texas gulf sulphur insider trading


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. silver. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. [37] Hearings before the House Committee on Interstate and Foreign Commerce on H.R. 239, 243 (SDNY 1962). But such a press release would have been highly misleading since the information necessary to draw such conclusions was not available on April 10 according to the TGS witnesses whom the District Court chose to believe. A similar standard has been adopted in private actions, see, e. g., Stevens v. Vowell, 343 F.2d 374 (10 Cir. 99, (S.D. And in the process, the court rewrote the insider trading playbook . 854, 94 L.Ed. Further contrast it with a hypothetical November 1963 press release implicitly suggested by the majority "TGS as a result of drilling on its property in Canada has knowledge of the more than marginal possibility of a mine of magnitude over an extensive region of remarkably rich mineralization." The text of the release and the three point drop in the market price following its issuance in the face of press reports that would normally have led to a large and, as matters developed, justified increase, are sufficient proof of that. 783 (2018) https://scholar.smu.edu/smulr/vol71/iss3/11 This Article is brought to you for free and open access by the Law Journals at SMU Scholar. 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. While the trial court concluded that TGS had exercised "reasonable business judgment under the circumstances," 258 F.Supp. 1968); see Jennings, Insider Trading in Corporate Securities: A Survey of Hazards and Disclosure Obligations under Rule 10b-5, 62 Nw.U.L.Rev. 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. [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. The insiders here were not trading on an equal footing with the outside investors. Even the Commission's experts, Adelstein and Pennebaker, would not estimate what ore, if any, might lie beyond the 1 1/8 inch core. Id. Heit v. Weitzen (amicus curiae). Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. 808, 823 (E.D.Wisc.1962) (dictum), aff'd, 319 F.2d 634 (7 Cir. 1966); Mamiye Bros. v. Barber S.S. Lines, Inc., 360 F. 2d 774, 776-778 (2 Cir. Those that had been advised by the broker Roche to purchase stock did not sell upon reading the April 12 release. Standard Shipping (eBay Standard Envelope for Trading Cards, Stamps, Postcards & Coins up to $20) I do not agree on the remand of the issue with respect to Stephens and Fogarty as recipients of stock options. 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. 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. 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. S.E.C. 258 F.Supp. 78ff). 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. 3 Loss, op. A remand on this point is therefore not justified. 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. Practically all TGS stock in question here was purchased between November 12, 1963 and April 8, 1964. We disagree. Texas Gulf Sulphur Co., 401 F.2d, at 849. [8] By that Act Congress [848] purposed to prevent inequitable and unfair practices and to insure fairness in securities transactions generally, whether conducted face-to-face, over the counter, or on exchanges, see 3 Loss, Securities Regulation 1455-56 (2d ed. 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. 1960), cert. Finally, Coates, as we have already indicated in fn. In discussing Rule 10b-5 Cohen expressed concern which, as a result of the majority opinion, seems to have been well founded, that Rule 10b-5 would be given an "unwarranted" extension. The requirement that a statement may not be found misleading unless its issuance is actuated by a "wrongful purpose" might well have the effect of permitting the issuers of misleading statements to seek an advantage but to escape liability if the advantage fails to materialize to the degree contemplated, or cannot be demonstrated. The geologist Darke possessed undisclosed material information and traded in TGS securities. 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. In 1942, lawmakers adopted the Rule 10b-5 in the Securities Exchange Act 1934 to allow its prosecution. We are satisfied that these purchases in February and March, coupled with his readily inferable and probably reliable, understanding of the highly favorable nature of preliminary operations on the Kidd segment, demonstrate that Huntington possessed material inside information such as to make his purchase violative of the Rule and the Act. Contrary to the belief of the trial court that Kline had no duty to disclose his knowledge of the Kidd project before accepting the stock option offered him, we believe that he, a vice president, who had become the general counsel of TGS in January 1964, but who had been secretary of the corporation since January 1961, and was present in that capacity when the options were granted, and who was in charge of the mechanics of issuance and acceptance of the options, was a member of top management and under a duty before accepting his option to disclose any material information he may have possessed, and, as he did not disclose such information to the Option Committee we direct rescission of the option he received. On this day 54 years ago, the Texas Gulf Sulphur Company announced a major copper strike 350 miles north of Toronto that would become the focus of a landmark insider trading case. 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. 9323), the bill a Committee of Conference eventually integrated with a similar Senate bill (S. 3420) to make the bill passed by both Houses of Congress that became the Securities Exchange Act of 1934, the House Committee which reported out H.R. The Second Circuit embraced the SEC's view that this conduct violated Rule 10b-5. 1070, 1075, 1076 n.29 (1965), the securities laws should be interpreted as an expansion of the common law[21] both to effectuate the broad remedial design of Congress, see SEC v. Capital Gains Research Bureau, supra, 375 U.S. at 195, 84 S.Ct. 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. 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. 1968). Freed v. Szabo Food Serv., Inc., CCH Fed. 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. The stock purchases by Clayton, Crawford and Coates on April 16, 1964, are considered later. 