2. 792, 73rd Cong., 2d Sess. 2 of SEC Act, 15 U.S.C. The only alteration made by the Conference Committee was to substitute the present closing language of Section 10(b), "* * * in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors" for the closing language of the original Section 10(b) of S. 3420, "* * * which the Commission may declare to be detrimental to the interests of investors." at 296, and that the release was not "misleading or deceptive on the basis of the facts then known," 258 F.Supp. [869] The Supreme Court made this clear beyond peradventure in the leading case of Hecht Co. v. Bowles, 321 U.S. 321, 64 S.Ct. I do not think there is any objection to that kind of a clause. In so holding, they confuse the inducing motive of the individual purchaser with knowledge of material [877] facts which ought to be revealed to the public at large. Throughout this litigation TGS has supported the legality of the actions of all the defendants the company's counsel having represented, among others, Stephens, Fogerty and Kline. However, until drilling was resumed, nothing further was learned about the ore content of the property other than as revealed in November and December 1963 from the analysis of K-55-1. Michigan Business & Entrepreneurial Law Review [Vol. Texas Gulf Sulphur Co.[6], a federal circuit court stated that anyone in possession of inside . [874] The Commission's position, consistent with its rules and regulations to protect the public from premature announcements which might well arouse speculative fervor are well expressed in its argument before this Court in its brief on appeal in Securities and Exchange Commission v. Great American Industries, Inc., et al., 259 F.Supp. Texas Gulf Sulphur Co., 401 F.2d 833, 848-49 (2d Cir. [10] Thus, material facts include not only information disclosing the earnings and distributions of a company but also those facts which affect the probable future of the company and those which may affect the desire of investors to buy, sell, or hold the company's securities. of Policy Research, SEC, Frank E. Kennamer, Jr., Asst. TGS brought in its first well on March 20, 1929. 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. 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." Those who purchased were apparently willing on the basis of the inconclusive first hole and other information to risk a certain amount of their funds in TGS stock, hopeful that future developments would be favorable. Several hundred of these were considered worthy of further study and options on the land around them were acquired. This result seems to have been predicated upon a misinterpretation of dicta in Cady, Roberts, where the SEC instructed insiders to "keep out of the market until the established procedures for public release of the information are carried out instead of hastening to execute transactions in advance of, and in frustration of, the objectives of the release," 40 SEC at 915 (emphasis supplied). The majority state that the K-55-1 drilling results were material because they "might well have affected the price of TGS stock." 78i provides that it shall be unlawful for any broker, dealer or other person to create a false or misleading appearance of activity in the market for a stock or to attempt to affect the price of a stock by certain specific manipulative devices. US 11th Circuit Opinions and Cases | FindLaw However, the importance of this case to the corporate and financial community centers around the news release, its timing and its content. 78l, requires the registration of securities traded on a stock exchange and of certain other widely held securities. The SEC argued below and maintains on this appeal that this release painted a misleading and deceptive picture of the drilling progress at the time of its issuance, and hence violated Rule 10b-5(2). However, even if it were not possible to evaluate and transmit current data in time to prepare the release on April 12, it would seem that TGS could have delayed the preparation a bit until an accurate report of a rapidly changing situation was possible. 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. 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. SMU LAW REVIEW 809, 830-33 (1968). [32] The imposition of liability on Clayton, Crawford and Coates for "beating the gun" does not require any such metamorphosis of Judge Frank's concept of fraud as the majority opinion seeks to perform. 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. ), cert. 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. From Mollison Fogarty had been told of the developments through 7:00 P. M. on April 10, and of [846] the remarkable discoveries made up to that time, detailed supra, which discoveries, according to the calculations of the experts who testified for the SEC at the hearing, demonstrated that TGS had already discovered 6.2 to 8.3 million tons of proven ore having gross assay values from $26 to $29 per ton. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. [4]The purchases made by "tippees" during this period were: In this connection, we point out that, though several of the Holyk purchases of shares and calls made between November 29, 1963 and March 30, 1964 were in the name of Mrs. Holyk or were in the names of both spouses, we have treated these purchases as if made in the name of defendant Holyk alone. H.Rep.No.85, 73dCong., 1st Sess. We analyze not only the published opinions in Texas Gulf Sulphur, but also the judges' internal memoranda. 