Coates, Crawford and Clayton, who ordered purchases before the news could be deemed disclosed, claim, nevertheless, that they were justified in doing so because they honestly believed that the news of the strike had become public at the time they placed their orders. 1964) (Corporation allegedly defrauded into issuing securities to its President through the failure or refusal of some of its directors fully to disclose to the remaining directors material facts concerning the transactions or the financial condition of the company); Bredehoeft v. Cornell, 260 F. Supp. Nor is there any inconsistency between the release and the District Court finding that as of April 9, 1964, "there was real evidence that a body of commercially mineable ore might exist." 80, 17 L.Ed.2d 70 (1966); see also SEC v. R. A. Holman & Co., 366 F.2d 456, 457-458 (2 Cir. 258 F.Supp. See Landis, Liability Sections of Securities Act, 18 Am.Acct. SEC v. Texas Gulf Sulphur, in which officers of Texas Gulf Sulphur learned of their company's rich ore strike in Canada and traded on this information before the news became public. In the field of speculation, it would be interesting to know the position the Commission would have taken if TGS had announced that K-55-1 was "one of the most impressive drill holes completed in modern times" and that it "is just beyond your wildest imagination" (SEC Brief, p. 25). But such a press release would have been highly misleading since the information necessary to draw such conclusions was not available on April 10 according to the TGS witnesses whom the District Court chose to believe. While no visual estimates of its core were immediately available, it was readily apparent by the evening of April 10 that substantial copper mineralization had been encountered over the last 127 feet of the hole's 569-foot length. The Commission advances the argument (successful with the majority) that [883] the "in connection" requirement is satisfied by the mere fact that the public is purchasing and selling securities on the open market. Beyond this, a rule imposing civil liability in such cases would work directly counter to what the SEC has properly called "a commendable and growing recognition on the part of industry and the investment community of the importance of informing security holders and the public generally with respect to important business and financial developments." The Texas Lawbook Free Speech, Due Process and Trial by Jury Appellate Bankruptcy Commercial Litigation Corp. Deal Tracker/M&A GCs/Corp. In 1968, Securities and Exchange Commission v. Texas Gulf Sulphur Co. implicated the employees of a Texas mining company and was the first famous case example of _____. Nor is it any justification that such an explicit disclosure of the truth might have "encouraged the rumor mill which they were seeking to allay." From this testimony, the trial court found: Despite the experts' virtually uncontradicted testimony, despite Rule 52(a) and despite the Supreme Court's statement of the law, the majority choose to reject the trial court's findings as to the results of the first drill core, K-55-1, and to substitute their own expertise in the mining engineering field by holding that "knowledge of the possibility which surely was more than marginal of the existence of a mine of the vast magnitude indicated 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, [873] if speculative, investor in deciding whether he should buy, sell or hold.". 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 212 (9 Cir. Question 2. Insider trading is termed illegal when one uses a company's confidential stock price information for personal gains. The Commission can suspend trading for successive periods of 10 days in any security which it feels is being affected by misleading press releases ( 15 (c) (5), 19(a) (4), 15 U.S.C. [34]The New York Stock Exchange Company Manual provides: "Dealing with Rumors Affecting the Market: Occasions may also arise when rumors have been circulated which have no basis in fact or which require clarification or interpretation and which also result in unusual activity or price changes in a particular security. [19] The record reveals that news usually appears on the Dow Jones broad tape 2-3 minutes after the reporter completes dictation. at 296. I, Form 1-A, Reg. 1937). 78ff) provisions. Meanwhile, rumors that a major ore strike was in the making had been circulating throughout Canada. at 293. 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. 521, 53 L.Ed. 301 (S.D.N.Y. I find it equally plain, as Judge Waterman's opinion convincingly demonstrates, that the release did not properly convey the information in the hands of the draftsmen on April 12, even granting, as I would, that in a case like this a court should not set the standard of care too high. In Dirks v. SEC, 463 U.S. 646, 662, 103 S.Ct. 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 . We are satisfied that these purchases in February and March, coupled with his readily inferable and probably reliable, understanding of the highly favorable nature of preliminary operations on the Kidd segment, demonstrate that Huntington possessed material inside information such as to make his purchase violative of the Rule and the Act. After all, TGS had prior experience in exploration where initially promising situations turned out to be "duds." 8:403. . 