78i provides that it shall be unlawful for any broker, dealer or other person to create a false or misleading appearance of activity in the market for a stock or to attempt to affect the price of a stock by certain specific manipulative devices. 78r) and criminal ( 32, 15 U.S.C. Export Reading mode BETA. Such an announcement would, of course, have been of no value to anyone except possibly a few graduates of Institutes of Technology and they, as the expert witnesses here, would have recognized that one drill hole does not reveal a commercially profitable mine. Milton Cohen, Truth in Securities Revisited, 79 Harv. The inference is therefore inescapable that the Court felt that a reasonable investor would not be misled by it. 258 F.Supp. We are to put ourselves so far as we can in the position of the legislature that uttered them, and decide whether or not it would declare that the situation that has arisen is within what it wishes to cover. 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. 1963) (Defendants caused plaintiff corporations, of which they were officers, to issue stock for property which was worth much less than the stock); cf. 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. What Just Happened to SEC Insider Trading Disgorgement? - LinkedIn Id. That section was not meant to be an auxiliary disclosure device or a provision to punish those who issue inaccurate statements in newspapers or documents filed with the Commission unless they are fraudulent acts integrally connected with securities transactions. The insider trading prohibition found a new home in the flexible confines of Rule 10b-5. 78o(c) (5), 78s(a) (4)). b (1932); and the common law concept of constructive fraud still available to private plaintiffs, see Trussell v. United Underwriters, Ltd., 228 F.Supp. An even more striking illustration would be found within the structure of a large pharmaceutical company where discoveries of panaceas to cure human disease occupies the workdays of thousands of scientists. [7] Mollison had returned to the United States for the weekend. 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. But the case stands differently as to paragraph (2). But vulnerable as the news release may be, what of the many daily developments in the Research and Development departments of giant corporations. 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. Texas Gulf Sulphur ( 1968 ), in which the federal appellate court governing Wall Street found that corporate insiders had illegally traded when they bought more stock in their mining company after learning of a probable find of substantial mineral deposits, but before the information was publicly disclosed. [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. 78n, the Commission has promulgated proxy rules setting forth information that must be sent to shareholders prior to their annual or other meetings. 10, and the Commission wished to make it emphatically clear that the Rule was expected, inter alia, to close this loophole. 872, 895 (1967). 1962); Kohler v. Kohler Co., 208 F.Supp. 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. 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." 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. 8:403. . 95 (S.D.N.Y. 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. Securities Law in the Sixties: The Supreme Court, the Second Circuit WASHINGTON, Dec. 20 (AP) The Texas Gulf Sulphur Com pany and nine officials and em ployes were denied a hearing today by the Supreme Court in a case that may set a precedent governing tha. 91,317 (N.D.Ill. 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. 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. Freed v. Szabo Food Serv., Inc., CCH Fed. 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? [28]Examined in retrospect, the situation in Timmins at the time the release was prepared seems to offer good reason for optimism. Dasho v. Susquehanna Corp., 380 F.2d 262 (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. 1960) (Accountants allegedly induced corporation to go through with a merger (a securities transaction) by preparing false financial statements and making other misrepresentations). Thank you. United States Court of Appeals Second Circuit. Visual estimates by Holyk of the core of K-55-1 indicated an average copper content of 1.15% and an average zinc content of 8.64% over a length of 599 feet. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. 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. How does her case differ from the insiders at Texas Gulf Sulphur or from other outsiders who have been convicted of insider trading? at 843-47. 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. TEXAS GULF LOSES BID IN HIGH COURT - The New York Times 6 . 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 . Meanwhile, rumors that a major ore strike was in the making had been circulating throughout Canada. The case continues to receive significant scholarly attention. When and how are promising results to be disclosed. The trial court did not find it necessary to decide whether TGS exercised such diligence and has not yet attempted to resolve this issue. Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir. 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. 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. at 281-82. 1966), appeal pending. What were the motives behind each of the purchases? That's somewhat ironic, because the whole concept of disgorgement was initially contrived through the SEC's early insider trading successes, beginning with SEC v. Texas Gulf Sulphur in 1968 . As has been well said, of a situation where time pressures and consequent risks were less, "One source of perplexity as to the appropriate bounds of the civil remedy for misleading [867] filings is that any remedy imposed against the issuer itself is indirectly imposed on all holders of the common stock, usually the most important segment of the total category of investors intended to be protected." 