[31] Of course, 12(1)'s imposition of a liability almost absolute upon the seller of a security that has not been registered in violation of 5 of the 1933 Act is grounded on distinctive concerns. Moreover, the formal announcement could not reasonably have been expected to be disseminated by the time of the opening of the exchanges on the morning of April 16, when Crawford must have expected his orders would be executed. In view of our conclusion as to materiality we hold that Stephens and Fogarty violated the Rule by accepting them. See Securities Exchange Act of 1934, Release No. (3) As to Mollison and Holyk, as recipients of certain stock options, we affirm the dismissal of the complaint. ); Glickman v. Schweickart & Co., 242 F.Supp. [31] But there is unanimity among the commentators, including some who were in a peculiarly good position to know, that 17(a) (2) of the 1933 Act indeed the whole of 17 was intended only to afford a basis for injunctive relief and, on a proper showing, for criminal liability, and was never believed to supplement the actions for damages provided by 11 and 12. 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." Tamar Frankel, Insider Trading, 71 SMU L. REV. The choice of an ambiguous general statement rather than a summary of the specific facts cannot reasonably be justified by any claimed urgency. (Emphasis supplied.) ); Meisel v. North Jersey Trust Co., 218 F.Supp. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. Our disagreement with the district judge on the issue does not, then, go to his findings of basic fact, as to which the "clearly erroneous" rule would apply, but to his understanding of the legal standard applicable to them. 78o(c) (5), 78s(a) (4)). 23, 15 L.Ed.2d 60 (1965); Cochran v. Channing Corp., 211 F.Supp. 1437 (1967). Instead, the court held that "the issuance of a false and misleading press release may constitute a violation of Section 10(b) and Rule 10b-5 if its purpose is to affect the market price of the company's stock to the advantage of the company or its insiders. While I am not convinced that imposition of liability for damages under Rule 10b-5(2), absent a scienter requirement, even limited in the way just proposed, would not go beyond the authority vested in the Commission by 10(b) to act against "any manipulative or deceptive device or contrivance" and be so inconsistent with the general structure of the statutes as to be impermissible, it is at least clear that the April 12 press release would be the worst possible case for the award of damages for merely negligent misstatement, as distinguished from the kind of recklessness that is equivalent to wilful fraud, see SEC v. Frank, 388 F.2d 486, 489 (2 Cir. at 293. 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. Foreign Corrupt Practices Act 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 ________. The attempt to acquire the adjoining properties at reasonable prices (ultimately $52,500) and the strictures on secrecy are customary in the mining industry, especially when dealing with land of a highly uncertain value. 8:403. . But even he did not act on the belief that the second press release had in fact reached the market, see 258 F. Supp. 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. United Hotels Co. v. Mealey, 147 F.2d 816, 819 (2 Cir. Its area was then limited to its one-quarter segment. 193, 90 L.Ed. Primarily, our task should be to review errors of law. 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. We should have in mind the wise words of Judge Learned Hand in Cawley v. United States, 272 F.2d 443, 445 (2 Cir. 258 F.Supp. 1383, 73rd Cong., 2d Sess. Texas Gulf Sulphur. The case began in 1959 when the Texas Gulf Sulphur Company purchased some property in Timmins, Ontario, to check for ore deposits. Transactions in Shares: Rule 10b-5, Insider Trading and Securities Fraud. If the only choices open to a corporation are either to remain silent and let false rumors do their work, or to make a communication, not legally required, at the risk that a slip of the pen or failure properly to amass or weigh the facts all judged in the bright gleam of hindsight will lead to large judgments, payable in the last analysis by innocent investors, for the benefit of speculators and their lawyers, most corporations would opt for the former. Dr. Bellemore, the Texas Gulf defendants' expert witness, has written: "The intelligent speculator assumes that facts are available for a thorough analysis. 658, 681-82 (1965). Clayton ordered 200 shares of TGS stock through his Canadian broker on April 15 and the order was executed that day over the Midwest Stock Exchange. The trial court based its opinion largely [871] upon the lack of materiality of such exploration results as were known between November 12, 1963 and April 9, 1964. Indeed, at times the purpose may be so manifest as to override even the explicit words used. 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 212 (9 Cir. ), cert. Such benefits, in essence, are forms of secret corporate compensation, see Cary, Corporate Standards and Legal Rules, 50 Calif.L.Rev. However, the ratification is irrelevant here, for we would hold with the district court that a member of top management, as was Kline, is required, before accepting a stock option, to disclose material inside information which, if disclosed, might affect the price of the stock during the period when the accepted option could be exercised. This means you can view content but cannot create content. (258 F.Supp. (10) As to Texas Gulf Sulphur, we reverse the dismissal of the complaint and remand for a further determination by the district judge in the light of the approach taken in this opinion. (2) Was the TGS press release of April 12, 1964, false, misleading or deceptive within the meaning of Section 10(b) and Rule 10b-5 in the light of TGS' then knowledge and the then existing factual situation. 