They contend, however, that their purchases were not proscribed purchases for the news had already been effectively disclosed. It seems clear, however, that if corporate management demonstrates that it was diligent in ascertaining that the information it published was the whole truth and that such diligently obtained information was disseminated in good faith, Rule 10b-5 would not have been violated. It is not altogether certain from the present record that the draftsmen could, as the SEC suggests, have readily obtained current reports of the drilling progress over the weekend of April 10-12, but they certainly should have obtained them if at all possible for them to do so. This is the old version of the H2O platform and is now read-only. United States vs. Newman 1983. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. Corp., supra, 188 F.2d at 786, and follow the lead of those Circuits that seem to have discarded the scienter requirement in actions for damages under Rule 10b-5,[32] Ellis v. Carter, 291 F.2d 270, 274 (9 Cir. 416, 419 (S.D N.Y.1955) (Kaufman, J. After all, TGS had prior experience in exploration where initially promising situations turned out to be "duds." [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. 1965), appeal pending; Gann v. BernzOmatic, 262 F.Supp. Forthcoming: 42 Quinnipiac Law Review (2023) (Symposium Issue), SMU Dedman School of Law Legal Studies Research . Whatever they knew or didn't know about Timmins, they were entitled to believe their superiors had reported the facts to the Option Committee unless they had information to the contrary. Stephens, Fogarty and Kline stand on an altogether different basis; as senior officers they had an obligation to inform the Committee that this was not the right time to grant options at 95% of the current price. This is the old version of the H2O platform and is now read-only. 1437 (1967). Although the problem of insider trading is not new, in recent years the extent of The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. 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. 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. Such thoughts can only arise from unfounded speculative imagination. denied, 385 U.S. 835, 87 S.Ct. ), cert. 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. This core was unusually good in mineral content. at 296. But the case stands differently as to paragraph (2). In my opinion the evidence establishes as a matter of law that the press release was misleading. While the trial court concluded that TGS had exercised "reasonable business judgment under the circumstances," 258 F.Supp. 33 (E.D.Pa.1964); Fischer v. Kletz, 266 F. Supp. Insider trading is one of the most violent crimes on the faith of fair dealing in a capital market. Thank you. Moreover, it would have obviously been better to have specifically described the known drilling progress as of April 10 by stating the basic facts. There were several choices. I, Form 1-A, Reg. 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. 2, supra, and persons listed in fn. Plaintiff, the Securities and Exchange Commission, brought this suit against Defendants, Texas Gulf Sulphur Co., et al., after Defendants bought shares . Presumably the Commission will make recommendations to the Congress to give that body an opportunity to accept or reject after thoughtful debate such proposals as may be made. Moreover, comparisons of Section 10(b) with the antifraud provisions of the Securities Act of 1933 ( 12(2), 15 U.S.C. 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." It stated in part: The majority offer suggestions for improving the press release, but, as their editorial skills and present appraisal of the then mining situation were not available when it was drafted, the relevant issue is whether the District Court was in error in determining that the release was accurate and not misleading. The conclusion of the majority is based primarily on this assumption. 854, 94 L.Ed. 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. More important, however, is the realization which we must again underscore at the risk of repetition, that the investing public is hurt by exposure to false or deceptive statements irrespective of the purpose underlying their issuance. The High Powered Committee on Stock Exchange Reforms, 1986 (Ch. [36] But in this case the only purpose of the press release was to quell the extravagant rumors circulating about the Canadian exploration project. Defendant Crawford ordered 300 shares about midnight on April 15 and 300 more shares the following morning, to be purchased for himself, and his wife, and these purchases are treated as having been made by the defendant Crawford. To be sure, SEC official publicity accompanying the promulgation of the Rule emphasized the insider trading aspects of the Rule, particularly the prohibition against purchases by insiders, but this was emphasized because "the previously existing rules against fraud in the purchase of securities applied only to brokers and dealers," 8 SEC Ann.Rep. Defendant Mollison purchased 100 shares on November 15 in his name only and on April 8 100 shares were purchased in the name of Mrs. Mollison. 