275, and to insure uniformity of enforcement, see Note, 32 U.Chi.L.Rev. [2]The purchases by the parties during this period were: [3] A "call" is a negotiable option contract by which the bearer has the right to buy from the writer of the contract a certain number of shares of a particular stock at a fixed price on or before a certain agreed-upon date. Texas Gulf Sulphur. Texas Gulf Sulphur Company - Wikipedia Friday morning, April 10, he had been on the Kidd tract "and had been advised by defendant Holyk as to the drilling results to 7:00 p.m. on April 10. See Freed v. Szabo Food Service, Inc., '61-'64 CCH Fed.Sec.L.Rep. LAW OF CORPORATE MANAGEMENT AND FINANCE LGST Legal Studies & Business Commenting on the section that became 10(b), Corcoran stated: Since the manipulative devices outlawed by 9 all involve fraudulent activities integrally related to securities transactions, the conclusion necessarily follows that the "other cunning devices" sought to be prohibited by 10(b) and Rule 10b-5 are those which also involve securities transactions as an integral part of the fraud. Held: cause of action stated under 10b-5). Some witnesses who testified at the hearing stated that they found the release encouraging. 1965); Ellis v. Carter, 291 F.2d 270 (9 Cir. The Texas Gulf Sulphur decision began what has become a fifty-year project of developing U.S. insider trading regulation through judicial lawmaking. 138, 51 L.R.A., N.S., 112 (1912), with Claman v. Robertson, 164 Ohio St. 61, 128 N.E.2d 429 (1955); cf. But the case stands differently as to paragraph (2). [8]15 U.S.C. In "Truth in Securities Revisited," op. 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. 3230 (May 21, 1942) ("The new rule closes a loophole in the protection against fraud administered by the Commission by prohibiting individuals or companies from buying securities if they engage in fraud in their purchase. 262, 269 (S.D.N.Y. Therefore we reverse the dismissal of the action as to him and his personal transactions. Standard Shipping (eBay Standard Envelope for Trading Cards, Stamps, Postcards & Coins up to $20) Assuming arguendo that the corporation cannot be enjoined except on a showing of lack of due diligence, since Fogarty and those who assisted him in the preparation of the press release were aware of the drilling results to which the district court's finding refers, they obviously did not use due diligence [870] in the preparation of the misleading press release. I agree with Judge Friendly, however, that we should provide guidance to the District Courts with respect to pending private claims for damages based upon Rule 10(b) (5) arising out of the transactions now before us. 1383 and S. 3420 from which it was derived, have always been acknowledged as catchalls. [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." Insider Trading And Recent Cases In India - Desi Kaanoon 1009, 1010 (1966), Fleischer, Securities Trading and Corporation Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L.Rev. Certain newspaper accounts of the release viewed the release as confirming the existence of preliminary favorable developments, and this optimistic view was held by some brokers, so it could be that the reasonable investor would have read between the lines of what appears to us to be an inconclusive and negative statement and would have envisioned the actual situation at the Kidd segment on April 12. (5) As to Kline, as a recipient of a stock option, we reverse the dismissal of the complaint and remand with directions to issue an order rescinding the option and for a determination of any other appropriate remedy in connection therewith. One of the most famous instances of insider trading was Charles F. Fogarty's purchase of Texas Gulf Sulphur shares during 1963 and 1964. On April 12 a fourth drill rig began to drill K-55-7, which was drilled westerly at a 45 angle, at the eastern edge of the anomaly. 1963); Note, 32 U.Chi. . SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. However, the rumors and casual disclosure through Canadian media, especially in view of the April 12 "gloomy" or incomplete release denying the rumors and promising official confirmation, hardly sufficed to inform traders on American exchanges affected by Crawford's purchases. Texas Gulf Sulphur Co. 1967. TGS decided to acquire the surrounding plots in the Kidd 55 area to enable it fully to investigate the anomaly. Indeed, if the correct standard is applied, the finding of the trial court requires the conclusion that the press release was misleading: The evidence in the record in support of this finding is overwhelming. Of these, only Kline was unaware of the detailed results of K-55-1, but he, too, knew that a hole containing favorable bodies of copper and zinc ore had been drilled in Timmins. That is too slim a basis to support a judicial excursion over such uncharted seas. Dr. Bellemore, the Texas Gulf defendants' expert witness, has written: "The intelligent speculator assumes that facts are available for a thorough analysis. 