853 (1909), the Rule is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information, see Cary, Insider Trading in Stocks, 21 Bus.Law. It was both a classic false press release securities fraud case' and an insider trading case. In 1942, lawmakers adopted the Rule 10b-5 in the Securities Exchange Act 1934 to allow its prosecution. Disgorgement in Insider Trading Cases: FY2005-FY2015 Verity Winship University of Illinois College of Law . I am unimpressed with the argument that Stephens, Fogarty and Kline could not perform this duty on the peculiar facts of this case, because of the corporate need for secrecy during the land acquisition program. 1966), aff'd in part, rev'd in part 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. Find many great new & used options and get the best deals for Postcard Railroad Train Texas Beaumont TX Gulf Sulphur Company 1970s Chrome at the best online prices at eBay! at 296. As the SEC moved to regulate insider trading, academic and legal voices argued that the SEC action was misplaced. See Gann v. Bernz-Omatic, 262 F.Supp. Held: sufficient allegation of fraud under 10b-5); Brennan v. Midwestern United Life Ins. 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. Texas Gulf Sulphur has chalked up a brilliant exploration success in its field program north of the Porcupine area. The Commission has carefully defined the scope of sampling required to justify even estimates, as follows: Id., Item 8(A) (c), 1 CCH Fed.Sec.L. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in . In, "Securities and Exchange Com'n v. Texas Gulf Sulphur Co.". 1964) (Corporation, as part of a campaign to boost the value of its stock to achieve stockholder approval of a merger, deliberately issued statements misrepresenting future combined earnings. 1951); Weber v. C. M. P. Corp., 242 F.Supp. No facts whatsoever were adduced which would have justified a finding that the release was issued for a fraudulent or manipulative purpose. Whether predicated on traditional fiduciary concepts, see, e. g., Hotchkiss v. Fisher, 136 Kan. 530, 16 P.2d 531 (Kan.1932), or on the "special facts" doctrine, see, e. g., Strong v. Repide, 213 U.S. 419, 29 S.Ct. [15] Even if insiders were in fact ignorant of the broad scope of the Rule and acted pursuant to a mistaken belief as to the applicable law such an ignorance does not insulate them from the consequences of their acts. Of course subsection (c) is a catch-all clause to prevent manipulative devices. at 281-82. ), cert. 548, 19 L.Ed.2d 564 (1967)), but no case supports the Commission's position that it is in effect meaningless. "); Milton Cohen, "Truth in Securities Revisited," 79 Harv. It would therefore appear that the Commission has failed in its burden of proof, unless it can be said that TGS was negligent in not obtaining later data from Timmins before issuing the release.[35]. 1968). 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. 25 When first notified of the discovery of a large and very valuable copper deposit, mine employees bought stock in the company while keeping the information secret. Thank you. Under the majority's decision, an insider must perform the uncommon act of refusing such an option, promoting speculation as to the reasons therefor, or accept the option and face possible 10b-5 liability. Question: Develop the argument that Martha Stewart was not really in possession of inside information that was disclosed in a breach of a fiduciary duty. 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 only difference of substance between 17(a) and Rule 10b-5 is that the latter applies to purchasers as well as sellers. 106 (S.D.N.Y. These individuals thereafter acquired TGS stock and calls. 2. 521, 53 L.Ed. 9323), the bill a Committee of Conference eventually integrated with a similar Senate bill (S. 3420) to make the bill passed by both Houses of Congress that became the Securities Exchange Act of 1934, the House Committee which reported out H.R. A definite statement "to clarify" was promised in the future. Finally, Coates, as we have already indicated in fn. Original Item: 1968). [30] [866] Since that issue is not before us, I merely make the reservation of my position clear. However, companies listed on a national exchange can scarcely broadcast to the nation on a daily basis their hopes and/or expectations from the developments in, for example, their research departments. 1383, 73rd Cong., 2d Sess. On the basis of approximately one-third more data, and, for all the record shows, without any additional figures as to estimated costs, TGS announced on April 16 a major strike with over 25 million tons of ore. Materiality must depend upon the facts and their resolution is for the fact-finder, court or jury. Rule 52(a) should be given particular weight where expert testimony must of necessity play an important role. 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. It should be noted that the discussion at that point of the report is not addressed to 10(b) but to the reporting and disclosure provisions of Securities Exchange Act of 1934, specifically 12-14, 16. N.Y.1966), where it said: The conservative (and in my opinion proper) approach of the Commission in Great American is reflected in its statement that "The ore content of a property is never `known' until the ore has been completely removed and the minerals separated." at 271). Faberge, Inc., 45 S.E.C. The trial court's finding that "he sought to, and did, `beat the news,'" 258 F.Supp. No reason appears why outside investors, perhaps better acquainted with speculative modes of investment and with, in many cases, perhaps more capital at their disposal for intelligent speculation, would have been less influenced, and would not have been similarly motivated to invest if they had known what the insider investors knew about the K-55-1 discovery. Cf. These findings are clearly supported by the proof upon which the court relied. 