See Sections 2 and 16 of the Act; H.R.Rep.No. Insider Trading Project | PDF | Insider Trading | Stocks - Scribd However, at the time of Texas Gulf Sulphur , it was not yet clear that insider trading was punishable as a crime. In these particulars we have followed the lead of the court below. No.1383. Where The Market Was The Wild World Of Biotech Insider Trading | Seeking Alpha 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. And in the process, the court rewrote the insider trading playbook . See 3 Loss, Securities Regulation 1692-96 (1961). 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. (1934). Like K-55-1, both K-55-3 and K-55-4 established substantial copper mineralization on the eastern edge of the anomaly. 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 . Mr. Justice Goldberg noted in SEC v. Capital Gains Research Bureau, 375 U.S. 180, 193, 84 S.Ct. 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. 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. 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. Texas Gulf Sulphur Co., 401 F.2d 833, 843 (2d Cir. denied, Bard v. Dasho, 389 U.S. 977, 88 S.Ct. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in . at 282. There is no evidence in the record suggesting that Murray purchased his stock on January 8, 1964, on the basis of material undisclosed information, and the disposition below is undisturbed as to him. The President, Claude O. Stephens, the Executive Vice-President, Charles F. Fogarty, and the Exploration Vice President, Richard D. Mollison, were notified, and Fogarty and Mollison flew to the drill site. Held: cause of action stated under 10b-5). But such a press release would have been highly misleading since the information necessary to draw such conclusions was not available on April 10 according to the TGS witnesses whom the District Court chose to believe. Since the issue of negligence is open to full review, Mamiye Bros v. Barber SS. If a labor strike had kept its plants idle for months, encouraging news of a possible settlement hoped for by the TGS labor negotiators might cause the negotiators to buy. 1965); Myzel v. Fields, 386 F.2d 718 (8 Cir. SEC L.Rep. [9] Congress intended by the Exchange Act to eliminate the idea that the use of inside information for personal advantage was a normal emolument of corporate office. Generally, in order to assess the probability that the event will occur, a factfinder will need to look to indicia of interest in the transactions at the highest corporate levels. 1070, 1079. cit. [22] Liability under 12(2) of the Securities Act of 1933, 15 U.S.C. 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. denied, 394 U.S. 976 (1969). 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 212 (9 Cir. But vulnerable as the news release may be, what of the many daily developments in the Research and Development departments of giant corporations. . 258 F.Supp. 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. The term "insider trading" describes the illegal use of con-fidential, material' information by an individual for personal profit in the stock market. Insider trading is a crime through judicial interpretation of the Securities Exchange Act of 1934. This is the old version of the H2O platform and is now read-only. (1934); Comment, 74 Yale L.J. All of the foregoing defendants accepted the options granted them. "Shadow Trading" Becomes Insider Trading | CLS Blue Sky Blog He then balances these risks against the apparent opportunities for capital gains and makes his decision accordingly. ", 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." [10] The House of Representatives committee that reported out the bill which eventually became the Act did so with the observation that "no investor, no speculator,can safely buy and sell securities upon exchanges without having an intelligent basis for forming his judgment as to the value of the securities he buys or sells." 1966) (by implication). 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. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. at 293. 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. H.R.Rep.No. 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. 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. Jan. 24, 1968); Howard v. Levine, 262 F.Supp. SEC v Texas Gulf Sulphur - Harvard University 673 (N.D.Indiana 1966) (Defendant corporation allegedly aided and abetted an alleged violation of 10b-5 by its brokerage firm because of its failure to report the improper activities of said firm to the proper authorities. A remand on this point is therefore not justified. 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. 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. 854, 94 L.Ed. In summary, the most disturbing aspect of the majority opinion is its utterly unrealistic approach to the problem of the corporate press release. These officers, who engaged in securities transactions on the basis of material, nonpublic information, 1 2 3 (p. 389) 4 5 6 by Brian JM Quinn ANNOTATION DISPLAY The following case, Texas Gulf Sulphur is an early federal insider trading case. 12: Insider Trading: Foundations and Merger News. To Catch a Thief: The Misappropriation Theory and Securities Fraud Albert R. Connelly, Donald I. Strauber, Cravath, Swaine & Moore, New York City, for Coates. It, too, was drilled at the anomaly's eastern edge. See Schedules 14A-14C, 17 C.F.R. 1070, 1079-81 (1965). 