252 F.Supp. (4) As to Stephens and Fogarty, as recipients of stock options, we reverse the dismissal of the complaint and remand for a further determination as to whether an injunction, in the exercise of the trial court's discretion, should issue. denied, 394 U.S. 976 (1969). A statement relative to the extent of the discovery, in substantial part drafted by Mollison, was given to the Ontario Minister of Mines for release to the Canadian media. No.1383. 1966), and cases cited in footnote 11 supra. (5) As to Kline, as a recipient of a stock option, we reverse the dismissal of the complaint and remand with directions to issue an order rescinding the option and for a determination of any other appropriate remedy in connection therewith. In the upper part of the hole, for example, a core length of 82 ft. ran 7.1% copper, 9.7% zinc and 2.4 ozs. 1966); United States v. Schaefer, 299 F.2d 625, 629 (7 Cir. Since only K-55-1 had been drilled at that point, the District Court correctly held that there was no duty of disclosure on the part of those receiving the options. at 293, the intent of the Securities Exchange Act of 1934 is the protection of investors against fraud. 23, 15 L.Ed.2d 60 (1965); Cochran v. Channing Corp., 211 F.Supp. Insider Trading in India-an Analysis of Yesterday, Today and Tomorrow United States of America was the first country who introduced the laws on insider trading, immediately after their market crashed during the Great Depression. [30] [866] Since that issue is not before us, I merely make the reservation of my position clear. The District Court correctly found that "the issuance of the release produced no unusual market action." The reading of a news release, which prompted Coates into action, is merely the first step in the process of dissemination required for compliance with the regulatory objective of providing all investors with an equal opportunity to make informed investment judgments. Here, assuming that the Dow Jones reporter left the press conference as early as possible, 10:10 A.M., the 10-15 minute release (which took at least that long to dictate) could not have appeared on the wire before 10:22, and for other reasons unknown to us did not appear until 10:54. The majority support their action in part by a long quotation from H.R.Rep. ), cert. at 294. 1960), cert. See id. 22, 23). 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." That being the case, I find it unnecessary to decide whether or not Kline was in "top management.". 1966), appeal pending. These officers, who engaged in securities transactions on the basis of material, nonpublic information, 1 2 3 (p. 389) 4 5 6 824, 832 n. 36 (1965), citing McClure v. Borne Chemical Co., 292 F.2d 824, 834 (3 Cir. Trading by an insider of a company in the shares of a company is not per se a violation of law. 1945). 1968). (9) As to Coates, as one who on April 16th purchased stock and gave information on which his son-in-law broker and the broker's customers purchased shares, we reverse the dismissal of the complaint, find that he violated 15 U.S.C. The Commission also seeks court orders upon certain of the individual defendants that are essentially remedies of a private, rather than of a regulatory nature, court orders designed to have those individual defendants disgorge any profits they enjoyed from TGS stock transactions they or their "tippees" engaged in from November 12, 1963 to April 17, 1964. AS OF: MAR. Gen. It read in pertinent part as follows: The release purported to give the Timmins drilling results as of the release date, April 12. We hold only that, in an action for injunctive relief, the district court has the discretionary power under Rule 10b-5 and Section 10(b) to issue an injunction, if the misleading statement resulted from a lack of due diligence on the part of TGS. Texas Gulf Sulphur Co. was a landmark of the jurisprudence of insider trading in the United States. Read in context it seems clear that 10 (b) was only meant to be a supplement to the specific prohibitions contained in 9 and 10(a). The primary legal issue in substance is what duty, if any, rested upon the purchasers to disclose the knowledge they possessed at the time of purchase. 1964), to include non-reckless negligent misrepresentations or omissions, see Note, 63 Mich.L.Rev. at 284. Faberge, Inc., 45 S.E.C. 670 (S.D.N.Y. Of course subsection (c) is a catch-all clause to prevent manipulative devices. at 294, seems to have derived from its views that "The defendants are to be judged on the facts known to them when the April 12 release was issued," 258 F.Supp. SEC v. Torr, 87 F.2d 446 (2 Cir. [16] Judges Waterman and Anderson, believing that there had been no definitive finding below as to whether Darke, expressly or by implication, transmitted to these outsiders any indication of the extremely favorable results of the drilling operation in which he was engaged, would remand for a determination on this issue, and if it should be determined that Darke did make such revelations, for a determination of the appropriate remedy. Moreover, noting that the "in connection" clause has been broadly construed, the District Court did not require that stock purchases by TGS or insiders be shown. 10, and the Commission wished to make it emphatically clear that the Rule was expected, inter alia, to close this loophole. Texas Gulf Sulphur 1 in transforming insider trading law. 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. See Baranow v. Gibraltar Factors Corp., 366 F.2d 584, 587 (2 Cir. Similarly 17(a) of the 1933 Act, 15 U.S.C. This means you can view content but cannot create content. 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. On April 13, the day on which the April 12 release was disseminated, TGS opened at 30 1/8, rose immediately to a high of 32 and gradually tapered off to close at 30 7/8. Insider trading is one of the most violent crimes on the faith of fair dealing in a capital market. 