Nor is it consonant with reality to suggest, as does the majority, that corporate executives may be motivated in accepting employment by the opportunity to make "secret corporate compensation * * * derived at the expense of the uninformed public." It was the intent of Congress that all members of the investing public should be subject to identical market risks, which market risks include, of course the risk that one's evaluative capacity or one's capital available to put at risk may exceed another's capacity or capital. Texas Gulf Sulphur, a Second Circuit decision that recognized insider trading as fraud under Rule 10b-5 of the Exchange Act, was the headline securities decision of the decade. cit. 1961); SEC Sec.Exch.Act Rel. 258 F. Supp. The final question to be answered is: were these officers and employees disqualified as the result of possessing information gleaned by the first drill core from purchasing TGS stock? Although I see no reason why we could not affirm nevertheless, I am content to leave it for him to consider whether, although he has power to issue an injunction, there is equity in this portion of the bill. The provisions of Sections 17(a) (2) and (3) of the Securities Act of 1933, 15 U.S.C. 7852 and H.R. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. Id. The trial court's finding that "he sought to, and did, `beat the news,'" 258 F.Supp. at 282. [2]The purchases by the parties during this period were: [3] A "call" is a negotiable option contract by which the bearer has the right to buy from the writer of the contract a certain number of shares of a particular stock at a fixed price on or before a certain agreed-upon date. It, too, was drilled at the anomaly's eastern edge. In their opinion, the majority have become so involved in usurping the function of the trial court, in selecting the witnesses they (at variance with the trial court) choose to believe, in forming their own factual conclusions from the evidence (in disregard of Rule 52 (a)), in deciding with, of course, the benefit of the wisdom of hindsight, how they, had they been executives of Texas Gulf Sulphur Company (TGS), would have handled the publicity attendant to the exploration of the Timmins property, in determining (to their own satisfaction) the motives which prompted each of the individual defendants to buy TGS stock and in becoming mining engineering experts in their own right, that I find it desirable in fact, essential to state my opinion as to the fundamental jurisdiction of the Court of Appeals and the issues properly before us. 258 F.Supp. denied, 385 U.S. 835, 87 S.Ct. And, I concur in as much as Part II of Judge Friendly's opinion as discusses the origins of the rule and the relevance of today's decision involving only an application by the S.E.C. Roche, a mining stock specialist, added that mines with significantly lower percentages of copper and with no zinc or silver, as here, were profitably operated. Texas Gulf Sulphur. 78o(c) (1) "* * * effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security * * *") demonstrate that when Congress intended that there be a participation in a securities transaction as a prerequisite of a violation, it knew how to make that intention clear. supra Table 1 at 16-17. 1271, 1278-80 (1965). 99 (S.D.N.Y.1966), appeal pending; Heit v. Weitzen, 260 F.Supp. [27] It does not appear to be unfair to impose upon corporate management a duty to ascertain the truth of any statements the corporation releases to its shareholders or to the investing public at [862] large. But such a statement could be made of almost any fact related to TGS. An insider's duty to disclose information or his duty to abstain from dealing in his company's securities arises only in "those situations which are essentially extraordinary in nature and which are reasonably certain to have a substantial effect on the market price of the security if [the extraordinary situation is] disclosed." 1968) (en banc), cert. I concur in Judge Waterman's majority opinion and I concur in the discussion of law set forth in Part II of Judge Friendly's concurring opinion. at 283, knowledge of the possibility, which surely was more than marginal, of the existence of a mine of the vast magnitude indicated [850] by the remarkably rich drill core located rather close to the surface (suggesting mineability by the less expensive open-pit method) within the confines of a large anomaly (suggesting an extensive region of mineralization) might well have affected the price of TGS stock and would certainly have been an important fact to a reasonable, if speculative, investor in deciding whether he should buy, sell, or hold. The hole was concealed and a barren core was intentionally drilled off the anomaly. Id. The event that changed it all was the SEC's 1966 suit against Texas Gulf Sulphur Company and thirteen of its employees and directors. All of these statements were inaccurate and a matter of concern to Fogarty and Stephens. [834] [835] [836] [837] [838] [839] Philip A. Loomis, Jr., Gen. More important, however, is the realization which we must again underscore at the risk of repetition, that the investing public is hurt by exposure to false or deceptive statements irrespective of the purpose underlying their issuance. By May 15, TGS stock was selling at 58. 