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy. Sec. at 282 (emphasis added). See the table at 258 F. Supp. 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." The District Court correctly found that "the issuance of the release produced no unusual market action." 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." Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547, quoting from SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 193, 84 S.Ct. The Wild World of Biotech Insider Trading - Medium Finally, Coates, as we have already indicated in fn. 1271, 1278-80 (1965). It is an equally needless exercise to require the district court to determine whether a reasonable investor would have been misled. Id. TGS brought in its first well on March 20, 1929. 273-275 and the special references to the Holyk purchases at 273, and the Crawford purchases at 287. 824, 839-44 (1965); Note, 63 Mich.L.Rev. . of Policy Research, SEC, Frank E. Kennamer, Jr., Asst. So, it is perhaps safer to say that the Texas Gulf Sulphur em- cases. 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. 80, 17 L.Ed. 301 (S.D.N.Y. See Cady, Roberts, supra at 912. Their motive for purchase does not establish the materiality of the facts which influenced them. 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. Who Is Harmed by Insider Trading? - Econlib At the very least, if TGS felt compelled to respond to the [864] spreading rumors of a spectacular discovery, it would have been more accurate to have stated that the situation was in flux and that the release was prepared as of April 10 information rather than purporting to report the progress "to date." Gediman v. Anheuser Busch, Inc., 299 F.2d 537, 545 (2 Cir. at 295, and in assuming that disclosure of the full underlying facts of the Timmins situation was not a viable alternative to the vague generalities which were asserted. In all of the above cases the defendants, unlike the defendant here, were clearly participants in a securities transaction and were guilty of or responsible for deceptive activities of which the securities transaction was an integral part. 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. 3255, 3265, 77 L.Ed.2d 911 (1983), the Court found that a tippee's duty to disclose or abstain "is derivative from that of the insider's duty," and thus a tippee is only liable under 10(b) or . I do not think there is any objection to that kind of a clause. Turning first to the question of whether the release was misleading, i. e., whether it conveyed to the public a false impression of the drilling situation at the time of its issuance, we note initially that the trial court did not actually decide this question. 2. Insider Trading And its Legal Mechanism: Insider trading is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. There were several choices. 1383 and S. 3420 from which it was derived, have always been acknowledged as catchalls. Disgorgement in Insider Trading Cases: FY2005-FY2015 - SMU TGS. Thus it is immaterial whether Crawford's orders were executed before or after the announcement was made in Canada (9:40 A.M., April 16) or in the United States (10:00 A.M.) or whether Coates's order was executed before or after the news appeared over the Merrill Lynch (10:29 A.M.) or Dow Jones (10:54 A.M.) wires. Plaintiff, the Securities and Exchange Commission, brought this suit against Defendants, Texas Gulf Sulphur Co., et al., after Defendants bought shares . 7.25). 91,317 (N.D.Ill. 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." See 258 F.Supp. 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. 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. The case offers a common insider-trading fact pattern: after a mining company discovered promising mineral depositsbut before it announced the discoveryseveral insiders bought the company's shares and options to acquire its shares. Transactions in Shares: Rule 10b-5, Insider Trading and Securities Fraud. Texas Gulf Sulphur Co. Brian JM Quinn. Factually, the premise posed by the majority is "clearly erroneous." Even if, however, we were to disregard the teaching of Judge Frank in Fischman v. Raytheon Mfg. 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. By May 15, TGS stock was selling at 58. [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. 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. Fair To All People: The SEC and the Regulation of Insider Trading Legal Depts. 7852 and H.R. No.1383. This action was commenced in the United States District Court for the Southern District of New York by the Securities and Exchange Commission (the SEC) pursuant to Sec. (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. 33, 37 (E.D.Pa.1964); see Ruder, Corporate Disclosures Required by the Federal Securities Laws: The Codification Implications of Texas Gulf Sulphur, 61 Nw.U.L.Rev. While drilling activity ensued to completion, TGC officials were taking steps toward ultimate disclosure of the discovery. 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. 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. The two companies rushed in twenty-eight rigs, drilled about 200 wells, and began plant construction. 1968), cert. Bellemore, Investments: Principles, Practices and Analysis 4 (2d ed.1962). 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. See S. E. C. v. Great American Industries, Inc., 259 F. Supp. These officers, who engaged in securities transactions on the basis of material, nonpublic information, 1 2 3 (p. 389) 4 5 6 Drilling of the initial hole, K-55-1, at the strongest part of the anomaly was commenced on November 8 and terminated on November 12 at a depth of 655 feet. As Stephens and Fogarty have surrendered the options and the corporation has canceled them, there has certainly been no violation of 10b-5 by them with respect to those options. H. L. Green Co. v. Childree, 185 F.Supp. 1962). 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). They extend over a gamut between definite extremes. 