1965), appeal pending; Gann v. BernzOmatic, 262 F.Supp. This is not to suggest, however, as did the trial court, that "the test of materiality must necessarily be a conservative one, particularly since many actions under Section 10(b) are brought on the basis of hindsight," 258 F.Supp. The importance of this opportunity to observe where technical or scientific problems are before the court, as here, has been succinctly stated by the Supreme Court in Graver Tank & Mfg. Non-management directors would not normally challenge a recommendation for postponement of an option plan from the President, the Executive Vice President, and the Vice President and General Counsel. On October 29 and 30, 1963, Clayton conducted a ground geophysical survey on the northeast portion of the Kidd 55 segment which confirmed the presence of an anomaly and indicated the necessity of diamond core drilling for further evaluation. However, the fact remains that 10(b) of the Securities Exchange Act was not passed to protect investors from the former type of injury, but leaves liability for such misrepresentation up to state law, which is well equipped to handle any such situation. 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. Fleischer, Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L.Rev. Although the core appears to have excellent mineral content `no body of commercial ore is known to exist on the property.'" Therefore, when materially misleading corporate statements or deceptive insider activities have been uncovered, the courts, as they should, have broadly construed the statutory phrase "in connection with the purchase or sale of any security." The SEC sought rescission of these options. Texas Gulf Sulphur Co. Brian JM Quinn. In any event, the normal motivation induced by stock ownership, i. e., the identification of an individual with corporate progress, is ill-promoted by condoning the sort of speculative insider activity which occurred here; for example, some of the corporation's stock was sold at market in order to purchase short-term calls upon that stock, calls which would never be exercised to increase a stockholder equity in TGS unless the market price of that stock rose sharply. In my opinion such a broad interpretation of the statute is unwarranted as a matter of statutory construction and unwise as a matter of policy. Silence, when there is a duty to speak, can itself be a fraud. 3230 (May 21, 1942) ("The new rule closes a loophole in the protection against fraud administered by the Commission by prohibiting individuals or companies from buying securities if they engage in fraud in their purchase. And there are impressive, strong sections within this width which in themselves are quite spectacular. 165.". 13 (1934); S.Rep.No. In addition 16(a), 15 U.S.C. 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. 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. Orison S. Marden, White & Case, William D. Conwell, Edward C. Schmults, P. R. Konrad Knake, Thomas McGanney, Peter G. Eikenberry, New York City, for Texas Gulf Sulphur, Fogarty, Mollison, Holyk, Darke, Stephens, Murray, Huntington and Kline, for Crawford and Clayton. 1961). Commenting on the disclosure purposes of the House bill (H.R. Stock Exchange Regulation, Hearings before the House Committee on Interstate and Foreign Commerce, 73rd Cong., 2d Sess. See also Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2 Cir. See id. You can access the new platform at https://opencasebook.org. 707 (SD NY 1949), rev'd on other grounds, 188 F.2d 783, 786 (2 Cir. 180 (S.D.N.Y. We will shortly be exploring this issue in the in banc consideration of Schoenbaum v. Firstbrook, 2 Cir., 405 F.2d 215. 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. This report, after having been submitted to Mollison and returned to the reporter unamended on April 15, was published in the April 16 issue. 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. Insider trading takes place legally every day, when corporate insiders. 16. 7741 (Nov. 4, 1965) relating to suspension in trading of Belock Instrument Corporation, a defendant in Heit v. Weitzen, supra. See List v. Fashion Park, Inc., 340 F.2d 457, 461-62 (2 Cir. It would seem, by the same token, that if, to make the pill easier to swallow, he urged the directors to include others lacking the knowledge he possessed, he would be liable for all the resulting damage. 1962) (lack of diligence is all that is required for conviction in a criminal prosecution for violation of 17(a) of the 1933 Act.). 1963) (Defendants caused plaintiff corporations, of which they were officers, to issue stock for property which was worth much less than the stock); cf. In May 2011, Raj Rajaratnam, the former head of the Galleon Group hedge fund, received an eleven-year prison sentence for insider trading, the longest ever imposed. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L.Ed. Coates left the TGS press conference and called his broker son-in-law Haemisegger shortly before 10:20 A. M. on the 16th and ordered 2,000 shares of TGS for family trust accounts of which Coates was a trustee but not a beneficiary; Haemisegger executed this order over the New York and Midwest Exchanges, and he and his customers purchased 1500 additional shares. However, at the time of Texas Gulf Sulphur , it was not yet clear that insider trading was punishable as a crime. 