1961); SEC Sec.Exch.Act Rel. By March 27, 1964, TGS decided that the land acquisition program had advanced to such a point that the company might well resume drilling, and drilling was resumed on March 31. The court [US Court of Appeals for the Second Circuit] contended that the federal insider trading prohibition was intended to assure that 'all investors trading on impersonal exchanges have relatively equal access to material information.' The majority suggest with, in my opinion, most remarkable business naivete that, instead of the April 12, 1964 press release which the trial court had found as a matter of fact had been issued in the exercise of "reasonable business judgment under the circumstances," in their 1968 judgment "it would have obviously been better to have specifically described the known drilling progress as of April 10th by stating the basic facts." Texas Gulf Sulphur 1 in transforming insider trading law. While we have often said that "a cessation of the alleged objectionable activities by the defendant in contemplation of an SEC suit will not defeat the district court's power to grant an injunction restraining continued activity," SEC v. Boren, 283 F.2d 312 (2 Cir. This is unfortunate because it has resulted in 10(b) being given a construction and significance which, in my opinion, Congress did not foresee and did not intend. 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. 14. 78p(a), requires certain officers, directors and major shareholders to file reports with the Commission and the stock exchanges as to their initial holdings of stock and subsequent changes. There is another group that is conceivably hurt by insider trading: the quasi-insiders known as stock market professionalsinvestment bankers, stock analysts, arbitrageurs, hedge fund managers, portfolio managerswho acquire public and nonpublic corporate information in the course of their work. The Commission also seeks court orders upon certain of the individual defendants that are essentially remedies of a private, rather than of a regulatory nature, court orders designed to have those individual defendants disgorge any profits they enjoyed from TGS stock transactions they or their "tippees" engaged in from November 12, 1963 to April 17, 1964. A close reading of 18 will demonstrate that a plaintiff proceeding under that section (as opposed to 10(b)) does not have to show that the misleading statement was issued by a person [or corporation] who engaged or participated in a securities transaction or even that the misstatement was intended to influence securities transactions as part of some fraudulent scheme. (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. Cady, Roberts, supra. When the House Committee Report listed the sections that "define the civil liabilities imposed by the Act" it pointed only to 11 and 12 and stated that "[t]o impose a greater responsibility [than that provided by 11 and 12] * * * would unnecessarily restrain the conscientious administration of honest business with no compensating advantage to the public." A offerings under the 1933 Act): Item 8(A) (b), 1 CCH Fed.Sec.L.Rep. -Schedule & execute hydrocarbon movements effectively to meet demand, inventory & service level targets for refined products, components . Insider Trading And its Legal Mechanism: Insider trading is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. ), cert. No. 215 (SDNY 1965); Cooper v. North Jersey Trust Co., 226 F.Supp. 9 (1934); S.E.C., Tenth Annual Report 50 (1944). 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. 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. (Emphasis supplied.) Jan. 24, 1968); Howard v. Levine, 262 F.Supp. Visual estimates indicated an average content of 1.14% copper and 8.24% zinc. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. Here, a valuable corporate purpose was served by delaying the publication of the K-55-1 discovery. There is therefore no inconsistency in the statements made and the conclusions reached in the two releases. On April 7, drilling of a third hole, K-55-4, 200 feet south of and parallel to K-55-1 and westerly at a 45 angle, was commenced and mineralization was encountered over 366 of its 579-foot length. If Judge Bonsal had denied a injunction on these grounds, I see no basis on which we could properly have reversed him. In their opinion, the majority have become so involved in usurping the function of the trial court, in selecting the witnesses they (at variance with the trial court) choose to believe, in forming their own factual conclusions from the evidence (in disregard of Rule 52 (a)), in deciding with, of course, the benefit of the wisdom of hindsight, how they, had they been executives of Texas Gulf Sulphur Company (TGS), would have handled the publicity attendant to the exploration of the Timmins property, in determining (to their own satisfaction) the motives which prompted each of the individual defendants to buy TGS stock and in becoming mining engineering experts in their own right, that I find it desirable in fact, essential to state my opinion as to the fundamental jurisdiction of the Court of Appeals and the issues properly before us. 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. 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. In Dirks v. SEC, 463 U.S. 646, 662, 103 S.Ct. Although the problem of insider trading is not new, in recent years the extent of 10261 (1934). 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 _____. TGS experts, on the other hand, denied at the hearing that proven or probable ore could have been calculated on April 11 or 12 because there was then no assurance of continuity in the mineralized zone. For purposes of insider trading law, insiders must wait a "reasonable" time after disclosure before trading. Dr. Bellemore, the Texas Gulf defendants' expert witness, has written: "The intelligent speculator assumes that facts are available for a thorough analysis. Rule 52(a) should be given particular weight where expert testimony must of necessity play an important role. It then stated, purporting to give the true facts in contradiction to the rumors: "The facts are as follows." The Commission's whole argument appears to be that the release should have been more optimistic (if conclusions were to be used at all), and that it should have referred to Kidd 55 as having "proven" or "probable" ore. 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. ), cert. 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. 258 F.Supp. The classical insider trading scheme, in which an insider (officer or director) at a public company trades in his company's stock while in possession of material non-public information SEC v.. The experts which the trial court credited were of the opinion that Kidd 55 was accurately portrayed as a prospect which required further exploration. 