What were the motives behind each of the purchases? See id. 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.". It seems clear, however, that if corporate management demonstrates that it was diligent in ascertaining that the information it published was the whole truth and that such diligently obtained information was disseminated in good faith, Rule 10b-5 would not have been violated. at 294. Meanwhile, the core of K-55-1 had been shipped to Utah for chemical assay which, when received in early December, revealed an average mineral content of 1.18% copper, 8.26% zinc, and 3.94% ounces of silver per ton over a length of 602 feet. N.Y.1964). Insider trading is trading of a corporation's stock or other securities (e.g. (Emphasis supplied.) 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. 78u(e), against Texas Gulf Sulphur Company (TGS) and several of its officers, directors and employees, to enjoin certain conduct by TGS and the individual defendants said to violate Section 10(b) of the Act, 15 U.S.C. SEC v. Texas Gulf Sulphur Co. Wikipedia Republished // WIKI 2 [34] Stephens advised Fogarty [879] that TGS should issue a press release to clarify the rumors that Fogarty therefore contacted Mollison who had just returned from Timmins. We should have in mind the wise words of Judge Learned Hand in Cawley v. United States, 272 F.2d 443, 445 (2 Cir. See 3 Loss, Securities Regulation, 1424 n. 7 (2d ed. [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. See Pettit v. American Stock Exchange, 217 F.Supp. 1945). 1963) (same); Lorenz v. Watson, 258 F.Supp. As to the sufficiency of the news release, the first issue would be what constitutes a "reasonable" investor. Before insiders may act upon material information, such information must have been effectively disclosed in a manner sufficient to insure its availability to the investing public. 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. 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. 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. 258 F.Supp. [31] But there is unanimity among the commentators, including some who were in a peculiarly good position to know, that 17(a) (2) of the 1933 Act indeed the whole of 17 was intended only to afford a basis for injunctive relief and, on a proper showing, for criminal liability, and was never believed to supplement the actions for damages provided by 11 and 12. Its conclusion that "the Commission has failed to demonstrate that it was false, misleading or deceptive," 258 F.Supp. The broad congressional purpose in passing the Securities Exchange Act of 1934 is set forth by Thomas G. Corcoran, one of the draftsmen of the bill that became the 1934 Act. [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. The case offers a common insider-trading fact pattern: after a mining company discovered promising mineral depositsbut before it announced the discoveryseveral insiders bought the company's shares and options to acquire its shares. 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. [24] As to Holyk and Mollison, the SEC has not appealed the holding below that they, not being then members of top management (although Mollison was a vice president) had no duty to disclose their knowledge of the drilling before accepting their options. at 229-30, 100 S.Ct. The foregoing discussion demonstrates that Congress intended to protect the investing public in connection with their purchases or sales on Exchanges from being misled by misleading statements promulgated for or on behalf of corporations irrespective of whether [861] the insiders contemporaneously trade in the securities of that corporation and irrespective of whether the corporation or its management have an ulterior purpose or purposes in making an official public release. 252 F.Supp. Under the current insider trading regime in the United States, stiff penalties1are imposed for a crime that has never been defined by statute or regulation.2The principal statutory authority for insider trading liability is section 10(b) of the Securities Exchange Act of 1934, which prohibits the employment of "any manipulative or deceptive 1070, 1079-81 (1965). [28]Examined in retrospect, the situation in Timmins at the time the release was prepared seems to offer good reason for optimism. Insider trading laws in India - Legal Services India [834] [835] [836] [837] [838] [839] Philip A. Loomis, Jr., Gen. The majority read the record as conclusively establishing "that knowledge of the results of the discovery hole, K-55-1, would have been important to a reasonable investor and might have affected the price of the stock." Several other samples verified the findings. at 287, is well documented by the record. 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. Corp., 282 F.2d 195, 201 n. 4 (5 Cir. To Catch a Thief: The Misappropriation Theory and Securities Fraud 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. The District Court found that "TGS had previously drilled 65 equally promising anomalies, but most of them had revealed either barren pyrite or graphite, while a few had shown marginal mineral deposits in insufficient quantities to be commercially mined." In a front page article carrying the title "Canada's Copper Rush" the Herald Tribune stated "The biggest ore strike since gold was discovered more than 60 years ago in Canada has stampeded speculators to the snowbound old mining city of Timmins * * *." 