78j(b) and Rule 10b-5, and remand, pursuant to the agreement of all the parties, for a determination of the appropriate remedy. 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. 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. Financial Integrity - Business Ethics 557 (D.Ore.1966) (Plaintiff induced to sell his stock to the corporation for less than its true value because the defendants, stockholders and directors of the company fraudulently concealed material facts); New Park Mining Co. v. Cranmer, 225 F.Supp. The inconsistency of the majority's position is immediately apparent. of Policy Research, SEC, Frank E. Kennamer, Jr., Asst. Texas Gulf Sulphur Co., 401 F.2d 833,843-47 (2d Cir. This is unfortunate because it has resulted in 10(b) being given a construction and significance which, in my opinion, Congress did not foresee and did not intend. H.Rep.No.85, 73dCong., 1st Sess. The Commission offered no proof that anyone was misled by the release e. g. testimony tending to show that most investors thought the release meant that TGS had no hopes of making an ore discovery. Nor is it consonant with reality to suggest, as does the majority, that corporate executives may be motivated in accepting employment by the opportunity to make "secret corporate compensation * * * derived at the expense of the uninformed public." Other situations and problems of an equally reductio ad absurdum character can easily be conjured up. This insider trading activity, which surely constitutes highly pertinent evidence and the only truly objective evidence of the materiality of the K-55-1 discovery, was apparently disregarded by the court below in favor of the testimony of defendants' expert witnesses, all of whom "agreed that one drill core does not establish an ore body, much less a mine," 258 F.Supp. 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? Primarily, our task should be to review errors of law. A corporation may itself violate Rule 10b-5 if it engages in fraudulent activities in connection with a merger or other transaction involving securities. Visual estimates indicated an average content of 1.14% copper and 8.24% zinc. [2] Over time, the U.S. Supreme Court embraced some of its holdings while rejecting others. 1967). 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. I think the remand should make crystal clear that the issue whether this is a proper case for an injunction remains open, and that with 49 private actions pending in the District Court for the Southern District of New York, see 258 F.Supp. The Science and Art of Disgorgement under Securities Law The construction given the "in connection" clause by the District Court has been followed in the many cases that have considered the point. The first five paragraphs read as follows: Should Make Substantial Open Pit Operation, TEXAS GULF SULPHUR COMES UP WITH A "MAJOR", See Big Tonnages Of Base Metals, Plus Silver. Lines, 360 F.2d 774 (2 Cir. Dasho v. Susquehanna Corp., 380 F.2d 262 (7 Cir. (1934); H.R.Rep.No. He is, to the best of his ability, taking calculated risks." 1962); Stevens v. Vowell, 343 F.2d 374 (10 Cir. 138, 51 L.R.A., N.S., 112 (1912), with Claman v. Robertson, 164 Ohio St. 61, 128 N.E.2d 429 (1955); cf. 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." The majority opinion appears to approve of the Commission's position without reservation. 3844 (Oct. 8, 1957). (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. 1383, 73rd Cong., 2d Sess. 258 F.Supp. 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. Insiders, as directors or management officers are, of course, by this Rule, precluded from so unfairly dealing, but the Rule is also applicable to one possessing the information who may not be strictly termed an "insider" within the meaning of Sec. L.Rev. The case began in 1959 when the Texas Gulf Sulphur Company purchased some property in Timmins, Ontario, to check for ore deposits. With the aid of one Carroll, a public relations consultant, Fogarty drafted a press release designed to quell the rumors, which release, after having been channeled through Stephens and Huntington, a TGS attorney, was issued at 3:00 P. M. on Sunday, April 12, and which appeared in the morning newspapers of general circulation on Monday, April 13. TGS felt it had a responsibility to protect would-by buyers of its shares from what it regarded as exaggerated rumors first in the Canadian and then in the New York City press, and none of the individual defendants sought to profit from the decline in the price of TGS stock caused by the release. 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." To encourage compliance with these disclosure and reporting requirements, Congress enacted civil ( 18, 15 U.S.C. 1966); United States v. Schaefer, 299 F.2d 625, 629 (7 Cir. Their belief that the strike would be protracted might cause them to sell. 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. The attention this case has received from the profession and our in banc consideration make it incumbent on us to give the district courts in our circuit as much guidance as we can. 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. 