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. 1961). These findings are clearly supported by the proof upon which the court relied. The Commission's arsenal of weapons for fighting misleading statements has certainly not been shown to be insufficient for it to carry out the tasks that Congress assigned to it. 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. 21 (S.D.N.Y. 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 295 (emphasis supplied), that the draftsmen "exercised reasonable business judgment under the circumstances," 258 F.Supp. Wanting the knowledge requisite to making our own appraisal of the significance of the core, we must depend upon the experts. Although I see no reason why we could not affirm nevertheless, I am content to leave it for him to consider whether, although he has power to issue an injunction, there is equity in this portion of the bill. If you would like access to the new version of the H2O platform and have not already been contacted by a member of our team, please contact us at h2o@cyber.law.harvard.edu. In TGS, the court starts from the position that insiders, as fiduciaries, have an obligation not to use the corporation's information for their personal benefit. Texas Gulf Sulphur Company - Wikipedia But such a statement could be made of almost any fact related to TGS. ); Thiele v. Shields, 131 F.Supp. Materiality must depend upon the facts and their resolution is for the fact-finder, court or jury. 31, 2023 LAW OF CORPORATE MANAGEMENT AND FINANCE LGST 2020 / 8020 Spring 2023 Prof. Vince What were the motives behind each of the purchases? 78o(c) (1) "* * * effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security * * *") demonstrate that when Congress intended that there be a participation in a securities transaction as a prerequisite of a violation, it knew how to make that intention clear. In any event if the Commission feels that its arsenal should be augmented, Congress not the courts is the proper forum for its arguments. This requirement is explicit in 10(b) of the Act (15 U.S.C. 1965); Myzel v. Fields, 386 F.2d 718 (8 Cir. 258 F. Supp. The company's initial survey showed evidence of massive deposits of copper and zinc, so Texas Gulf quietly acquired the surrounding property. 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." 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. The evidence as to the effect of this release on the investing public was equivocal and less than abundant. Solved Questions: Could you argue that Martha Stewart did - Chegg But this must be recorded as one of the most impressive drill holes completed in modern times. 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. at 296. Where The Market Was Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act. The scope and stringency of the violation and penalties differ wildly from country to country. Texas Gulf Sulphur Co.[6], a federal circuit court stated that anyone in possession of inside . See Landis, Liability Sections of Securities Act, 18 Am.Acct. TGS could have announced by November 15, 1963 that it had completed a first exploratory hole, the core of which by visual examination revealed over a length of 599 of 655 feet drilled, an average copper content of 1.15%, zinc 8.64% or, had TGS waited until mid-December, by chemical analysis 1.18% copper, 8.26% zinc and 2.94% ounces of silver per ton; that TGS would try to acquire the other three-quarters of the segment unless the announcement boosted prices to unwarranted heights; that if the property could be acquired further exploratory holes would be drilled to ascertain the nature and extent, if any, of the ore body; that reports of developments would be made from time to time but that the SEC had indicated that TGS should advise its stockholders and the public that there was no proof as yet that a body of commercial ore exists on the property. We do not believe that Congress intended that the proscriptions of the Act would not be violated unless the makers of a misleading statement also participated in pertinent securities transactions in connection therewith, or unless it could be shown that the issuance of the statement was motivated by a plan to benefit the corporation or themselves at the expense of a duped investing public. I would grant the application for an injunction. Therefore we reverse the dismissal of the action as to him and his personal transactions. 754 (1944). 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 . In view of our conclusion as to materiality we hold that Stephens and Fogarty violated the Rule by accepting them. Firm Management White-Collar/Regulatory Pro Bono/Public Service/D&I Is ESG a Trade Secret? Co. v. Linde Air Prods. If corporations were literally to follow its implications, every press release would have to have the same SEC clearance as a prospectus. 92,141 (S.D.N.Y. Texas Gulf Sulphur Co. (1966), a federal circuit court stated ,that anyone in the possession of inside information must either disclose information or . 10(b) and Rule 10b-5 and the SEC appeals from the remainder of the decision which dismissed the complaint against defendants TGS, Fogarty, Mollison, Holyk, Darke, Stephens, Kline, Murray, and Coates.[6]. Id. 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. 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. 