at 843-47. See, e. g., Note, Accountant's Liabilities for False and Misleading Statements, 67 Colum.L.Rev. 78j reads in pertinent part as follows: 78j. Rep. 7327. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. The inconsistency of the majority's position is immediately apparent. Their belief that the strike would be protracted might cause them to sell. It, too, was drilled at the anomaly's eastern edge. 252 F.Supp. If corporations were literally to follow its implications, every press release would have to have the same SEC clearance as a prospectus. 2 of SEC Act, 15 U.S.C. The trial court's finding as to this fact is unassailable: This conclusion is amply supported by the record. 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. It is unfortunate that the atmosphere surrounding this important issue has been so colored and in the collective mind of the majority so contaminated by the comparatively insignificant stock purchase issue. Similarly, corporate officers or directors may be liable for causing their corporation to engage in securities transactions. (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. Thus any statement issued by a publicly listed company is made "in connection" with the purchase or sale of securities. But even he did not act on the belief that the second press release had in fact reached the market, see 258 F. Supp. 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. It was then said that, as of April 12, the release date, "* * * any statement as to size and grade of ore would be premature and possibly misleading." At one extreme is a rule that no officer or employee or any member of their families shall own stock of the company for which they work or purchase stock if he possesses "material" inside information. Therefore it seems clear from the legislative purpose Congress expressed in the Act, and the legislative history of Section 10(b) that Congress when it used the phrase "in connection with the purchase or sale of any security" intended only that the device employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation's securities. 31, 2023 LAW OF CORPORATE MANAGEMENT AND FINANCE LGST 2020 / 8020 Spring 2023 Prof. Vince 1968) (en banc), cert. 809, 830-33 (1968). Select one: a. insider trading. Manipulative and deceptive devices, It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . (1934), p. 11. Id. What constitutes a reasonable time depends on the circumstances of the dissemination. [19] The record reveals that news usually appears on the Dow Jones broad tape 2-3 minutes after the reporter completes dictation. It would be unrealistic to include any of these purchases as having been made by other than the defendants, and unrealistic to include them as having been made by members of the general public receiving "tips" from insiders. What were the motives behind each of the purchases? SMU LAW REVIEW 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. (1934); H.R.Rep.No. The trial court also found, 258 F.Supp. Of course subsection (c) is a catch-all clause to prevent manipulative devices. The release did not appear in most newspapers of general circulation until later in the morning of Monday, the 13th. 78u(e), a permanent injunction restraining the issuance of any further materially false and misleading publicly distributed informative items.[26]. Mollison had been advised by Holyk as to the drilling results up to 7:00 p.m. on April 10th. The Texas Gulf Sulphur decision began what has become a fifty-year project of developing U.S. insider trading regulation through judicial lawmaking. H.R.Rep.No. See also Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2 Cir. Disgorgement in Insider Trading Cases: FY2005-FY2015 - SMU 78o(c) (5), 78s(a) (4)). 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. 168 (1953), that cannot be done without an appreciation of the illegality of the conduct proposed to be excused, cf. Some witnesses who testified at the hearing stated that they found the release encouraging. He added, however, that it "is a natural thing to buy more stock once they give you the first drill hole." Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir. 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. Thus, as to him, as one who purchased stock between November 12, 1963 and April 9, 1964, we reverse the implicit dismissal of the complaint, find that he violated 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy. Of necessity the April 12 press release had to be issued on the basis of the drilling results through 7:00 p. m., April 10, and it seems clear that the trial court determined that it would not be reasonable to charge TGS with knowledge of later information. 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. ), cert. Their motive for purchase does not establish the materiality of the facts which influenced them. Conversely, we are not a jury of nine with no requirement of a unanimous verdict. D. Rule 10b-5 Occupies the Field: Texas Gulf Sulphur 396 R E. Insider Trading Retrenchment and Renewal 402 R II. ); Meisel v. North Jersey Trust Co., 218 F.Supp. THROUGH TEXAS GULF SULPHUR - Duke University Shortly after the appeal was argued defendant Lamont passed away, and by agreement of the parties an order was entered discontinuing his appeal and directing that the judgment below dismissing the action against him be severed from the judgment as to the other defendants. The Ever-Changing Scope of Insider Trading Liability for Tippees in the 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. See Baranow v. Gibralter Factors Corp., 366 F.2d 584, 587-589 (2 Cir. 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. The speculator then examines the facts to discover and evaluate the risks that are present. Incorrect Mark 0 out of 1. 