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. at 288. 275, 11 L.Ed.2d 237 (1965); cf. 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. 239, 243 (SDNY 1962). I would grant the application for an injunction. Crawford telephoned his orders to his Chicago broker about midnight on April 15 and again at 8:30 in the morning of the 16th, with instructions to buy at the opening of the Midwest Stock Exchange that morning. Even the Commission's experts, Adelstein and Pennebaker, would not estimate what ore, if any, might lie beyond the 1 1/8 inch core. TGS brought in its first well on March 20, 1929. 872, 895 (1967). On April 10, a third drill rig commenced drilling yet another hole, K-55-5, 200 feet north of K-55-1, parallel to the prior holes, and slanted westerly at a 45 angle. 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. Id. denied, Bard v. Dasho, 389 U.S. 977, 88 S.Ct. Texas Gulf Sulphur Co. (1966), a federal circuit court stated ,that anyone in the possession of inside information must either disclose information or . [856] Thus, the beliefs of Coates, Crawford and Clayton that the news of the ore strike was sufficiently public at the time of their purchase orders are to no avail if those beliefs were not reasonable under the circumstances. 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. 1966); United States v. Schaefer, 299 F.2d 625, 629 (7 Cir. 416 (SDNY 1955), for policy reasons which seem perfectly consistent with the broad Congressional design "* * * to insure the maintenance of fair and honest markets in * * * [securities] transactions." But in both cases the courts recognized that further factual and legal development was necessary for the proper resolution of the issue. Huntington was involved in insider trading. 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. A definite statement "to clarify" was promised in the future. [30] [866] Since that issue is not before us, I merely make the reservation of my position clear. at 1291, by requesting in advance that their orders be executed immediately after the dissemination of a major news release but before outsiders could act on the release. 301 (SDNY 1966); Cochran v. Channing Corp., 211 F.Supp. And still deeper, a strong zinc section of better than 100 ft. averaged out to in excess of seven ounces of silver in addition to ore-grade zinc values. Moreover, it would have obviously been better to have specifically described the known drilling progress as of April 10 by stating the basic facts. 26 (S.D. The statute as enacted requires that the fraudulent scheme be "in connection with the purchase or sale of any security." See List v. Fashion Park, Inc., 340 F.2d 457, 461-62 (2 Cir. By 7:00 P. M. on April 15, the hole had been completed to a length of 707 feet but had only encountered additional mineralization during a 26-foot length between the 425 and 451-foot marks. The Second Circuit . 1340, 1370 (1967). 78m, to be kept "reasonably current" by periodic and other reports filed with the Commission and the stock exchanges. 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 _____. PRIVATE RIGHTS OF ACTION 403 R A. No facts whatsoever were adduced which would have justified a finding that the release was issued for a fraudulent or manipulative purpose. Also by 7:00 A. M. on April 13, K-55-6 had found mineralization to the 946-foot mark. 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. The Commission, however, impliedly suggests for affirmative answer the question: "Whether the chances of imminent success, viewed in the light of the magnitude of the potential economic benefit to Texas Gulf" did not require disclosure by insiders of the status of the drilling [then only the first hole, K-55-1]? [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. Fair To All People: The SEC and the Regulation of Insider Trading The core of the drill hole contained relatively high percentages of copper and zinc and some silver, although the percentages at any given point fluctuated widely. The only one of these defendants who came close to a showing of good faith was Coates. When and how are promising results to be disclosed. These regulations vary across countries, but generally require disclosure of such information and impose penalties for violations. (6) As to Fogarty, Mollison, Holyk, Darke, and Huntington, as purchasers of stock or calls thereon between November 12, 1963, and April 9, 1964, we reverse the dismissal of the complaint and find that they violated 15 U.S.C. 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. Before LUMBARD, Chief Judge, and WATERMAN, MOORE, FRIENDLY, SMITH, KAUFMAN, HAYS, ANDERSON and FEINBERG, Circuit Judges. Cady, Roberts, supra. 1356 (1952); Hooper v. Mountain States Sec. The trial court also found that later, as of March 30, 1964, Darke not only used his material knowledge for his own purchases but that the substantial amounts of TGS stock and calls purchased by these outside individuals on that day, see footnote 4, supra, was "strong circumstantial evidence that Darke must have passed the word to one or more of his `tippees' that drilling on the Kidd 55 segment was about to be resumed." 