215 (S.D.N.Y. No facts whatsoever were adduced which would have justified a finding that the release was issued for a fraudulent or manipulative purpose. This, of course, encompasses any fact "* * * which in reasonable and objective contemplation might affect the value of the corporation's stock or securities * * *." Firm Management White-Collar/Regulatory Pro Bono/Public Service/D&I Is ESG a Trade Secret? We point out, nevertheless, that the surrender of these options after the SEC commenced the case is not a satisfaction of the SEC claim, and a determination as to whether the issuance of injunctions against Stephens and Fogarty is advisable in order to prevent or deter future violations of regulatory provisions is remanded for the exercise of discretion by the trial court. 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]. D. Rule 10b-5 Occupies the Field: Texas Gulf Sulphur 396 R E. Insider Trading Retrenchment and Renewal 402 R II. Texas Gulf Sulphur Co., 401 F.2d, at 849. Holyk left for New York Saturday morning and arrived that same day. 16(b) of the Act. In addition 16(a), 15 U.S.C. Stock Exchange Regulation, Hearings before the House Committee on Interstate and Foreign Commerce, 73rd Cong., 2d Sess. By 7:00 P. M. on April 15, the hole had been completed to a length of 707 feet but had only encountered additional mineralization during a 26-foot length between the 425 and 451-foot marks. In the House Committee hearings on the proposed House bill, Thomas G. Corcoran, Counsel with the Reconstruction Finance Corporation and a spokesman for the Roosevelt Administration, described the broad prohibitions contained in 9(c), the section which corresponded to Section 10(b) of S. 3420 and eventually to Section 10(b) of the Act, as follows: "Subsection (c) says, `Thou shalt not devise any other cunning devices' * * *. The court below found: "There is no evidence that TGS derived any direct benefit from the issuance of the press release or that any of the defendants who participated in its preparation used it to their personal advantage." On April 12 a fourth drill rig began to drill K-55-7, which was drilled westerly at a 45 angle, at the eastern edge of the anomaly. 808, 823 (E.D.Wisc.1962) (dictum), aff'd, 319 F.2d 634 (7 Cir. Yet the requirement of hourly bulletins to the press from the conference room would not be compatible with common [876] sense. On November 12, 1963 drilling of K-55-1 was terminated at 655 feet. Since the issue of negligence is open to full review, Mamiye Bros v. Barber SS. 1965) (Broker induced plaintiff to purchase some stock and to finance the purchase through a factor without disclosing material facts concerning the risks of such a procedure. [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, * * *. As to Stephens and Fogarty, the majority decision places insider recipients of stock options in a difficult dilemma. 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! By March 27, 1964, TGS decided that the land acquisition program had advanced to such a point that the company might well resume drilling, and drilling was resumed on March 31. We do intend to convey, however, that where a corporate purpose is thus served by withholding the news of a material fact, those persons who are thus quite properly true to their corporate trust must not during the period of non-disclosure deal personally in the corporation's securities or give to outsiders confidential information not generally available to all the corporations' stockholders and to the public at large. As fiduciaries, insiders have an . at 296 (emphasis supplied) it applied an incorrect legal standard in appraising whether TGS should have issued its April 12 release on the basis of the facts known to its draftsmen at the time of its preparation, 258 F.Supp. See Schedules 14A-14C, 17 C.F.R. Thus, anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. Assuming arguendo that the information was material, those not in top management have no duty to disclose to the directors information already reported to their own superiors since they may reasonably assume that the information has been conveyed to the directors on the stock option committee. The SEC argued below and maintains on this appeal that this release painted a misleading and deceptive picture of the drilling progress at the time of its issuance, and hence violated Rule 10b-5(2). According to Corcoran these five ideas were (1) control on the amount of credit, (2) control of manipulations, (3) control of insider trading [ 16(b)], (4) elimination of abuses in the market machinery, and (5) the establishment of the Securities Exchange Commission to administer the Act. These individuals thereafter acquired TGS stock and calls. Therefore, the statements in the legislative history applicable to the reporting and disclosure provisions have no bearing on the correct interpretation of 10 (b). at 296, and that the release was not "misleading or deceptive on the basis of the facts then known," 258 F.Supp. Thus, the legislative history of Section 10(b) does not support the proposition urged upon us by Texas Gulf Sulphur [860] that Congress intended the limited construction of the "in connection with" phrase applied by the trial court. See Webster's New International Dictionary (2d ed. [834] [835] [836] [837] [838] [839] Philip A. Loomis, Jr., Gen. 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. [20] The SEC seeks permanent injunctions restraining future proscribed activity by all the individual defendants and the corporation. The only alteration made by the Conference Committee was to substitute the present closing language of Section 10(b), "* * * in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors" for the closing language of the original Section 10(b) of S. 3420, "* * * which the Commission may declare to be detrimental to the interests of investors." Texas Gulf Sulphur Co., a federal circuit court supported the SEC's ruling, stating that anyone who has inside . 