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. Absent any clear indication of a legislative intention to require a showing of specific fraudulent intent, see Note, 63 Mich.L.Rev. 14. There is no indication that Congress intended that the corporations or persons responsible for the issuance of a misleading statement would not violate the section unless they engaged in related securities transactions or otherwise acted with wrongful motives; indeed, the obvious purposes of the Act to protect the investing public and to secure fair dealing in the securities markets would be seriously undermined by applying such a gloss onto the legislative language. The majority says that negligent misstatement by a corporation is enough for injunctive relief under Rule 10b-5 (2) in a proper case; it reserves the question, not here presented, whether the corporation is liable for damages. Consequently, although Clayton is named only as an appellant our decision with respect to the materiality of K-55-1 renders it necessary to treat him also as an appellee. 33 (E.D.Pa.1964); Fischer v. Kletz, 266 F. Supp. [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. Dasho v. Susquehanna Corp., 380 F.2d 262 (7 Cir. supra, at 1366, he said: The majority opinion must also be considered in light of its overall impact before a decision can be reached as to its advisability (assuming that the power to interpret 10(b) is as unlimited as the majority apparently believe). 6 . Texas Gulf Sulphur Co., 401 F.2d 833,843-47 (2d Cir. The classical insider trading scheme, in which an insider (officer or director) at a public company trades in his company's stock while in possession of material non-public information SEC v.. The core of the drill hole contained relatively high percentages of copper and zinc and some silver, although the percentages at any given point fluctuated widely. 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 * * *.". The requirement that a statement may not be found misleading unless its issuance is actuated by a "wrongful purpose" might well have the effect of permitting the issuers of misleading statements to seek an advantage but to escape liability if the advantage fails to materialize to the degree contemplated, or cannot be demonstrated. In any case, the failure to exercise an option is less likely to suggest that the insider possessed material information than the failure to accept such an option. While such an erroneous view of the law is pardonable, it is not "good faith" in a legal sense. Thus, even if TGS or its insiders had not engaged in securities transactions, if there were evidence from which it could be inferred that the press release was intentionally issued to depress the price of the stock as part of some fraudulent scheme, a 10b-5 violation would have been stated. May the Future, the Congress or possibly the SEC itself be able to bring some semblance of order by means of workable rules and regulations in this field so that the corporations and their stockholders may not be subjected to countless lawsuits at the whim of every purchaser, seller or potential purchaser who may claim he would have acted or refrained from acting had a news release been more comprehensive, less comprehensive or had it been adequately published in the news media of the 50 States. If a labor strike had kept its plants idle for months, encouraging news of a possible settlement hoped for by the TGS labor negotiators might cause the negotiators to buy. Therefore, the court below concluded that only directors Stephens and Fogarty, of the top management, would have violated the Rule by accepting stock options without disclosure, but it also found that they had not acted improperly as the information in their possession was not material. [22] Finally, we note that this position is not, as asserted by defendants, irreconcilable with previous language in this circuit because "some form of the traditional scienter requirement," Barnes v. Osofsky, 373 F.2d 269, 272 (2 Cir. 1966), aff'd in part, rev'd in part Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. A close reading of 18 will demonstrate that a plaintiff proceeding under that section (as opposed to 10(b)) does not have to show that the misleading statement was issued by a person [or corporation] who engaged or participated in a securities transaction or even that the misstatement was intended to influence securities transactions as part of some fraudulent scheme. Daily progress reports of the drilling of this hole K-55-3 and of all subsequently drilled holes were sent to defendants Stephens and Fogarty (President and Executive Vice President of TGS) by Holyk and Mollison. "Securities and Exchange Com'n v. Texas Gulf Sulphur Co.". Absent a securities transaction by an insider it is almost impossible to prove that a wrongful purpose motivated the issuance of the misleading statement. 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. Ellis v. Carter, 291 F.2d 270, 272-274 (9th Cir. The mere fact that an insider did not engage in securities transactions does not negate the possibility of wrongful purpose; perhaps the market did not react to the misleading statement as much as was anticipated or perhaps the wrongful purpose was something other than the desire to buy at a low price or sell at a high price. See Berko v. SEC, 316 F.2d 137, 141-142 (2 Cir. [32] The imposition of liability on Clayton, Crawford and Coates for "beating the gun" does not require any such metamorphosis of Judge Frank's concept of fraud as the majority opinion seeks to perform.
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