1945). The objective of protecting a corporation from selling securities to insiders at a price below their true worth [878] is fully served by requiring nondisclosing insiders to abstain, not from accepting the stock options, but merely from exercising them an event likely to occur after the inside information has become public. Most of the footage drilled by April 10 had been in a single plane (2400 S), but by April 15 drilling had established mineralization in a number of additional planes. Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act. 78j(b) and Rule 10b-5, and remand, pursuant to the agreement of all the parties, for a determination of the appropriate remedy. 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. In TGS, the court starts from the position that insiders, as fiduciaries, have an obligation not to use the corporation's information for their personal benefit. 757, 772 (D.Colo.1964), has been expanded from recklessness, see Prosser, Torts, 102, pp. Against this factual background, what position should have been taken by those few officers and employees of TGS [875] after they knew of the core, K-55-1, and the reports thereon made after visual inspection and analysis? at 293. The conclusion of the majority is based primarily on this assumption. Silence, when there is a duty to speak, can itself be a fraud. 2. It is of course true, as the Commission points out, that the "in connection" clause has been given a broad construction by the courts in line with the remedial nature of securities legislation (see SEC v. Capital Gains Bureau, 375 U.S. 180, 195, 84 S.Ct. Stephens and Fogarty decided that the best course was to give their evaluation of the situation a reasonable business judgment that should not incur 10b-5 liability unless their evaluation was either false or misleading. 1965) (Plaintiffs retained stock in a company solely because a broker misrepresented or failed to disclose certain material facts. [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. 19, supra, could not reasonably have expected the official release to have been disseminated when he placed his order before 10:20 for immediate execution nor were the Canadian disclosures relied on by Crawford sufficient to render the conduct of Coates permissible under the circumstances.[23]. There is therefore no inconsistency in the statements made and the conclusions reached in the two releases. 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." 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. I do not think there is any objection to that kind of a clause. On this day 54 years ago, the Texas Gulf Sulphur Company announced a major copper strike 350 miles north of Toronto that would become the focus of a landmark insider trading case. 301 (S.D.N.Y. Mr. Justice Goldberg noted in SEC v. Capital Gains Research Bureau, 375 U.S. 180, 193, 84 S.Ct. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. The trial court did not find it necessary to decide whether TGS exercised such diligence and has not yet attempted to resolve this issue. And there are impressive, strong sections within this width which in themselves are quite spectacular. 1383, 73d Cong., 2d Sess. Furthermore, even if some investors considered the release to be discouraging compared to the rumors afloat, if the facts and conclusions presented were accurate (as they were) and if they were not presented in a manner that would mislead a reasonable investor (which they were not) then there can be no violation of 10b-5. It was obviously thought that sections outlawing devices that had been shown at great length to be deleterious did not require any lengthy explication. Therefore it seems clear from the legislative purpose Congress expressed in the Act, and the legislative history of Section 10(b) that Congress when it used the phrase "in connection with the purchase or sale of any security" intended only that the device employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation's securities. Accepting the conservative view of TGS's expert Wiles that 95.2% would be absorbed by costs, the ultimate profit could then have been estimated at more than $14,000,000. 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. In TGS, the court starts from the position that insiders, as fiduciaries, have an obligation not to use the corporation's information for their personal benefit. To them, completely disregarding the trial court's findings and substituting themselves as a jury, these purchases are "the only truly objective evidence of the materiality of the K-55-1 discovery." Furthermore, such a holding might well have the unfortunate result of deterring the dissemination of corporate news despite the strong policy underlying all securities legislation of encouraging disclosure of information useful to present and potential investors. Defendants Clayton and Crawford appeal from that part of the decision below which held that they had violated Sec. 77l(2), the language of which is strikingly similar to that of 10b-5(2), attaches from the mere fact of misrepresentation or misleading omission unless defendant proves that "he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission." bonds or stock options) by the individuals with potential to access to non-public information about company. 78j(b) and Rule 10b-5. [21] Even at common law, the essentially private remedy of rescission which is sought here does not require more than a showing of negligence and frequently even less than that, see Restatement, Contracts, 476, comm. The Report of the Senate Committee which presented S. 3420 to the Senate summarized Section 10(b) as follows: Indeed, from its very inception, Section 10(b), and the proposed sections in H.R. On the basis of these findings relative to the foregoing drilling results, the trial court concluded that the vertical plane created by the intersection of K-55-1 and K-55-3, which measured at least 350 feet wide by 500 feet deep extended southward 200 feet to its intersection with K-55-4, and that "There was real evidence that a body of commercially mineable ore might exist." 