1271 (1965), both of which are cited in TGS. 1968). 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. Tamar Frankel, Insider Trading, 71 SMU L. REV. 2Andrew Beattie, "Top 4 Most Scandalous Insider Trading Debacles . [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. 1963); SEC v. Capital Gains, etc., Bureau, 375 U.S. 180, 193, 84 S.Ct. 321 (SDNY 1965); Thiele v. Shields, 131 F.Supp. He stated that the completion of "the first drill hole" with "a 600 foot drill core is very very significant * * * anything over 200 feet is considered very significant and 600 feet is just beyond your wildest imagination." Yet the requirement of hourly bulletins to the press from the conference room would not be compatible with common [876] sense. The only remedy the Commission seeks against the corporation is an injunction, see footnote 26, supra, and therefore we do not find it necessary to decide whether just a lack of due diligence on the part of TGS, absent a showing of bad faith, would subject the corporation to any liability for damages. [2] Over time, the U.S. Supreme Court embraced some of its holdings while rejecting others. 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). 95 (S.D.N.Y. 258 F.Supp. (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. 7.25). (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. The Exchange Act was passed after the 1929 stock market crash with the intent, in part, to restore public trust in the markets. [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. (Great American brief, pp. [16] Judges Waterman and Anderson, believing that there had been no definitive finding below as to whether Darke, expressly or by implication, transmitted to these outsiders any indication of the extremely favorable results of the drilling operation in which he was engaged, would remand for a determination on this issue, and if it should be determined that Darke did make such revelations, for a determination of the appropriate remedy. However, the "facts" disclosed relative to the Kidd-55 segment were: "Recent drilling on one property near Timmins has led to preliminary indications that more drilling would be required for proper evaluation of this prospect. Abstract. Detailed information similar to that required by the 1933 Act has to be filed with the Commission for such registered securities, and this information is required by 13, 15 U.S.C. Therefore, the issue of whether, by accepting, they violated the Act, is not before us, and the holding below is undisturbed. 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. Section 12 of the Act, 15 U.S.C. 824, 839-44 (1965); Note, 63 Mich.L.Rev. Co. v. Linde Air Prods. There is no proof here that the purchases of the defendants, even if motivated by hopes not then solidly grounded, raised or lowered the market or were manipulative, misleading, deceptive or were accomplished by false or fraudulent devices. The Act and the Rule apply to the transactions here, all of which were consummated on exchanges. Wanting the knowledge requisite to making our own appraisal of the significance of the core, we must depend upon the experts. Where The Market Was 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. 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. Section 9, 15 U.S.C. I understand that the Commission has conducted, or is conducting, hearings to enable it to learn the views of the many persons and corporations affected. (9) As to Coates, as one who on April 16th purchased stock and gave information on which his son-in-law broker and the broker's customers purchased shares, we reverse the dismissal of the complaint, find that he violated 15 U.S.C. This is the old version of the H2O platform and is now read-only. Daily progress reports of the drilling of this hole K-55-3 and of all subsequently drilled holes were sent to defendants Stephens and Fogarty (President and Executive Vice President of TGS) by Holyk and Mollison. The term "insider trading" describes the illegal use of con-fidential, material' information by an individual for personal profit in the stock market. 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? 406. 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. 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. The reading of a news release, which prompted Coates into action, is merely the first step in the process of dissemination required for compliance with the regulatory objective of providing all investors with an equal opportunity to make informed investment judgments. Whistleblower Similarly, corporate officers or directors may be liable for causing their corporation to engage in securities transactions. Texas Gulf Sulphur is mostly known today for transforming insider trading law, but the judges of the Second Circuit hearing that case struggled more with the question of corporate liability. The trial court, in addition to finding the knowledge of the results of the K-55 discovery to be immaterial, held that Kline had no detailed knowledge of the drilling progress and that Holyk and Mollison could reasonably assume that their superiors, Stephens and Fogarty, who were directors of the corporation, would report the results if that was advisable; indeed all employees had been instructed not to divulge this information pending completion of the land acquisition program, 258 F.Supp. Faced with this problem, the trial court selected a period from November 12, 1963 (the first information) to some date after drilling was resumed when it might reasonably be said that a body of commercially mineable ore might exist. 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. [30] [866] Since that issue is not before us, I merely make the reservation of my position clear. #2- What is your assessment of the Texas Gulf Sulphur press release of April 12? 598 (S.D.N.Y.1966), Howard v. Levine, 262 F.Supp. In the field of speculation, it would be interesting to know the position the Commission would have taken if TGS had announced that K-55-1 was "one of the most impressive drill holes completed in modern times" and that it "is just beyond your wildest imagination" (SEC Brief, p. 25). Restatement, Torts 538(2) (a); accord Prosser, Torts 554-55; I Harper & James, Torts 565-66." 1964)." 26 (SD NY 1964); but see, e. g., Weber v. C. M. P. Corp., 242 F.Supp. Nor did he find the release to be "gloomy." 262, 269 (S.D.N.Y.

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