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. Any such procedure would have invited the initial question on cross-examination of TGS officials: How could any such "explicit disclosure" have permitted the investing public to evaluate the prospect of a mine, without the necessity of transmitting it for expert opinion to some School of Mines? Plaintiff, the Securities and Exchange Commission, brought this suit against Defendants, Texas Gulf Sulphur Co., et al., after Defendants bought shares . The facts as established between the date of the resumption of drilling and the drafting of the release are as follows: On March 31, 1964 TGS moved four drill rigs onto the property, and by April 10th all were in operation. It should be realized that the construction given 10b-5 will turn it into a comprehensive regulatory provision applicable to all corporate and individual statements, but without any of the detailed standards necessary to implement such a program. 99, (S.D. On April 16, the day of the official announcement of the Timmins discovery, the price climbed to a high of 37 and closed at 36 3/8. REGULATING INSIDER TRADING THROUGH TEXAS GULF SULPHUR James D. Cox* ABSTRACT Data summarized in the opening of this article document shows that in- . 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. SEC v. Torr, 87 F.2d 446 (2 Cir. See the table at 258 F. Supp. Short answer: Insider trading regulations are laws that aim to prevent individuals with access to non-public information from using it to trade securities, thus gaining an unfair advantage. Id. Tager v. SEC, 344 F.2d 5, 8 (2 Cir. 12: Insider Trading: Foundations and Merger News. 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. List v. Fashion Park, Inc., supra at 462, quoting from Kohler v. Kohler Co., 319 F.2d 634, 642, 7 A.L.R.3d 486 (7 Cir. The article also stated that the richness of the copper was so great that the core was flown out of the country to be assayed and that four more drill rigs were scheduled to start working the following week. SEC v. Texas Gulf Sulphur Co. - Wikipedia As to the sufficiency of the news release, the first issue would be what constitutes a "reasonable" investor. 258 F.Supp. Id. at 1294-95, if such assertions are false or misleading or are so incomplete as to mislead irrespective of whether the issuance of the release was motivated by corporate officials for ulterior purposes. ", 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." 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. Such an announcement would, of course, have been of no value to anyone except possibly a few graduates of Institutes of Technology and they, as the expert witnesses here, would have recognized that one drill hole does not reveal a commercially profitable mine. The Act and the Rule apply to the transactions here, all of which were consummated on exchanges. They call it "a major factor in determining whether the K-55-1 discovery was a material fact" and say that this "virtually compels the inference that the insiders were influenced by the drilling results." 33 (E.D.Pa.1964); Fischer v. Kletz, 266 F. Supp. One area, called Kidd 55, was deemed promising by the survey, and a hole was drilled with the resulting core analyzed. But this must be recorded as one of the most impressive drill holes completed in modern times. Conversely, we are not a jury of nine with no requirement of a unanimous verdict. Like K-55-1, both K-55-3 and K-55-4 established substantial copper mineralization on the eastern edge of the anomaly. . He is, to the best of his ability, taking calculated risks." #2- What is your assessment of the Texas Gulf Sulphur press release of April 12? 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. 182, 98 L.Ed. [38] Thus one who conspires with or aids and abets another in the [887] fraudulent purchase or sale of securities may have the needed connection. 2Andrew Beattie, "Top 4 Most Scandalous Insider Trading Debacles . 330, 331 (1933); Douglas and Bates, Federal Securities Act of 1933, 43 Yale L.J. In each case, then, whether facts are material within Rule 10b-5 when the facts relate to a particular event and are undisclosed by those persons who are knowledgeable thereof will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity. (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 seems to me easier on the facts but harder on the law than it does to the majority. The Commission advances the argument (successful with the majority) that [883] the "in connection" requirement is satisfied by the mere fact that the public is purchasing and selling securities on the open market. Section 12 of the Act, 15 U.S.C. All of the foregoing defendants accepted the options granted them. And finally there is the sardonic anomaly that the very members of society which Congress has charged the SEC with protecting, i. e., the stockholders, will be the real victims of its misdirected zeal. at 282. In any event, the permissible timing of insider transactions after disclosures of various sorts is one of the many areas of expertise for appropriate exercise of the SEC's rule-making power, which we hope will be utilized in the future to provide some predictability of certainty for the business community. PDF The Ethics of Insider Trading Reform - Mercatus Center See also Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2 Cir. 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. 1966) (by implication). Texas Gulf Sulphur Co. (1968), began with the discovery of the Kidd Mine and implicated the employees of Texas mining company. 