15. So, the trial court concluded, "There is no doubt that the drill core of K-55-1 was unusually [844] good and that it excited the interest and speculation of those who knew about it." 77q(a) "* * * in the [offer or] sale of any securities to obtain money or property by means of * * *"; [language in brackets was added in 1954 amendments]), and with the 1936 antifraud amendment of Section 15 of the Securities Exchange Act of 1934 ( 15(c) (1), 15 U.S.C. [7] The following morning, Sunday, Fogarty again telephoned Mollison, inquiring whether Mollison had any further information and told him to return to Timmins with Holyk, the TGS Chief Geologist, as soon as possible "to move things along." Section 9, 15 U.S.C. 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. 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. 670 (S.D.N.Y. Matter of Cady, Roberts & Co., 40 SEC 907, 912 (1961). Miller v. Bargain City, U. S. A., 229 F.Supp. 16(b) of the Act. The essence of the SEC's case is that Timmins was a once-in-a-lifetime affair; the company's motive in issuing the release was laudable; and the defect was solely a pardonable one of execution. Factually, the premise posed by the majority is "clearly erroneous." No. 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. 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. 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. [36] But in this case the only purpose of the press release was to quell the extravagant rumors circulating about the Canadian exploration project. 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 * * *." They would only point more directly to the conclusion that an injunction here would not only violate fundamental legal principles which for centuries have restricted the injunctive grant but would not be justified by any sufficient factual showing in this case. Finally, when faced with the repeated issuance of misleading press releases, the courts can without more proof draw the inference that they were purposefully distributed to affect the price of the issuer's securities, justifying injunctive relief under 10b-5 and possibly other remedies. 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 . The majority disagree as to Kline, placing him in top management along with Stephens and Fogarty, and holding that he had sufficient knowledge that his non-disclosure violated Rule 10b-5. See 3 Loss, Securities Regulation 1975-83 (1961). The Securities Act, 1933 prohibited fraud in the sale of securities. A definite statement "to clarify" was promised in the future. Commenting on the disclosure purposes of the House bill (H.R. Id. 1961). 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. L.Rev. Counsel, David Ferber, Sol., Roger S. Foster, Sp. TGS decided to acquire the surrounding plots in the Kidd 55 area to enable it fully to investigate the anomaly. 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. 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." Id. This is the old version of the H2O platform and is now read-only. 1383, 73rd Cong., 2d Sess. Gediman v. Anheuser Busch, Inc., 299 F.2d 537, 545 (2 Cir. Therefore, in a case where disclosure to the grantors of an option would seriously jeopardize corporate security, it could well be desirable, in order to protect a corporation from selling securities to insiders who are in a position to appreciate their true worth at a price which may not accurately reflect the true value of the securities and at the same time to preserve when necessary the secrecy of corporate activity, not to require that an insider possessed of undisclosed material information reject the offer of a stock option, but only to require that he abstain from exercising it until such time as there shall have been a full disclosure and, after the full disclosure, a ratification such as was voted here. cit. See Baranow v. Gibraltar Factors Corp., 366 F.2d 584, 587 (2 Cir. 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. Their motive for purchase does not establish the materiality of the facts which influenced them. 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." [24]The options granted on February 20, 1964 to Mollison, Holyk, and Kline were ratified by the Texas Gulf directors on July 15, 1965 after there had been, of course, a full disclosure and after this action had been commenced. [30] [866] Since that issue is not before us, I merely make the reservation of my position clear. The speculator then examines the facts to discover and evaluate the risks that are present. The trial court found that the release was not "misleading or deceptive on the basis of the facts then known," and the majority state that from the record they cannot "definitively conclude that it was deceptive or misleading to the reasonable investor." at 281-82. The only provision in either the 1933 or the 1934 Act that can be read to impose liability for damages for negligent misrepresentation without restrictions as to the kinds of plaintiffs, due diligence defenses, a short statute of limitations, or an undertaking for costs that were insisted on by the investment community, is 17(a) (2) of the Act of 1933 the source of Rule 10b-5(2). Law. SEC v. Torr, 87 F.2d 446 (2 Cir. 1960) (Accountants allegedly induced corporation to go through with a merger (a securities transaction) by preparing false financial statements and making other misrepresentations). 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.