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. And there are impressive, strong sections within this width which in themselves are quite spectacular. This is the old version of the H2O platform and is now read-only. Of course subsection (c) is a catch-all clause to prevent manipulative devices. Consequently, I agree with the majority in giving the Board's action no weight here. Thus, but for a chemicial assay made in December 1963 of contents of this same core, no other knowledge of the nature and possible extent of the area was available during the acquisition program. 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. All of the foregoing defendants accepted the options granted them. 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." The derivation of Rule 10b-5 is peculiar. He added, however, that it "is a natural thing to buy more stock once they give you the first drill hole." 1951) is preserved. The press release was drawn up with the aid of the above-mentioned persons on Saturday and Sunday morning, and was delivered to the press on Sunday for publication in the Monday papers. Cady, Roberts, supra at 911. The statement was released Sunday afternoon and Mollison and Holyk were asked "to return to Timmins as promptly as possible and to move things along." See 3 Loss, Securities Regulation 1975-83 (1961). The plaintiffs were held to have stated a cause of action under 10b-5 because they allegedly bought stock in the combined company on the strength of those misrepresentations. See S.Rep.No.792, 73rd Cong., 2d Sess. 1271, 1289. 1962); Stevens v. Vowell, 343 F.2d 374 (10 Cir. 115 (1934). Either announcement might well have affected the market and would to those who bought or sold have seemed misleading and deceptive if the anticipated event did not come to pass. S.E.C. at 283, knowledge of the possibility, which surely was more than marginal, of the existence of a mine of the vast magnitude indicated [850] by the remarkably rich drill core located rather close to the surface (suggesting mineability by the less expensive open-pit method) within the confines of a large anomaly (suggesting an extensive region of mineralization) might well have affected the price of TGS stock and would certainly have been an important fact to a reasonable, if speculative, investor in deciding whether he should buy, sell, or hold. 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. [7] Mollison had returned to the United States for the weekend. 80, 17 L.Ed.2d 70 (1966); see also SEC v. R. A. Holman & Co., 366 F.2d 456, 457-458 (2 Cir. PRIVATE RIGHTS OF ACTION 403 R A. 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." The Missing Link Between Insider Trading and Securities Fraud 824, 832 n. 36 (1965), citing McClure v. Borne Chemical Co., 292 F.2d 824, 834 (3 Cir. [33] In re Cady, Roberts & Co., 40 SEC 907 (1961). silver. 281. (3) As to Mollison and Holyk, as recipients of certain stock options, we affirm the dismissal of the complaint. 77l of the 1933 Act provides that any person who "offers or sells a security" by means of a prospectus or oral communication which includes a misstatement or omission of a material fact shall be civilly liable. 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." 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. A further insight into the proper scope of 10b-5 can be gained by examining 17 (a), 15 U.S.C. While we certainly agree with the trial court that "in retrospect, the press release may appear gloomy or incomplete,"[28] 258 F. [863] Supp. Insider Trading - crsreports.congress.gov 1961). See 3 Loss, Securities Regulation 1692-96 (1961). Visual estimates of K-55-3 revealed an average mineral content of 1.12% copper and 7.93% zinc over 641 of the hole's 876-foot length. This was followed by continuous values of ore tenor deeper down, a 100-ft. section runs 0.33% copper, 0.8% lead, 14.3% zinc and 4.2 ozs. [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. However, the fact remains that 10(b) of the Securities Exchange Act was not passed to protect investors from the former type of injury, but leaves liability for such misrepresentation up to state law, which is well equipped to handle any such situation. [22] Liability under 12(2) of the Securities Act of 1933, 15 U.S.C. Turning now to the hypothesis of disclosure: As previously stated, any announcement of the discovery of a remarkable mine would have been both false and misleading. The trial court did not find it necessary to decide whether TGS exercised such diligence and has not yet attempted to resolve this issue. 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. 9 (1934); S.E.C., Tenth Annual Report 50 (1944). Clayton ordered 200 shares of TGS stock through his Canadian broker on April 15 and the order was executed that day over the Midwest Stock Exchange. The draftsmen of the release had full knowledge of the discoveries up to 7:00 P.M. on Friday, April 10. 258 F.Supp. The Wild World Of Biotech Insider Trading | Seeking Alpha Consequently, although Clayton is named only as an appellant our decision with respect to the materiality of K-55-1 renders it necessary to treat him also as an appellee. By May 15, TGS stock was selling at 58. 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. 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." What Is Insider Trading And Why Is It Illegal? - YouTube Trading by an insider of a company in the shares of a company is not per se a violation of law. To say that the drilling at Timmins had afforded only "preliminary indications that more drilling would be required for proper evaluation of this prospect," was a wholly insufficient statement of what TGS knew. at 296. 23 (E.D.N.Y. That is too slim a basis to support a judicial excursion over such uncharted seas. 