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. [7] Mollison had returned to the United States for the weekend. TGS experts could name very few base metal mines with a greater assay value and the court observed that bodies of much lower assay value were commercially mined, 258 F.Supp. Since the majority admit that Kline knew only that a hole containing favorable bodies of copper and zinc ore had been drilled in Timmins, it seems clear that he did not possess material information that had to be disclosed. 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. In any event if the Commission feels that its arsenal should be augmented, Congress not the courts is the proper forum for its arguments. See also 9(a) (4), 15(c) (1), (2), 15 U.S. C. 78i(a) (4); 78o(c) (1), (2). However, as they have surrendered the options and the corporation has canceled them, supra at 292, n. 17, we find it unnecessary to order that the [857] injunctions prayed for be actually issued. However, the District Court found that: The April 12 release therefore correctly described Kidd 55 as a "prospect." silver. 258 F.Supp. No. 9 It even raised in- triguing issues about the legality of an insider accepting stock options while in possession of material nonpublic information.' 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. For reasons which appear below, we decide the various issues presented as follows: (1) As to Clayton and Crawford, as purchasers of stock on April 15 and 16, 1964, we affirm the finding that they violated 15 U.S.C. 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 _____. Restatement, Torts 538(2) (a); accord Prosser, Torts 554-55; I Harper & James, Torts 565-66." The two companies rushed in twenty-eight rigs, drilled about 200 wells, and began plant construction. 1961). It can, indeed, be argued that, even on this basis, Rule 10b-5(2), absent the reading in of a scienter requirement, goes beyond the authority granted by 10(b) of the 1934 Act. [30] Though the Board of Directors of TGS ratified the issuance of the options after the Timmins discovery had been fully publicized, it obviously was of the belief that Kline had committed no serious wrong in remaining silent. A similar standard has been adopted in private actions, see, e. g., Stevens v. Vowell, 343 F.2d 374 (10 Cir. 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." The core of Rule 10b-5 is the implementation of the Congressional purpose that all investors should have equal access to the rewards of participation [852] in securities transactions. As to the sufficiency of the news release, the first issue would be what constitutes a "reasonable" investor. at 284. Before further discussing this matter it seems desirable to state exactly what the SEC claimed in its complaint and what it seeks. 262, at 292-296 (SDNY 1966). See List v. Fashion Park, Inc., 340 F.2d 457, 461-62 (2 Cir. Prior to these transactions these persons had owned 1135 shares of TGS stock and possessed no calls; thereafter they owned a total of 8235 shares and possessed 12,300 calls. 78j(b) and Rule 10b-5, and remand, pursuant to the agreement of all the parties, for a determination of the appropriate remedy. [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. at 296. 1966), and cases cited in footnote 11 supra. Texas Gulf Sulphur Co., 401 F.2d 833, 848-49 (2d Cir. Those that had been advised by the broker Roche to purchase stock did not sell upon reading the April 12 release. See Berko v. SEC, 316 F.2d 137, 141-142 (2 Cir. 240.14a-101-103. D. Rule 10b-5 Occupies the Field: Texas Gulf Sulphur 396 R E. Insider Trading Retrenchment and Renewal 402 R II. Detailed information similar to that required by the 1933 Act has to be filed with the Commission for such registered securities, and this information is required by 13, 15 U.S.C. 262, 269 (S.D.N.Y. This paper includes a comparative overview of the difference between India's Insider trading laws and the U.S.'s Insider trading laws. Freed v. Szabo Food Serv., Inc., CCH Fed. 1968). 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. You can access the new platform at https://opencasebook.org. insider trading law by trading securities (without disclosure) based on material, non-public information. 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. Firm Management White-Collar/Regulatory Pro Bono/Public Service/D&I Is ESG a Trade Secret? at 294. 1967). By morning of April 13, in K-55-5, the fifth drill hole, substantial copper mineralization had been encountered to the 580 foot mark, and the hole was subsequently drilled to a length of 757 feet without further results. Appellant Crawford, who ordered[17] the purchase of TGS stock shortly before the TGS April 16 official announcement, and defendant Coates, who placed orders with and communicated the news to his broker immediately after the official announcement was read at the TGS-called press conference, concede that they were in possession of material information. Of course, if any of the five knowledgeable defendants had rejected his option there might well have been speculation as to the reason for the rejection. 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. 1383, 73d Cong., 2d Sess. Contrary to the belief of the trial court that Kline had no duty to disclose his knowledge of the Kidd project before accepting the stock option offered him, we believe that he, a vice president, who had become the general counsel of TGS in January 1964, but who had been secretary of the corporation since January 1961, and was present in that capacity when the options were granted, and who was in charge of the mechanics of issuance and acceptance of the options, was a member of top management and under a duty before accepting his option to disclose any material information he may have possessed, and, as he did not disclose such information to the Option Committee we direct rescission of the option he received. 