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 212 (9 Cir. 1967), (emphasis supplied), sometimes defined as "fraud," Fischman v. Raytheon Mfg. Crawford ordered 300 shares at midnight on the 15th and another 300 shares at 8:30 A. M. the next day, and these orders were executed over the Midwest Exchange in Chicago at its opening on April 16. At 3:00 P.M. on April 12, 1964, evidently believing it desirable to comment upon the rumors concerning the Timmins project, TGS issued the press release quoted in pertinent part in the text at page 845, supra. A. PR. 2002) [2002 BL 100] . See footnote 16, supra. . As evidence that the April 12 release was probably inaccurate, the majority point to the fact that only three days later TGS prepared the April 16 release which announced a major mineral discovery. The next day the market closed at 30. Feb. 26, 1968). FROM Gulf Sulphur autumn (TGS) of 1963 through bought their - JSTOR 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. Such a deceptive or manipulative practice would be prohibited by 10(b) and Rule 10b-5. at 293. 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. But in both cases the courts recognized that further factual and legal development was necessary for the proper resolution of the issue. Judge Bonsal in a detailed opinion[5] decided, inter alia, that the insider activity prior to April 9, 1964 was not illegal because the drilling results were not "material" until then; that Clayton and Crawford had traded in violation of law because they traded after that date; that Coates had committed no violation as he did not trade before disclosure was made; and that the issuance of the press release was not unlawful because it was not issued for the purpose of benefiting the corporation, there was no evidence that any insider used the release to his personal advantage and it was not "misleading, or deceptive on the basis of the facts then known," 258 F.Supp. Accordingly, we hold that Rule 10b-5 is violated whenever assertions are made, as here, in a manner reasonably calculated to influence the investing public, e. g., by means of the financial media, Fleischer, supra, 51 Va.L.Rev. Tager v. SEC, 344 F.2d 5, 8 (2 Cir. Timeline: A History of Insider Trading - The New York Times The first is a situation that will not often arise, involving as it does the acceptance of stock options during a period when inside information likely to produce a rapid and substantial increase in the price of the stock was known to some of the grantees but unknown to those in charge of the granting. 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. Under such circumstances, the most effective procedure is the quick and speedy denial of such rumors through a release to the public Press * * *". For example, the company had spent some $7,000,000 to purchase an underwater dome off the coast of Texas and an additional $1,000,000 to drill 21 holes before concluding that there was not enough sulphur in the dome to be of commercial interest. 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. On the basis of these findings relative to the foregoing drilling results, the trial court concluded that the vertical plane created by the intersection of K-55-1 and K-55-3, which measured at least 350 feet wide by 500 feet deep extended southward 200 feet to its intersection with K-55-4, and that "There was real evidence that a body of commercially mineable ore might exist." Before further discussing this matter it seems desirable to state exactly what the SEC claimed in its complaint and what it seeks. Case (Aug. 14, 1968) . Section 10(b) was certainly not intended to be a mandate to the Commission to erect a comprehensive regulatory system policing all corporate publicity, as the majority now contend. Here the trial court had an opportunity not only to hear the qualifications of the experts but also from their demeanor and responses to form its opinion as to their credibility. His statement was that: "While, in retrospect, the press release may appear gloomy or incomplete, this does not make it misleading or deceptive on the basis of the facts then known." This hole was drilled westerly at an angle of 60 and was intended to explore mineralization beneath K-55-1. It would therefore appear that the Commission has failed in its burden of proof, unless it can be said that TGS was negligent in not obtaining later data from Timmins before issuing the release.[35]. 2, supra, and persons listed in fn. To them, completely disregarding the trial court's findings and substituting themselves as a jury, these purchases are "the only truly objective evidence of the materiality of the K-55-1 discovery." While that term is a word of art in the mining trade used to describe "a property where there is no assurance, from the information known, that a commercially mineable ore body exists" [Pennebaker], its technical definition is no different from the definition in common use. 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? Its conclusion that "the Commission has failed to demonstrate that it was false, misleading or deceptive," 258 F.Supp. 1966); United States v. Schaefer, 299 F.2d 625, 629 (7 Cir. 854, 94 L.Ed. Jan. 24, 1968); Howard v. Levine, 262 F.Supp. 2 Close C5P5 The rapid development of a broad insider trading prohibition under Rule 10b-5 would face a formidable obstacle, however, after Lewis Powell joined the . The SEC does not contest the alternative holding below that Holyk and Mollison, not being members of TGS's top management, had no duty of disclosure prior to acceptance of stock options. 