1968). Fair To All People: The SEC and the Regulation of Insider Trading The SEC Takes Command Texas Gulf Sulphur The opportunity to extend that administrative rule to the common law would be mined in the financial transactions surrounding the discovery of copper and zinc ore in deposits owned by the Texas Gulf Sulphur Company near Timmins, Ontario. Had TGS followed this ex post facto directive, it first would have had to find some news medium capable of reaching the nation's potential investing public and willing to publish a mass of metallurgical reports disclosing the "basic facts." at 281-82. See also 9(a) (4), 15(c) (1), (2), 15 U.S. C. 78i(a) (4); 78o(c) (1), (2). Congress has made it clear in the other antifraud provisions of general application that its concern was not with allegedly misleading corporate publicity but rather with purposeful schemes to deceive and defraud the public by means of manipulative and deceptive devices which directly involve purchases or sales of securities. 1960), and cases there cited, it is likewise true that an isolated violation, especially in the absence of bad faith, does not require such relief. v. Texas Gulf Sulphur became the first insider trading case to be litigated in federal courts in American history, making the beginning of disgorgement in S.E.C. He stated that the completion of "the first drill hole" with "a 600 foot drill core is very very significant * * * anything over 200 feet is considered very significant and 600 feet is just beyond your wildest imagination." It closed at 30 the next day, and at 29 3/8 on April 15. The TGS opinion rested on a policy of equality of access to information. As of that time SEC experts estimated ore reserves of over 8 million tons at a gross assay value (excluding costs) of over $26 a ton. Texas Gulf Sulphur Co. (1968), began with the discovery of the Kidd Mine and implicated the employees of Texas mining company. 5 Surprising Facts About Insider Trading | FINRA.org Materiality must depend upon the facts and their resolution is for the fact-finder, court or jury. No.1383. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. . On Saturday morning, April 11th, both the New York Herald Tribune and the New York Times prominently reported a major ore discovery. Assuming the majority's and the Commission's full disclosure theory, would the facts as then developed have given the buying or selling public the so-called advantages possessed by the insiders? Similarly, corporate officers or directors may be liable for causing their corporation to engage in securities transactions. Later, on March 16, he helped prepare a letter for Dr. Holyk's signature in which TGS made a substantial offer for lands near K-55-1, and on the same day he, who had never before purchased calls on any stock, purchased a call on 100 shares of TGS stock. The District Court characterized the press release as an accurate portrayal of the situation as it was known at that time. Those who purchased were apparently willing on the basis of the inconclusive first hole and other information to risk a certain amount of their funds in TGS stock, hopeful that future developments would be favorable. 99, (S.D. Even if, however, we were to disregard the teaching of Judge Frank in Fischman v. Raytheon Mfg. 258 F.Supp. A further insight into the proper scope of 10b-5 can be gained by examining 17 (a), 15 U.S.C. Another series of decisions involve a broker, dealer or financial institution which fraudulently induced plaintiff's purchase or sale. bonds or stock options) by the individuals with potential to access to non-public information about company. Following a visit to the discovery property, The Northern Miner can say that a major new zinc-copper-silver mine is definitely in the making, one that has all the earmarks of shaping into a substantial open pit operation. They argue that the "connection" that has to exist between a corporate statement and a security transaction is supplied by the theoretical argument that every "material" corporate statement presumably affects the market price of the issuer's securities. Cf. JM Quinn B, "SEC v Texas Gulf Sulphur" (SEC v Texas Gulf Sulphur . 2d 549 (S.D. at 282-283. 262 at 280, in the sense that the materiality of facts is to be assessed solely by measuring the effect the knowledge of the facts would have upon prudent or conservative investors. Kline had known since November 1962 that K-55-1 had been drilled, that the drilling had intersected a sulphide body containing copper and zinc, and that TGS desired to acquire adjacent property. The issue here, however, is the different one of an injunction. 