78ff). What specific features of the information that she obtained make her case different The legislative history clearly reveals that the statute was passed to prohibit deceptive and manipulative devices used in connection with securities transactions, and that the "connection" between the complained of conduct and the securities transactions must be a closer one than the majority now sanctions. By 7:00 p.m., April 10, the following data was available: The Commission's experts testified that because copper and zinc had been found in these five holes (although in varying percentages) it could reasonably be concluded that the mineralization was continuous between holes 400 feet apart and also 100 feet byond in each direction and to a depth of 600 feet, one hundred feet below the deepest hole. 10 (1942). 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." 1945). 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 * * *.". It has been accepted for inclusion in SMU Law Review by an authorized administrator of SMU Scholar. The TGS opinion rested on a policy of equality of access to information. 1964), a decision that has not found favor with other circuits. Under the current insider trading regime in the United States, stiff penalties1are imposed for a crime that has never been defined by statute or regulation.2The principal statutory authority for insider trading liability is section 10(b) of the Securities Exchange Act of 1934, which prohibits the employment of "any manipulative or deceptive #2- What is your assessment of the Texas Gulf Sulphur press release of April 12? On Friday morning, April 10th, Mollison and Holyk visited the property and learned the results of the drilling up to that time. [20] The SEC seeks permanent injunctions restraining future proscribed activity by all the individual defendants and the corporation. No one has asserted, or reasonably could assert, that the purpose for issuing a release was anything but good. They believe Conradt was informed by his roommate at the time in 2009. A correct decision in this case may well hang upon [872] their testimony and its credibility because what these observers knew or should have known between November 12, 1963 and April 9, 1964 is basic to a determination of what, if anything, should have been disclosed or whether it was "material. 1963) (same); Lorenz v. Watson, 258 F.Supp. Mollison and Holyk were in New York for the weekend, and there was no telephone at the site the only way to communicate with the site was to go there. However, at the time of Texas Gulf Sulphur , it was not yet clear that insider trading was punishable as a crime. Holyk left for New York Saturday morning and arrived that same day. 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. The second point, to me transcending in public importance all others in this important case, is the press release issued by TGS on April 12, 1964. What's Insider Trading? Co., 259 F.Supp. Faberge, Inc., 45 S.E.C. at 296, we cannot, from the present record, by applying the standard Congress intended, definitively conclude that it was deceptive or misleading to the reasonable investor, or that he would have been misled by it. We have recently stated in a case involving a private suit under Rule 10b-5 in which damages and an injunction were sought, "`It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for monetary damages.'" Their motive for purchase does not establish the materiality of the facts which influenced them. 1962); Kohler v. Kohler Co., 208 F.Supp. On April 13 the New York Herald Tribune in an article head-noted "Copper Rumor Deflated" quoted from the TGS release of April 12 and backtracked from its original April 11 report of a major strike but nevertheless inferred from the TGS release that "recent mineral exploratory activity near Timmins, Ontario, has provided preliminary favorable results, sufficient at least to require a step-up in drilling operations." And, by 7:00 A.M. on Sunday, April 10, eight hours before the release was issued to the press, 77.9% of the drilling in mineralization had been completed, 84.4% by 7:00 P.M. on the 12th, and 90.2% by 7 A.M. on April 13. at 271). 78o(c) (5), 78s(a) (4)). 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 statute as enacted requires that the fraudulent scheme be "in connection with the purchase or sale of any security." [14] The trial court found that defendant Murray "had no detailed knowledge as to the work" on the Kidd-55 segment. 239 (SDNY 1962). 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." See S. E. C. v. Great American Industries, Inc., 259 F. Supp. Thomas Conradt and David Weishaus bought shares of SPSS Inc. after illegally discovering about their near future acquisition of IBM. However, as this suggestion was not presented to us, we do not consider it or make any determination with reference to it. This is probably an overstatement because by the time of the TGS April 16, 1964 press release, exploration had advanced to a point where an estimate of the extent of the tonnage might have been rather accurately made. 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.
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