548, 19 L.Ed.2d 564 (1967)), but no case supports the Commission's position that it is in effect meaningless. Query, as to whether twelve witnesses (akin to a jury) should be required and would a seven-to-five count be acceptable or would ten-to-two more accurately reflect public opinion? 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9 Cir. See id. SEC Enforcement on Insider Trading and the Dark Web Its conclusion that "the Commission has failed to demonstrate that it was false, misleading or deceptive," 258 F.Supp. 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." Significantly, however, the court below, while relying upon what these defense experts said the defendant insiders ought to have thought about the worth to TGS of the K-55-1 discovery, and finding that from November 12, 1963 to April 6, 1964 Fogarty, Murray, Holyk and Darke spent more than $100,000 in purchasing TGS stock and calls on that stock, made no finding that the insiders were motivated by any factor other than the extraordinary K-55-1 discovery when they bought their stock and their calls. His awareness of the contents of the April 12 release renders unreasonable any claim that he believed the news was truly public. Since the issue of negligence is open to full review, Mamiye Bros v. Barber SS. Since only K-55-1 had been drilled at that point, the District Court correctly held that there was no duty of disclosure on the part of those receiving the options. See footnote 16, supra. 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. The case began in 1959 when the Texas Gulf Sulphur Company purchased some property in Timmins, Ontario, to check for ore deposits. The Commission is presently arguing that 10b-5 is applicable to all corporate statements disseminated to the public or filed with the Commission. Under such circumstances, the most effective procedure is the quick and speedy denial of such rumors through a release to the public Press * * *". The Commission should have the authority to deal with new manipulative devices." Materiality must depend upon the facts and their resolution is for the fact-finder, court or jury. The evidence of the actual effect of the release on investors was at best inconclusive. A statement relative to the extent of the discovery, in substantial part drafted by Mollison, was given to the Ontario Minister of Mines for release to the Canadian media. 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." 78j(b) and Rule 10b-5. Matter of Cady, Roberts & Co., 40 SEC 907, 912 (1961). There can be little doubt but that those familiar with the results of K-55-1 were influenced thereby in making their purchases. Coates was absolved by the court below because his telephone order was placed shortly before 10:20 A.M. on April 16, which was after the announcement had been made even though the news could not be considered already a matter of public information. 1967) (Corporation fraudulently arranged a merger so that one class of shareholders would receive much less than the other class which was comprised of officers and directors. The Ever-Changing Scope of Insider Trading Liability for Tippees in the I would grant the application for an injunction. With the aid of hindsight the release may indeed seem gloomy, but that is because it is now known that a very substantial tonnage of ore exists. 10 (1942). 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. 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. 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." See id. 262, at 292-296 (SDNY 1966). 3230 (May 21, 1942); 10 SEC Ann.Rep. While drilling activity ensued to completion, TGC officials were taking steps toward ultimate disclosure of the discovery. 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. Texas Gulf Sulphur Co., a federal circuit court supported the SEC's ruling, stating that anyone who has inside . Our decision to expand the limited protection afforded outside investors by the trial court's narrow definition of materiality is not at all shaken by fears that the elimination of insider trading benefits will deplete the ranks of capable corporate managers by taking away an incentive to accept such employment. For purposes of insider trading law, insiders must wait a "reasonable" time after disclosure before trading. 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. 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. Thank you. 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 . However, as this suggestion was not presented to us, we do not consider it or make any determination with reference to it. He then balances these risks against the apparent opportunities for capital gains and makes his decision accordingly. On the morning of Saturday, April 11, Stephens at his home in Greenwich, Conn. read in the New York Herald Tribune and in the New York Times unauthorized reports of the TGS drilling which seemed to infer a rich strike from the fact that the drill cores had been flown to the United States for chemical assay. Co., 339 U.S. 605, 70 S.Ct. Faberge, Inc., 45 S.E.C. The trial court also found, 258 F.Supp. 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. (Ibid.) But vulnerable as the news release may be, what of the many daily developments in the Research and Development departments of giant corporations.
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