Kodak had "sufficient financial resources" despite the naysayers. Id. ¶¶ 34-37, 40-43. Plaintiff alleges that such statements were false and misleading at the time they were made because Defendants "failed to disclose the true and material fact[]" that Kodak lacked adequate financial resources and that a significant portion of Kodak's cash balance was not available to fund the U.S. operations. Id. ¶¶ 39, 45.

As evidence of Kodak's deteriorating financial condition-which in turn eroded Kodak's negotiating leverage with respect to IP licensing and sales vis-a-vis deep-pocket technology companies-the Amended Complaint highlights the following events. Id. ¶ 20. On March 15, 2011, Kodak issued a press release disclosing a private placement raising $250 million, $50 million of which was used to repurchase outstanding debt. Id. ¶ 46. On April 26, 2011, Kodak renegotiated their loan agreement and removed the negative covenant requiring a cash minimum of $250 million in the U.S. Id. ¶¶ 53(g), 108. On April 28, 2011, Kodak reported a loss of $249 million in the first-quarter from continuing operations. Id. ¶ 49. Plaintiff alleges that Defendants failed to disclose that the above measures were taken because Kodak was "desperate for cash" and was "in jeopardy of default" by violating the minimum cash covenant; instead Kodak misleadingly characterized them as "opportunistic" and "tak[ing] advantage of improvements in the credit market." Id. ¶¶ 48(f), 53(g). Plaintiff alleges that Defendants Perez and McCorvey, nonetheless, went on to misleadingly affirm the company's digital transformation by 2012 in the April 28, 2011, press release and earnings conference call, id. 51, and during the May 11, 2011, Annual General Meeting, where Defendant Perez again stated, "[W]e are committed to finish with [sic] this transformation in the year 2012. And our strategy has not changed and we have the resources to execute it, fundamentally the IP and the sales of non-strategic assets is what fund our digital businesses." Id. ¶ 54.

On July 20, 2011, Kodak announced that it had engaged Lazard Freres & Co. LLC ("Lazard") because it was exploring the "strategic alternative[]" of selling its digital patent portfolio, estimated to be worth $2-3 billion. Id. ¶¶ 21, 58. Plaintiff alleges that this announcement was yet again misleading because Kodak did not disclose that the new strategy was due to its desperation for cash and that Lazard had been hired "also for bankruptcy and restructuring counseling." Id. ¶ 60(f), (g). Defendants Perez and McCorvey continued to express Kodak's commitment to digital transformation by 2012 and affirmed the prior projection of year-end cash balance in July. Id. ¶ 62. Bloomberg, on August 30, 2011, reported Defendant Perez's statement that "a large number" of buyers were interested in the patent portfolio. Id. ¶ 66. Plaintiff alleges that the above statements were misleading because Kodak had difficulty finding a buyer due to the concern that the purchase would be considered a fraudulent transfer if Kodak ever became insolvent. Id. ¶ 69.

Still unable to execute the patent portfolio sale, Kodak announced on September 23, 2011, that it was drawing $160 million against its credit line, and the share price declined by 27% to $1.74 per share. Id. ¶¶ 72, 75. A week later, the share price further declined to "an all-time closing low" of $0.78 per share when Kodak confirmed the news that it had hired Jones Day, a law firm known for bankruptcy restructuring. Id. ¶ 81. Although Kodak commented that it had "no intention" of filing for bankruptcy on that day, id. ¶ 82, and Defendant Perez publicly remained optimistic about its ability to sell the digital imaging patent portfolio as late as November 3, 2011, id. ¶ 86, Kodak finally announced on January 19, 2012, that it was filing petitions for Chapter 11 bankruptcy protection, id. ¶ 92. Plaintiff alleges that since September 2011, Defendants issued false and misleading statements about Kodak's intention to file for bankruptcy since "[u]nbeknownst to investors, Kodak's liquidity had suffered a significant and critical decline." Id. ¶ 83(g).


A. Legal Standards

To survive a motion to dismiss under Rule 12(b)(6), "the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient 'to raise a right to relief above the speculative level.'" ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). While a court must accept as true all of the factual allegations contained in the complaint, "the tenet . . . is inapplicable to threadbare recitals of a cause of action's elements, supported by mere conclusory statements." Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). The Court, at this stage, is not limited to the complaint but "may consider any written instrument attached . . . statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI, 493 F.3d at 98.

In addition, a complaint alleging securities fraud such as the one before this Court "must satisfy the heightened pleading requirements" of Rule 9(b) and the Private Securities Litigation Reform Act (the "PSLRA") "by stating with particularity the circumstances constituting fraud." ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009). Under Rule 9(b), plaintiffs alleging fraud must: (1) specify the statements that the plaintiff contends were fraudulent; (2) identify the speaker; (3) state where and when the statements were made; and (4) explain why the statements were fraudulent. Fed. R. Civ. P. 9(b). The PSLRA, in turn, requires the court to dismiss the complaint if it fails to: (1) specify each statement alleged to be false or misleading along with reason(s) why it is so; or (2) "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u--4(b).

B. Claims under Section 10(b) and Rule 10b-5

Plaintiff alleges that Defendants' misrepresentations and omissions about Kodak's liquidity, IP licensing and sales, digital transformation, financial projections, and bankruptcy artificially inflated the stock prices and are thus actionable under Section 10(b) of the Exchange Act. Under that provision, it is unlawful to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Rule 10b-5, in turn, defines "employment of manipulative and deceptive devices" to include, inter alia, "mak[ing] any untrue statement of a material fact or [] omit[ting] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b--5(b). To state a claim under Section 10(b) and Rule 10b-5, Plaintiff must allege that defendants "(1) made misstatements or omissions of ...

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