1959), relative to an interpretation of the words contained within a congressional statute, that "* * * unless they explicitly forbid it, the purpose of a statutory provision is the best test of the meaning of the words chosen. The Texas Gulf Sulphur decision began what has become a fifty-year project of developing U.S. insider trading regulation through judicial lawmaking. The Commission argues that there was a failure to disclose material information. "[13] Roche, a Canadian broker whose firm specialized in mining securities, characterized the [851] importance to investors of the results of K-55-1. Original Item: The release, see p. 845, supra, began by referring to rumored reports that the company had made a substantial copper discovery and then continued: "These reports exaggerate the scale of operations, and mention plans and statistics of size and grade of ore that are without factual basis and have evidently originated by speculation of people not connected with TGS." We should have in mind the wise words of Judge Learned Hand in Cawley v. United States, 272 F.2d 443, 445 (2 Cir. c. bribery. They would only point more directly to the conclusion that an injunction here would not only violate fundamental legal principles which for centuries have restricted the injunctive grant but would not be justified by any sufficient factual showing in this case. ); Cooper v. North Jersey Trust Co., 226 F.Supp. The Second Circuit . Kidd 55 was only one of several thousand anomalies (areas where there is unusual variation in the electrical conductivity of rocks) that TGS detected in its aerial exploration of the Canadian shield. ", Dr. Park, former Dean of the School of Earth Sciences at Stanford, admitted that K-55-1 was "an interesting one, a good one" but that there was not "any evidence at all for any discussion of extent, from one drill hole." Rule 10b-5, 17 CFR 240.10b-5, on which this action is predicated, provides: Rule 10b-5 was promulgated pursuant to the grant of authority given the SEC by Congress in Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Their motive for purchase does not establish the materiality of the facts which influenced them. Therefore, in a case where disclosure to the grantors of an option would seriously jeopardize corporate security, it could well be desirable, in order to protect a corporation from selling securities to insiders who are in a position to appreciate their true worth at a price which may not accurately reflect the true value of the securities and at the same time to preserve when necessary the secrecy of corporate activity, not to require that an insider possessed of undisclosed material information reject the offer of a stock option, but only to require that he abstain from exercising it until such time as there shall have been a full disclosure and, after the full disclosure, a ratification such as was voted here. 240.14a-101-103. Absent a securities transaction by an insider it is almost impossible to prove that a wrongful purpose motivated the issuance of the misleading statement. TGS. Feb. 26, 1968). 258 F.Supp. at 294. TGS decided to acquire the surrounding plots in the Kidd 55 area to enable it fully to investigate the anomaly. The analysis showed that the minerals present in the area were extremely rich in minerals. at 284. 193, 90 L.Ed. . Such a deceptive or manipulative practice would be prohibited by 10(b) and Rule 10b-5. 2 Less recognized is the opinion's foundational role in Rule 10b 5's use to create a remedy against corporations for misstatements made by their officers (or others) even if the speaker had no evil motive. Accordingly, we hold that Rule 10b-5 is violated whenever assertions are made, as here, in a manner reasonably calculated to influence the investing public, e. g., by means of the financial media, Fleischer, supra, 51 Va.L.Rev. As it is our holding that the information acquired after the drilling of K-55-1 was material, we, on the basis of the findings of direct and circumstantial evidence on the issue that the trial court has already expressed, hold that Darke violated Rule 10b-5 (3) and Section 10(b) by "tipping" and we remand, pursuant to the agreement of the parties, for a determination of the appropriate remedy. Coates, however, placed his call no later than 10:20. 78j(b) and Rule 10b-5. Firm Management White-Collar/Regulatory Pro Bono/Public Service/D&I Is ESG a Trade Secret? At 3:00 P.M. on April 12, 1964, evidently believing it desirable to comment upon the rumors concerning the Timmins project, TGS issued the press release quoted in pertinent part in the text at page 845, supra. Export Reading mode BETA. [23] Coates's violations encompass not only his own purchases but also the purchases by his son-in-law and the customers of his son-in-law, to whom the material information was passed. Further contrast it with a hypothetical November 1963 press release implicitly suggested by the majority "TGS as a result of drilling on its property in Canada has knowledge of the more than marginal possibility of a mine of magnitude over an extensive region of remarkably rich mineralization." 1966), aff'd in part, rev'd in part [29] Since none of the parties has raised the question, I assume the continuing vitality of Ruckle, despite what have been regarded as contrary intimations in O'Neill v. Maytag, 339 F.2d 764 (2 Cir. denied, 382 U.S. 811, 86 S.Ct. The companies, the securities of which are listed on exchanges, their employees and investing public alike should have some knowledge of the rules which will govern their actions. 