1070, 1075, 1076 n.29 (1965), the securities laws should be interpreted as an expansion of the common law[21] both to effectuate the broad remedial design of Congress, see SEC v. Capital Gains Research Bureau, supra, 375 U.S. at 195, 84 S.Ct. They believe Conradt was informed by his roommate at the time in 2009. The majority suggest with, in my opinion, most remarkable business naivete that, instead of the April 12, 1964 press release which the trial court had found as a matter of fact had been issued in the exercise of "reasonable business judgment under the circumstances," in their 1968 judgment "it would have obviously been better to have specifically described the known drilling progress as of April 10th by stating the basic facts." Firm Management White-Collar/Regulatory Pro Bono/Public Service/D&I Is ESG a Trade Secret? By-passing momentarily the general knowledge possessed by the officers of TGS as to the far-flung nature of the company's operations, its heavy concentration in the sulphur field, its non-engagement in the field of copper mining, the adverse effect which low sulphur prices had had for many years on the company's earnings despite substantial sales and focusing attention solely upon the Timmins property, the participants in that exploration and the knowledge available to them, I find no factual disputes of importance. 22, 23). This, of course, encompasses any fact "* * * which in reasonable and objective contemplation might affect the value of the corporation's stock or securities * * *." These insiders, after learning of an unprecedented discovery . This result undoubtedly "excited the interest" of the TGS exploration team. [34] Stephens advised Fogarty [879] that TGS should issue a press release to clarify the rumors that Fogarty therefore contacted Mollison who had just returned from Timmins. Tamar Frankel, Insider Trading, 71 SMU L. REV. 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. 1951) is preserved. In my opinion the evidence establishes as a matter of law that the press release was misleading. Co., 339 U.S. 605, 70 S.Ct. If they are not disclosed, the corporation is concealing information; [889] if disclosed and hoped-for results do not materialize, there will always be those with the advantage of hindsight to brand them as false or misleading. [27] See the discussion in footnotes 20, 21, and 22, supra, and in the accompanying text, dispensing with a fraudulent intent requirement in actions based on clause (3) of Rule 10b-5. However, as this suggestion was not presented to us, we do not consider it or make any determination with reference to it. 1070, 1079-81 (1965). It closed at 30 the next day, and at 29 3/8 on April 15. 78p(a), requires certain officers, directors and major shareholders to file reports with the Commission and the stock exchanges as to their initial holdings of stock and subsequent changes. You can access the new platform at https://opencasebook.org. 275, and to insure uniformity of enforcement, see Note, 32 U.Chi.L.Rev. In 1971, S.E.C. The case continues to receive significant scholarly attention. 10261 (1934). The majority support their action in part by a long quotation from H.R.Rep. 8720, 73rd Cong., 2d Sess. 281. The market opened at 30 1/8 on the 13th (when the release became public) and closed at 30 7/8 scarcely a sign of public pessimism. 598 (S.D.N.Y. Visual estimates indicated an average content of 1.14% copper and 8.24% zinc. Such thoughts can only arise from unfounded speculative imagination. Russell G. Ryan, a former assistant director of enforcement at the Securities and Exchange Commission and former deputy chief of enforcement at the Financial Industry Regulatory Authority, is a. 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. . They also suggest that "[s]uch an explicit disclosure would have permitted the investing public to evaluate the `prospect' of a mine at Timmins without having to read between the lines to understand that preliminary indications were favorable in itself an understatement." 258 F.Supp. cit. Nevertheless, the evidence shows that he knew about and participated in TGS's land acquisition program which followed the receipt of the K-55-1 drilling results, and that on February 26, 1964 he purchased 50 shares of TGS stock. The geologist Darke possessed undisclosed material information and traded in TGS securities. 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 following case, Texas Gulf Sulphur is an early federal insider trading case. Section 78j(b), and Rule 10b-5 (17 CFR 240.10b-5) (the Rule), promulgated thereunder, and to compel the rescission by the individual defendants of securities transactions assertedly conducted contrary to law. 643 (S.D.N.Y. Huntington was involved in insider trading. However, even if it were not possible to evaluate and transmit current data in time to prepare the release on April 12, it would seem that TGS could have delayed the preparation a bit until an accurate report of a rapidly changing situation was possible. The next morning the 137 foot mark had been reached, fifty feet of which showed mineralization. No. If a fraud of this kind may ever be cured by ratification, compare Continental Securities Co. v. Belmont, 206 N.Y. 7, 99 N.E. For example, the company had spent some $7,000,000 to purchase an underwater dome off the coast of Texas and an additional $1,000,000 to drill 21 holes before concluding that there was not enough sulphur in the dome to be of commercial interest. Select one: a. insider trading. Even if, however, we were to disregard the teaching of Judge Frank in Fischman v. Raytheon Mfg. At that time approximately 2/3 of the ore ultimately found to exist by the time of the preparation of the April 16 "major strike" release had been discovered by 5 holes placed so as to indicate continuity of mineralization within the large anomaly. 