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. Tamar Frankel, Insider Trading, 71 SMU L. REV. at 284. 1960), and cases there cited, it is likewise true that an isolated violation, especially in the absence of bad faith, does not require such relief. 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." 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. The trial court's finding as to this fact is unassailable: This conclusion is amply supported by the record. Such benefits, in essence, are forms of secret corporate compensation, see Cary, Corporate Standards and Legal Rules, 50 Calif.L.Rev. 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. On April 13, the day on which the April 12 release was disseminated, TGS opened at 30 1/8, rose immediately to a high of 32 and gradually tapered off to close at 30 7/8. The Harvard Law School Forum on Corporate Governance | Contributors Insider Trading as Private Corruption - The Harvard Law School Forum on 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. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in . 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. However, the ratification is irrelevant here, for we would hold with the district court that a member of top management, as was Kline, is required, before accepting a stock option, to disclose material inside information which, if disclosed, might affect the price of the stock during the period when the accepted option could be exercised. 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. Rule 52(a) should be given particular weight where expert testimony must of necessity play an important role. By the evening of April 10 in this hole, too, substantial copper mineralization had been encountered over the last 42 feet of its 97-foot length. 2, supra, and persons listed in fn. Indeed, even the abbreviated version of the release reported by Merrill Lynch over its private wire did not appear until 10:29. 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. My concurrence in the disposition of the press release issue assumes that such consideration is permitted. On April 8 TGS began with a second drill rig to drill another hole, K-55-6, 300 feet easterly of K-55-1. ), cert. 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. The text of the article was approved by Mollison in Timmins on April 15th. ", The specific relief the SEC seeks is, pursuant to Section 21(e) of Securities Exchange Act of 1934, 15 U.S.C. 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. 78ff) provisions. Markham v. Cabell, 326 U.S. 404, 66 S.Ct. (8) As to Darke, as one who passed on information to tippees, we reverse the dismissal of the complaint and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy. 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. Meanwhile, rumors that a major ore strike was in the making had been circulating throughout Canada. Accepting the conservative view of TGS's expert Wiles that 95.2% would be absorbed by costs, the ultimate profit could then have been estimated at more than $14,000,000. SMU Law Review This conclusion is fortified by the provisions of the Act dealing with manipulation since the more specific prohibitions make it clear what evils Congress intended to eradicate by 10(b). unabridged 1960). 1340, 1364 (1966). 1968), where corporate insiders bought stock BEFORE the company announced the discovery of the largest silver ore deposit in North America. 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." Moreover, comparisons of Section 10(b) with the antifraud provisions of the Securities Act of 1933 ( 12(2), 15 U.S.C. Dr. Lacy, head of the mining department of the University of Arizona, was of the opinion that "There is no basis for making any sort of prediction out from the hole.". denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L.Ed. As we stated in List v. Fashion Park, Inc., 340 F.2d 457, 462, "The basic test of materiality * * * is whether a reasonable man would attach importance * * * in determining his choice of action in the transaction in question. 12: Insider Trading: Foundations and Merger News. 13 (1934); S.Rep.No. Fleischer, Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L.Rev. Thank you. Texas Gulf Sulphur Co., 401 F.2d 833,843-47 (2d Cir. 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. So, it is here no justification for insider activity that disclosure was forbidden by the legitimate corporate objective of acquiring options to purchase the land surrounding the exploration site; if the information was, as the SEC contends, material,[9] its possessors should have kept out of the market until disclosure was accomplished. They alone were in a position to evaluate the probability and magnitude of what seemed from the outset to be a major ore strike; they alone could invest safely, secure in the expectation that the price of TGS stock would rise substantially in the event such a major strike should materialize, but would decline little, if at all, in the event of failure, for the public, ignorant at the outset of the favorable probabilities would likewise be unaware of the unproductive exploration, and the additional exploration costs would not significantly affect TGS market prices. Matter of Cady, Roberts & Co., 40 SEC 907, 912 (1961). Hindsight, however, is not the test. [17] The effective protection of the public from insider exploitation of advance notice of material information requires that the time that an insider places an order, rather than the time of its ultimate execution, be determinative for Rule 10b-5 purposes.
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