16(b) of the Act. 78j) which provides: [882] Pursuant to this authority the Commission in 1942 promulgated Rule 10b-5 (17 C.F.R. But the case stands differently as to paragraph (2). Instead, the court held that "the issuance of a false and misleading press release may constitute a violation of Section 10(b) and Rule 10b-5 if its purpose is to affect the market price of the company's stock to the advantage of the company or its insiders. May the Future, the Congress or possibly the SEC itself be able to bring some semblance of order by means of workable rules and regulations in this field so that the corporations and their stockholders may not be subjected to countless lawsuits at the whim of every purchaser, seller or potential purchaser who may claim he would have acted or refrained from acting had a news release been more comprehensive, less comprehensive or had it been adequately published in the news media of the 50 States. 168 (1953), that cannot be done without an appreciation of the illegality of the conduct proposed to be excused, cf. 1967), (emphasis supplied), sometimes defined as "fraud," Fischman v. Raytheon Mfg. cases. at 284. Mollison left for New York that evening, arriving on Saturday morning. See Sections 2 and 16 of the Act; H.R.Rep.No. contemporaneous assessments of early insider trading law include William Cary, Insider Trading in Stocks, 21 Bus. 258 F.Supp. . It, too, was drilled at the anomaly's eastern edge. The case continues to receive significant scholarly attention. Since the majority admit that Kline knew only that a hole containing favorable bodies of copper and zinc ore had been drilled in Timmins, it seems clear that he did not possess material information that had to be disclosed. [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." The rumors of a major ore strike which had been circulated in Canada and, to a lesser extent, in New York, had been disclaimed by the TGS press release of April 12, which significantly promised the public an official detailed announcement when possibilities had ripened into actualities. United States vs. Newman 1983. 3 Loss, op. 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. 80, 17 L.Ed. The Commission can also obtain injunctions to enforce compliance with the disclosure and other provisions of the Securities Exchange Act ( 21, 15 U.S.C. 9-10 (1933). Whether predicated on traditional fiduciary concepts, see, e. g., Hotchkiss v. Fisher, 136 Kan. 530, 16 P.2d 531 (Kan.1932), or on the "special facts" doctrine, see, e. g., Strong v. Repide, 213 U.S. 419, 29 S.Ct. This requirement, whether it be termed lack of diligence, constructive fraud, or unreasonable or negligent conduct, remains implicit in this standard, a standard that promotes the deterrence objective of the Rule. One of the most famous instances of insider trading was Charles F. Fogarty's purchase of Texas Gulf Sulphur shares during 1963 and 1964. 10, and the Commission wished to make it emphatically clear that the Rule was expected, inter alia, to close this loophole. 95 (S.D.N.Y. 1951); Weber v. C. M. P. Corp., 242 F.Supp. [18] Although the only insider who acted after the news appeared over the Dow Jones broad tape is not an appellant and therefore we need not discuss the necessity of considering the advisability of a "reasonable waiting period" during which outsiders may absorb and evaluate disclosures, we note in passing that, where the news is of a sort which is not readily translatable into investment action, insiders may not take advantage of their advance opportunity to evaluate the information by acting immediately upon dissemination. denied, 385 U.S. 835, 87 S.Ct. 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. 1808, 20 L.Ed.2d 653 (May 21, 1968), I see no need for a remand on that score. Such benefits, in essence, are forms of secret corporate compensation, see Cary, Corporate Standards and Legal Rules, 50 Calif.L.Rev. 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. 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." Texas Gulf Sulphur Co. (1968), began with the discovery of the Kidd Mine and implicated the employees of Texas mining company. Author Page for Marc I. Steinberg :: SSRN 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. 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. Therefore, the statements in the legislative history applicable to the reporting and disclosure provisions have no bearing on the correct interpretation of 10 (b). at 282-283. 7741 (Nov. 4, 1965) relating to suspension in trading of Belock Instrument Corporation, a defendant in Heit v. Weitzen, supra. Matter of Cady, Roberts & Co., 40 SEC 907, 912 (1961). A similar standard has been adopted in private actions, see, e. g., Stevens v. Vowell, 343 F.2d 374 (10 Cir. These insiders, after learning of an unprecedented discovery . 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. Moreover, adequate incentives for corporate officers may be provided by properly administered stock options and employee purchase plans of which there are many in existence. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. 23 (E.D.N.Y. Incorrect Mark 0 out of 1. 8720, 73rd Cong., 2d Sess. WASHINGTON, Dec. 20 (AP) The Texas Gulf Sulphur Com pany and nine officials and em ployes were denied a hearing today by the Supreme Court in a case that may set a precedent governing tha. 707 (SD NY 1949), rev'd on other grounds, 188 F.2d 783, 786 (2 Cir. 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). 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.