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). Insider trading is a crime through judicial interpretation of the Securities Exchange Act of 1934. SMU LAW REVIEW ", 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." Nor is there anything about Rule 10b-5 which demonstrates that the SEC sought by the Rule not fully to implement the Congressional purpose and objectives underlying Section 10(b). Commenting on the section that became 10(b), Corcoran stated: Since the manipulative devices outlawed by 9 all involve fraudulent activities integrally related to securities transactions, the conclusion necessarily follows that the "other cunning devices" sought to be prohibited by 10(b) and Rule 10b-5 are those which also involve securities transactions as an integral part of the fraud. The Moral Problem in Insider Trading - University of Pennsylvania The next morning the 137 foot mark had been reached, fifty feet of which showed mineralization. What specific features of the information that she obtained make her case different While we certainly agree with the trial court that "in retrospect, the press release may appear gloomy or incomplete,"[28] 258 F. [863] Supp. 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. 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. 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. . That being the case, I find it unnecessary to decide whether or not Kline was in "top management.". b. fiduciary duty. 240.14a-101-103. However, as this suggestion was not presented to us, we do not consider it or make any determination with reference to it. But even he did not act on the belief that the second press release had in fact reached the market, see 258 F. Supp. Coates, however, placed his call no later than 10:20. Timeline: A History of Insider Trading - The New York Times 9 It even raised in- triguing issues about the legality of an insider accepting stock options while in possession of material nonpublic information.' Insider Trading And its Legal Mechanism in India - Commercial Law The foregoing discussion demonstrates that Congress intended to protect the investing public in connection with their purchases or sales on Exchanges from being misled by misleading statements promulgated for or on behalf of corporations irrespective of whether [861] the insiders contemporaneously trade in the securities of that corporation and irrespective of whether the corporation or its management have an ulterior purpose or purposes in making an official public release. If press releases have to read like prospectuses to guard against possible 10b-5 liability, it is safe to predict that they will quickly fall out of favor with corporate management. Holyk left for New York Saturday morning and arrived that same day. The only remedy the Commission seeks against the corporation is an injunction, see footnote 26, supra, and therefore we do not find it necessary to decide whether just a lack of due diligence on the part of TGS, absent a showing of bad faith, would subject the corporation to any liability for damages. Houston, Texas Area. It is most doubtful that Congress intended such a result, and the merits of such a change are so unexplored that Congress should certainly be consulted before making it. Such inequities based upon unequal access to knowledge should not be shrugged off as inevitable in our way of life, or, in view of the congressional concern in the area, remain uncorrected. The insiders here were not trading on an equal footing with the outside investors. 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. 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. 78 Cong.Rec. Significantly, however, the court below, while relying upon what these defense experts said the defendant insiders ought to have thought about the worth to TGS of the K-55-1 discovery, and finding that from November 12, 1963 to April 6, 1964 Fogarty, Murray, Holyk and Darke spent more than $100,000 in purchasing TGS stock and calls on that stock, made no finding that the insiders were motivated by any factor other than the extraordinary K-55-1 discovery when they bought their stock and their calls. One of the most famous instances of insider trading was Charles F. Fogarty's purchase of Texas Gulf Sulphur shares during 1963 and 1964. Once it had been established, however, that an aggrieved buyer has a private action under 10(b) of the 1934 Act, there seemed little practical point in denying the existence of such an action under 17 with the important proviso that fraud, as distinct from mere negligence, must be alleged. 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. 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. 252 F.Supp. If the SEC had appealed the ruling dismissing this portion of the complaint as to Holyk and Mollison, I would have upheld the dismissal quite apart from the special circumstance that a refusal on their part could well have broken the wall of secrecy it was important for TGS to preserve. Commenting on the disclosure purposes of the House bill (H.R. Securities and Exchange Commission v. Texas Gulf Sulphur Co Cf. 643 (S.D.N.Y. [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. The statute as enacted requires that the fraudulent scheme be "in connection with the purchase or sale of any security." Additional testimony revealed that the prices of stocks of other companies, albeit less diversified, smaller firms, had increased substantially solely on the basis of the discovery of good anomalies or even because of the proximity of their lands to the situs of a potentially major strike. Rule 52(a) should be given particular weight where expert testimony must of necessity play an important role. L.Rev. If we were writing on a clean slate, I would have some doubt whether the framers of the Securities Exchange Act intended 10b to provide a remedy for an evil that had long been effectively handled by derivative actions for waste of corporate assets under state law simply because in a particular case the waste took the form of a sale of securities.
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