91,317 (N.D.Ill. 78j (b) and Rule 10b-5; we reverse the judgment order entered below dismissing the complaint against appellees Charles F. Fogarty, Richard H. Clayton, Richard D. Mollison, Walter Holyk, Kenneth H. Darke, Earl L. Huntington, and Francis G. Coates, as we find that they have violated 15 U.S.C. Graded Quiz Unit 5 - Opening the Gates to Higher Education - Studocu Furthermore, the location of drilling holes is critical in determining continuity. By doing so, a person acts in violation of their duties and breaches the trust of the affected parties. To hold that such a statement incurs 10b-5 liability is contrary to the intent of Congress in passing 10(b) and settled judicial construction. The years following Texas Gulf Sulphur were a period of intense regulation and rebuttal of the insider trading system that the SEC fought to establish. 1966), aff'd in part, rev'd in part On Saturday morning, April 11th, both the New York Herald Tribune and the New York Times prominently reported a major ore discovery. It was the intent of Congress that all members of the investing public should be subject to identical market risks, which market risks include, of course the risk that one's evaluative capacity or one's capital available to put at risk may exceed another's capacity or capital. (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. The market opened at 30 1/8 on the 13th (when the release became public) and closed at 30 7/8 scarcely a sign of public pessimism. Hence, as one of the foregoing hypotheticals suggests, I am not at all sure that a company in the position of TGS might not have a claim against top officers who breached their duty of disclosure for the entire damage suffered as a result of the untimely issuance of options, rather than merely one for rescission of the options issued to them. 281. No.1383. c. bribery. In fact, the Commission itself indulges in the very speculation it condemns for, after conceding that "the trial court correctly stated that one drill hole does not establish the existence of a commercially mineable mineral deposit," it straightway contends that the information which arose after the drilling of this first and only (for 4 months) drill hole revealed such "chances of imminent success, viewed in the light of the magnitude of the potential economic benefit to Texas Gulf" as to require disclosure by insiders desiring to buy TGS securities. The case began in 1959 when the Texas Gulf Sulphur Company purchased some property in Timmins, Ontario, to check for ore deposits. 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. (Great American brief, pp. After a slight decline to 16 3/8 by Friday, November 22, the price rose to 20 7/8 by December 13, when the chemical assay results of K-55-1 were received, and closed at a high of 24 1/8 on February 21, the day after the stock options had been issued. (1) In resolving the stock purchase issue, the primary factual inquiry must be concentrated on (a) the nature and extent of the knowledge possessed by, or available to, the purchaser on the date of purchase, and (b) the position of the purchaser in relation to TGS. See 258 F.Supp. [30] [866] Since that issue is not before us, I merely make the reservation of my position clear. The drilling done to date has not been conclusive but the statements made by many outside quarters are unreliable." While such an erroneous view of the law is pardonable, it is not "good faith" in a legal sense. The District Court held that Holyk, Mollison and Kline were not in top management and that Kline was ignorant of the details of the drilling results, so as to them no violation of 10b-5 had been made out. [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. This assumption raises the question of what is material and who is to make such a determination. 1965); Ellis v. Carter, 291 F.2d 270 (9 Cir. 1966), appeal pending. [25] TGS relies [858] on the holding of the court below that "The issuance of the release produced no unusual market action" and "In the absence of a showing that the purpose of the April 12 press release was to affect the market price of TGS stock to the advantage of TGS or its insiders, the issuance of the press release did not constitute a violation of Section 10(b) or Rule 10b-5 since it was not issued `in connection with the purchase or sale of any security'" and, alternatively, "even if it had been established that the April 12 release was issued in connection with the purchase or sale of any security, the Commission has failed to demonstrate that it was false, misleading or deceptive." Coates, however, placed his call no later than 10:20. Jun 2013 - Jun 20152 years 1 month. The importance of this opportunity to observe where technical or scientific problems are before the court, as here, has been succinctly stated by the Supreme Court in Graver Tank & Mfg. at 291. No reason appears why outside investors, perhaps better acquainted with speculative modes of investment and with, in many cases, perhaps more capital at their disposal for intelligent speculation, would have been less influenced, and would not have been similarly motivated to invest if they had known what the insider investors knew about the K-55-1 discovery. 1968). My assessment on the Texas Gulf Sulphur press release of April 12 was that due to the rumors that "a major ore strike is I the making," and the unauthorized report being published, there was an actual press release. In any event, the Commission still has the problem of showing that the other requirement of the statute and rule is met, namely that the release was issued "in connection with" a securities transaction on the part of TGS. 