13 (1934); S.Rep.No. That being the case, I find it unnecessary to decide whether or not Kline was in "top management.". 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. at 294. The court [US Court of Appeals for the Second Circuit] contended that the federal insider trading prohibition was intended to assure that 'all investors trading on impersonal exchanges have relatively equal access to material information.' 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.. 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. ), cert. The experts which the trial court credited were of the opinion that Kidd 55 was accurately portrayed as a prospect which required further exploration. There can be little doubt but that those familiar with the results of K-55-1 were influenced thereby in making their purchases. Moreover, it should be possible for officers to communicate with directors, of all people, without fearing a breach of confidence. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. Jan. 24, 1968); Howard v. Levine, 262 F.Supp. No. Ellis v. Carter, 291 F.2d 270, 272-274 (9th Cir. Lines, 360 F.2d 774 (2 Cir. 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. Friday morning, April 10, he had been on the Kidd tract "and had been advised by defendant Holyk as to the drilling results to 7:00 p.m. on April 10. The company's initial survey showed evidence of massive deposits of copper and zinc, so Texas Gulf quietly acquired the surrounding property. Id. All the information that was available upon the completion of the drilling, November 12, 1963, was contained in a core (denominated K-55-1) which was visually examined by Dr. Walter Holyk, Chief Geologist for TGS, and by Kenneth H. Darke, a TGS geologist. Meanwhile, rumors that a major ore strike was in the making had been circulating throughout Canada. And there are impressive, strong sections within this width which in themselves are quite spectacular. 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. The speculator then examines the facts to discover and evaluate the risks that are present. I do not think there is any objection to that kind of a clause. 240.14a-101-103. 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. These operations resulted in the detection of numerous anomalies, i. e., extraordinary variations in the conductivity of rocks, one of which was on the Kidd 55 segment of land located near Timmins, Ontario. Texas Gulf Sulphur is mostly known today for transforming insider trading law, but the judges of the Second Circuit hearing that case struggled more with the question of corporate liability. See 3 Loss, Securities Regulation, 1424 n. 7 (2d ed. 2. at 293. denied, 394 U.S. 976 (1969). On April 16, the day of the official announcement of the Timmins discovery, the price climbed to a high of 37 and closed at 36 3/8. Like K-55-1, both K-55-3 and K-55-4 established substantial copper mineralization on the eastern edge of the anomaly. ), cert. ), cert. See, e.g., Andrew Verstein, Insider Trading in Commodities Markets, 102 V. A. L. R. EV. (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. 1966) (by implication). 4, supra, said to have received "tips" from them, purchased TGS stock or calls thereon. The decision to issue a press release was not made until Saturday, at which point Fogarty testified it "would just be very difficult for us to try to find anyone in Timmins." However, as such an enforcement agency, where it assumes a plaintiff's role it must bear the evidentiary fair preponderance burden of all litigants and be subject to the rule that the determination of what evidence is "credible" is for the trial judge. See United States v. Chiarella, 588 F.2d 1358, 1362 (2d Cir. Crawford telephoned his orders to his Chicago broker about midnight on April 15 and again at 8:30 in the morning of the 16th, with instructions to buy at the opening of the Midwest Stock Exchange that morning. Cf. Indeed, the Commission has been charged by Congress with the responsibility of policing all misleading corporate statements from those contained in an initial prospectus to those contained in a notice to stockholders relative to the need or desirability of terminating the existence of a corporation or of merging it with another. Otherwise, insiders would be able to "beat the news," cf. The District Court characterized the press release as an accurate portrayal of the situation as it was known at that time. 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. In summary, therefore, we affirm the finding of the court below that appellants Richard H. Clayton and David M. Crawford have violated 15 U.S.C. 80, 17 L.Ed.2d 70 (1966); see also SEC v. R. A. Holman & Co., 366 F.2d 456, 457-458 (2 Cir. 77q(a) (2) and (3), which are virtually identical to the provisions of Rule 10b-5(2) and (3) and were, in fact, the model therefor, see Birnbaum v. Newport Steel Corp., 193 F.2d 461, 463 (2 Cir. [8] By that Act Congress [848] purposed to prevent inequitable and unfair practices and to insure fairness in securities transactions generally, whether conducted face-to-face, over the counter, or on exchanges, see 3 Loss, Securities Regulation 1455-56 (2d ed. Here, notwithstanding the trial court's conclusion that the results of the first drill core, K-55-1, were "too `remote' * * * to have had any significant impact on the market, i. e., to be deemed material,"[11] 258 F.Supp. Feb. 26, 1968). [856] Thus, the beliefs of Coates, Crawford and Clayton that the news of the ore strike was sufficiently public at the time of their purchase orders are to no avail if those beliefs were not reasonable under the circumstances. at 293, the intent of the Securities Exchange Act of 1934 is the protection of investors against fraud. "Shadow Trading" Becomes Insider Trading By Stephen J. Crimmins March 28, 2022 1 Comment On January 14, 2022, the U.S. District Court in San Francisco denied a motion to dismiss charges filed by the Securities and Exchange Commission under an expansive new theory of insider trading liability. 