416, 419 (S.D N.Y.1955) (Kaufman, J. 447, 458-59 (2016) (observing that . at 296. So, it is perhaps safer to say that the Texas Gulf Sulphur em- Particularly here, where a formal announcement to the entire financial news media had been promised in a prior official release known to the media, all insider activity must await dissemination of the promised official announcement. It seems clear, however, that if corporate management demonstrates that it was diligent in ascertaining that the information it published was the whole truth and that such diligently obtained information was disseminated in good faith, Rule 10b-5 would not have been violated. By morning of April 13, in K-55-5, the fifth drill hole, substantial copper mineralization had been encountered to the 580 foot mark, and the hole was subsequently drilled to a length of 757 feet without further results. silver. At one extreme is a rule that no officer or employee or any member of their families shall own stock of the company for which they work or purchase stock if he possesses "material" inside information. Clayton, who was unaware of the April 16 disclosure announcement TGS was to make can, in support of his claim that the favorable news was public, rely only on the rumors and on the phone calls received by TGS prior to the placing of his order from those who seemed to have heard some version or rumors of the news. This visual estimate convinced TGS that it was desirable to acquire the remainder of the Kidd 55 segment, and in order to facilitate this acquisition TGS President Stephens instructed the exploration group to keep the results of K-55-1 confidential and undisclosed even as to other officers, directors, and employees of TGS. Such thoughts can only arise from unfounded speculative imagination. The Texas Lawbook Free Speech, Due Process and Trial by Jury Appellate Bankruptcy Commercial Litigation Corp. Deal Tracker/M&A GCs/Corp. 1437 (1967). 1383, 73rd Cong., 2d Sess. Hindsight, however, is not the test. [1] Pursuant to a stipulation by all parties, the question of the appropriate remedies to be applied was deferred pending a final determination whether the defendants or any of them had violated Section 10(b) and Rule 10b-5 and therefore that question is not now before us. 26 (S.D. Counsel, David Ferber, Sol., Roger S. Foster, Sp. [25] TGS relies [858] on the holding of the court below that "The issuance of the release produced no unusual market action" and "In the absence of a showing that the purpose of the April 12 press release was to affect the market price of TGS stock to the advantage of TGS or its insiders, the issuance of the press release did not constitute a violation of Section 10(b) or Rule 10b-5 since it was not issued `in connection with the purchase or sale of any security'" and, alternatively, "even if it had been established that the April 12 release was issued in connection with the purchase or sale of any security, the Commission has failed to demonstrate that it was false, misleading or deceptive." On the other hand, in view of the decline of the market price of TGS stock from a high of 32 on the morning of April 13 when the release was disseminated to 29 3/8 by the close of trading on April 15, and the reaction to the release by other brokers, it is far from certain that the release was generally interpreted as a highly encouraging report or even encouraging at all. This result undoubtedly "excited the interest" of the TGS exploration team. Indeed, if the correct standard is applied, the finding of the trial court requires the conclusion that the press release was misleading: The evidence in the record in support of this finding is overwhelming. Although several other witnesses objected to the breadth of the proposed prohibition that Corcoran was supporting, the section as enacted did not in any way limit the broad scope of the "in connection with" phrase. Insider trading takes place legally every day, when corporate insiders. These insiders, after learning of an unprecedented discovery . TEXAS GULF LOSES BID IN HIGH COURT - The New York Times And finally there is the sardonic anomaly that the very members of society which Congress has charged the SEC with protecting, i. e., the stockholders, will be the real victims of its misdirected zeal. Solved Questions: Could you argue that Martha Stewart did - Chegg Several other samples verified the findings. The inconsistency of the majority's position is immediately apparent. Insider Trading - Library of Economics and Liberty SEC v. Texas Gulf Sulphur Co. is a case from the United States Court of Appeals for the Second Circuit which articulated standards for a number of aspects of insider trading law under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5.In particular, it set out standards for materiality of inside information, effective disclosure of such information, and what constitutes a . [15] Inasmuch as the visual evaluation of that drill core (a generally reliable estimate though less accurate than a chemical assay) constituted