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. The Commission can suspend trading for successive periods of 10 days in any security which it feels is being affected by misleading press releases ( 15 (c) (5), 19(a) (4), 15 U.S.C. denied, Bard v. Dasho, 389 U.S. 977, 88 S.Ct. 171, 181-82 (1933); 3 Loss, Securities Regulation 1785-86 (1961). 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 ________. Insider trading is termed illegal when one uses a company's confidential stock price information for personal gains. The majority remand the case against the corporate defendant to the district court for a determination as to whether the April 12 press release was misleading and whether, if so, those responsible for the release used due diligence. SEC v. Texas Gulf Sulphur Co. Wikipedia Republished // WIKI 2 The statute as enacted requires that the fraudulent scheme be "in connection with the purchase or sale of any security." 5 Surprising Facts About Insider Trading | FINRA.org In the event that it is found that the statement was misleading to the reasonable investor it will then become necessary to determine whether its issuance resulted from a lack of due diligence. LAW OF CORPORATE MANAGEMENT AND FINANCE LGST Legal Studies & Business [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." 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. SEC Enforcement on Insider Trading and the Dark Web Like K-55-1, both K-55-3 and K-55-4 established substantial copper mineralization on the eastern edge of the anomaly. 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 * * *." 239, 243 (SDNY 1962). 1964) (Corporation allegedly defrauded into issuing securities to its President through the failure or refusal of some of its directors fully to disclose to the remaining directors material facts concerning the transactions or the financial condition of the company); Bredehoeft v. Cornell, 260 F. Supp. Whistleblower 262 at 280, in the sense that the materiality of facts is to be assessed solely by measuring the effect the knowledge of the facts would have upon prudent or conservative investors. at 284, that Darke, after the drilling of K-55-1 had been completed and with detailed knowledge of the results thereof, told certain outside individuals that TGS "was a good buy." A definite statement "to clarify" was promised in the future. 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. 78m, to be kept "reasonably current" by periodic and other reports filed with the Commission and the stock exchanges. at 284. The novel problem in the instant case is to define the responsibility of officers when a directors' committee administering a stock option plan proposes of its own initiative to make options available to them and others at a time when they know that the option price, geared to the market value of the stock, did not reflect a substantial increment likely to be realized in short order and was therefore unfair to the corporation. Nor is it any justification that such an explicit disclosure of the truth might have "encouraged the rumor mill which they were seeking to allay." [834] [835] [836] [837] [838] [839] Philip A. Loomis, Jr., Gen. Here there is no danger of repetition of an unduly gloomy press release like that of April 12. With reference to Huntington, the trial court found that he "had no detailed knowledge as to the work" on the Kidd-55 segment, 258 F.Supp. 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. To encourage compliance with these disclosure and reporting requirements, Congress enacted civil ( 18, 15 U.S.C. As to Stephens and Fogarty, the majority decision places insider recipients of stock options in a difficult dilemma. 1271 (1965), both of which are cited in TGS. Id. 1961). [12] We do not suggest that material facts must be disclosed immediately; the timing of disclosure is a matter for the business judgment of the corporate officers entrusted with the management of the corporation within the affirmative disclosure requirements promulgated by the exchanges and by the SEC. In re Enron Corporation Securities, Derivative & Erisa Litigation235 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. 275, 11 L.Ed.2d 237 (1963), that the elements of a cause of action for "fraud" vary "with the nature of the relief sought" and that "It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for money damages." Section 78j(b), and Rule 10b-5 (17 CFR 240.10b-5) (the Rule), promulgated thereunder, and to compel the rescission by the individual defendants of securities transactions assertedly conducted contrary to law. However, as this suggestion was not presented to us, we do not consider it or make any determination with reference to it. [16] As Darke's "tippees" are not [853] defendants in this action, we need not decide whether, if they acted with actual or constructive knowledge that the material information was undisclosed, their conduct is as equally violative of the Rule as the conduct of their insider source, though we note that it certainly could be equally reprehensible. 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. at 293. Nor is an insider obligated to confer upon outside investors the benefit of his superior financial or other expert analysis by disclosing his educated guesses or predictions. 7327. 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. On the other hand, in view of the decline of the market price of TGS stock from a high of 32 on the morning of April 13 when the release was disseminated to 29 3/8 by the close of trading on April 15, and the reaction to the release by other brokers, it is far from certain that the release was generally interpreted as a highly encouraging report or even encouraging at all.
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