275, 11 L.Ed.2d 237 (1965); cf. While the alleged fraudulent acts were committed before plaintiff sold his stock (he had not at the time of suit), he was about to be forced to sell his part of a single fraudulent scheme.). 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. denied, 382 U.S. 811, 86 S.Ct. 10 (1942)), and have been read, upon close scrutiny of their legislative history, as not requiring specific fraudulent intent, SEC v. Van Horn, 371 F.2d 181, at 184-186 (7 Cir. However, whether the case before us is treated solely as an SEC enforcement proceeding or as a private action,[20] proof of a specific intent to defraud is unnecessary. 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. [2] Over time, the U.S. Supreme Court embraced some of its holdings while rejecting others. Meanwhile, drilling operations continued. a statement which under the circumstances and then known facts would have been the height of recklessness. 1964),[29] that if a corporate officer having such knowledge persuaded an unknowing board of directors to grant him an option at a price approximating the current market, the option would be rescindable in an action under Rule 10b-5. To say that the drilling at Timmins had afforded only "preliminary indications that more drilling would be required for proper evaluation of this prospect," was a wholly insufficient statement of what TGS knew. Texas Gulf Sulphur Co.[6], a federal circuit court stated that anyone in possession of inside . So, it is here no justification for insider activity that disclosure was forbidden by the legitimate corporate objective of acquiring options to purchase the land surrounding the exploration site; if the information was, as the SEC contends, material,[9] its possessors should have kept out of the market until disclosure was accomplished. ); cf. See Berko v. SEC, 316 F.2d 137, 141-142 (2 Cir. TGS could have announced by November 15, 1963 that it had completed a first exploratory hole, the core of which by visual examination revealed over a length of 599 of 655 feet drilled, an average copper content of 1.15%, zinc 8.64% or, had TGS waited until mid-December, by chemical analysis 1.18% copper, 8.26% zinc and 2.94% ounces of silver per ton; that TGS would try to acquire the other three-quarters of the segment unless the announcement boosted prices to unwarranted heights; that if the property could be acquired further exploratory holes would be drilled to ascertain the nature and extent, if any, of the ore body; that reports of developments would be made from time to time but that the SEC had indicated that TGS should advise its stockholders and the public that there was no proof as yet that a body of commercial ore exists on the property. 10261 (1934). But this must be recorded as one of the most impressive drill holes completed in modern times. 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. The consequences of holding that negligence in the drafting of a press release such as that of April 12, 1964, may impose civil liability on the corporation are frightening. Section 12 of the Act, 15 U.S.C. 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. The evidence of the actual effect of the release on investors was at best inconclusive. 258 F.Supp. 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. 783 (2018) https://scholar.smu.edu/smulr/vol71/iss3/11 This Article is brought to you for free and open access by the Law Journals at SMU Scholar. 1070, 1079. 1966), and cases cited in footnote 11 supra. The inference is therefore inescapable that the Court felt that a reasonable investor would not be misled by it. This report, after having been submitted to Mollison and returned to the reporter unamended on April 15, was published in the April 16 issue. 78 Cong.Rec. He stated at a 1934 House hearing that "this bill has at bottom five ideas in it, and all 36 pages tie in around the five ideas." Freed v. Szabo Food Serv., Inc., CCH Fed. 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. On the other hand, a Canadian mining security specialist, Roche, stated that "earlier in the week [before April 16] we had a Dow Jones saying that they [TGS] didn't have anything basically" and a TGS stock specialist for the Midwest Stock Exchange became concerned about his long position in the stock after reading the release. Consequently, I agree with the majority in giving the Board's action no weight here. [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. Cf. 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. 754 (1944). 78ff). Whether merger discussions in any particular case are material therefore depends on the facts. 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. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in . 249, 255 (1973), citing Texas Gulf Sulphur, 401 F.2d at 854. The Texas Gulf Sulphur decision began what has become a fifty-year project of developing U.S. insider trading regulation through judicial lawmaking. (7) As to Clayton, although the district judge did not specify that the complaint be dismissed with respect to his purchases of TGS stock before April 9, [843] 1964, such a dismissal is implicit in his treatment of the individual appellees who acted similarly.
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