material information, those advised of the results of the visual evaluation as well as those informed of the chemical assay traded in violation of law. 91,317 (N.D.Ill. However, it does not necessarily follow that this is an appropriate case for granting an injunction as to future press releases. Moreover, a review of other sections of the Act from which Rule 10b-5 seems to have been drawn suggests that the implementation of a standard of conduct that encompasses negligence as well as active fraud comports with the administrative and the legislative purposes underlying the Rule. 115 (1934). It can, indeed, be argued that, even on this basis, Rule 10b-5(2), absent the reading in of a scienter requirement, goes beyond the authority granted by 10(b) of the 1934 Act. 2 Close C5P5 The rapid development of a broad insider trading prohibition under Rule 10b-5 would face a formidable obstacle, however, after Lewis Powell joined the . 78o(c) (1), (2) provides that no broker or dealer shall (1) induce the purchase or sale of any security by means of any manipulative, deceptive or other fraudulent contrivance or (2) attempt to induce the purchase or sale of any security "in connection with which such broker or dealer engages in any fraudulent, deceptive, or manipulative act or practice * * *.". 972, 978 (SDNY 1964); Miller v. Bargain City, U. S. A., Inc., 229 F.Supp. There is therefore no inconsistency in the statements made and the conclusions reached in the two releases. See 3 Loss, Securities Regulation 1692-96 (1961). . The term "insider trading" describes the illegal use of con-fidential, material' information by an individual for personal profit in the stock market. The number of possibilities for Congressional legislation and Commission rulings are legion. At that time drill holes K-55-1, K-55-3 and K-55-4 had been completed; drilling of K-55-5 had started on Section 2200 S and had been drilled to 97 feet, encountering mineralization on the last 42 feet; and drilling of K-55-6 had been started on Section 2400 S and had been drilled to 569 feet, encountering mineralization over the last 127 feet." 1965); Ellis v. Carter, 291 F.2d 270 (9 Cir. a statement which under the circumstances and then known facts would have been the height of recklessness. Since I believe that the findings of the trial court are solidly founded and should be respected, I agree with its decision as to Crawford and Clayton. 22. This seems to me easier on the facts but harder on the law than it does to the majority. ); Meisel v. North Jersey Trust Co., 218 F.Supp. Our new book, A History of Securities Law in the Supreme Court, explores how the Supreme Court has made (and remade) securities law.It covers the history of the federal securities laws from their inception during the Great Depression, relying on the justices' conference notes, internal memoranda, and correspondence to shed light on how they came to their decisions and drafted their opinions. But disclosure of the "results", namely, preliminary visual inspection of the contents, would have violated the Commission's own rules and standards. Insider trading is trading of a corporation's stock or other securities (e.g. In June 2003, the SEC brought a civil action for insider trading, which was separate from the criminal charges of which Stewart was found guilty. 1964) (Trust company alleged to be a participant in a fraudulent scheme whereby loans were made to plaintiff by [888] a factor who converted the stock when it was pledged as collateral for the loan. Texas Gulf Sulphur Co., 401 F.2d, at 849. I, Form 1-A, Reg. 9323 stated: Section 10(b) of the Act (see footnote 8, supra) was taken by the Conference Committee from Section 10(b) of the proposed Senate bill, S. 3420, and taken from it verbatim insofar as here pertinent. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. How Insider Trading Regulations Help to Ensure Fairness in the 92,141 (S.D.N.Y. 258 F.Supp. See footnote 16, supra. Our decision to expand the limited protection afforded outside investors by the trial court's narrow definition of materiality is not at all shaken by fears that the elimination of insider trading benefits will deplete the ranks of capable corporate managers by taking away an incentive to accept such employment. Texas Gulf Sulphur represented the first time a federal court held that insider trading violated federal securities law and remained the leading case on insider trading for a decade. 2. See Pettit v. American Stock Exchange, 217 F.Supp. In any event, the permissible timing of insider transactions after disclosures of various sorts is one of the many areas of expertise for appropriate exercise of the SEC's rule-making power, which we hope will be utilized in the future to provide some predictability of certainty for the business community. While that term is a word of art in the mining trade used to describe "a property where there is no assurance, from the information known, that a commercially mineable ore body exists" [Pennebaker], its technical definition is no different from the definition in common use.
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