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? Thus any statement issued by a publicly listed company is made "in connection" with the purchase or sale of securities. To go further than this, as [868] Professor Loss powerfully argues, Securities Regulation at 1785, would totally undermine the carefully framed limitations imposed on the buyer's right to recover granted by 12(2) of the 1933 Act. United Hotels Co. v. Mealey, 147 F.2d 816, 819 (2 Cir. [36] But in this case the only purpose of the press release was to quell the extravagant rumors circulating about the Canadian exploration project. 1978) (affirming first criminal insider trading case conviction), rev'd on other grounds, 445 U.S. 222 (1980). 215 (S.D.N.Y. 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. 824, 839-44 (1965); Note, 63 Mich.L.Rev. (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. The TGS opinion rested on a policy of equality of access to information. As to these eight individuals we remand so that in accordance with the agreement between the parties the Commission may notice a hearing before the court below to determine the remedies to be applied against them. 1966), and cases cited in footnote 11 supra. [25]Rule 10b-5(2) provides in pertinent part: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, * * *, (2) to make any untrue statement of a material fact or to omit 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, * * *. 275, 11 L.Ed.2d 237 (1963), that the elements of a cause of action for "fraud" vary "with the nature of the relief sought" and that "It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for money damages." Such a fact is a material fact and must be effectively disclosed to the investing public prior to the commencement of insider trading in the corporation's securities. What Is Insider Trading And Why Is It Illegal? denied, Bard v. Dasho, 389 U.S. 977, 88 S.Ct. It seems to me clear that the injunction sought by the Commission should be granted. A rule requiring a minor officer to reject an option so tendered would not comport with the realities either of human nature or of corporate life. 258 F.Supp. 695, 5 L.Ed.2d 693 (1961), apply criminal penalties to sellers only (Rule 10b-5 was promulgated to fill this gap in enforcement, SEC Ann.Rep. The Commission in that case also stated two truisms (1) that "it is extremely important that all facts relevant to an estimate of the value of such property be disclosed," and (2) that "the judgment of the `value' of this property is dependent upon the results of exploratory work * * *." The majority argue that when compared with the above provisions the slight change of wording in 10(b) the insertion of the phrase "in connection with [885] * * *" indicates that Congress intended a revolutionary change in the whole thrust of the securities laws. On February 20, 1964 the stock option committee, which was not informed of the developments at Kidd 55, granted options to Stephens, Fogarty, Mollison, Holyk, Kline and a number of other top officers of TGS. for an injunction to private damage actions. When drilling was resumed on March 31, hole K-55-3 was commenced 510 feet west of K-55-1 and was drilled easterly at a 45 angle so as to cross K-55-1 in a vertical plane. The text of the release and the three point drop in the market price following its issuance in the face of press reports that would normally have led to a large and, as matters developed, justified increase, are sufficient proof of that. However, it does not necessarily follow that this is an appropriate case for granting an injunction as to future press releases. 1437 (1967). Insider trading is trading of a corporation's stock or other securities (e.g. JM Quinn B, "SEC v Texas Gulf Sulphur" (SEC v Texas Gulf Sulphur . Although the problem of insider trading is not new, in recent years the extent of For purposes of insider trading law, insiders must wait a "reasonable" time after disclosure before trading. 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. 1968); SEC v. Texas Gulf Sulphur Co., 258 F. Supp. Texas Gulf Sulphur Co. Brian JM Quinn. At this time, neither the TGS Stock Option Committee nor its Board of Directors had been informed of the results of K-55-1, presumably because of the pending land acquisition program which required confidentiality. silver. Any such procedure would have invited the initial question on cross-examination of TGS officials: How could any such "explicit disclosure" have permitted the investing public to evaluate the prospect of a mine, without the necessity of transmitting it for expert opinion to some School of Mines? Shortly after the appeal was argued defendant Lamont passed away, and by agreement of the parties an order was entered discontinuing his appeal and directing that the judgment below dismissing the action against him be severed from the judgment as to the other defendants. [12] We do not suggest that material facts must be disclosed immediately; the timing of disclosure is a matter for the business judgment of the corporate officers entrusted with the management of the corporation within the affirmative disclosure requirements promulgated by the exchanges and by the SEC. The specific SEC allegation in its complaint is that this April 12 press release "* * * was materially false and misleading and was known by certain of defendant Texas Gulf's officers and employees, including defendants Fogarty, Mollison, Holyk, Darke and Clayton, to be materially false and misleading. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. As evidence that the April 12 release was probably inaccurate, the majority point to the fact that only three days later TGS prepared the April 16 release which announced a major mineral discovery.