To them, completely disregarding the trial court's findings and substituting themselves as a jury, these purchases are "the only truly objective evidence of the materiality of the K-55-1 discovery." In summary, the most disturbing aspect of the majority opinion is its utterly unrealistic approach to the problem of the corporate press release. [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. Commenting on the disclosure purposes of the House bill (H.R. (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. 9323 stated: Section 10(b) of the Act (see footnote 8, supra) was taken by the Conference Committee from Section 10(b) of the proposed Senate bill, S. 3420, and taken from it verbatim insofar as here pertinent. [881] The District Court aptly pointed out that in quelling the rumors TGS had to proceed with caution: While it thus might have been "safer" for TGS to have issued a sheaf of drilling results and mineral analyses (which the press would probably have declined to print), "they would have [thereby] encouraged the rumor mill which they were seeking to allay." 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. Absent a securities transaction by an insider it is almost impossible to prove that a wrongful purpose motivated the issuance of the misleading statement. 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. for an injunction to private damage actions. [834] [835] [836] [837] [838] [839] Philip A. Loomis, Jr., Gen. A offerings under the 1933 Act): Item 8(A) (b), 1 CCH Fed.Sec.L.Rep. The choice of an ambiguous general statement rather than a summary of the specific facts cannot reasonably be justified by any claimed urgency. 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. (7) As to Clayton, although the district judge did not specify that the complaint be dismissed with respect to his purchases of TGS stock before April 9, [843] 1964, such a dismissal is implicit in his treatment of the individual appellees who acted similarly. Their belief that the strike would be protracted might cause them to sell. 715-17 (3d ed. 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. Knowing that the nature and extent of this prospect could not be measured until further exploration was conducted and that further exploration had to await additional land acquisition they could have made no announcement as was the case here. The term "insider trading" describes the illegal use of con-fidential, material' information by an individual for personal profit in the stock market. Furthermore, such a holding might well have the unfortunate result of deterring the dissemination of corporate news despite the strong policy underlying all securities legislation of encouraging disclosure of information useful to present and potential investors. Other situations and problems of an equally reductio ad absurdum character can easily be conjured up. (2) Was the TGS press release of April 12, 1964, false, misleading or deceptive within the meaning of Section 10(b) and Rule 10b-5 in the light of TGS' then knowledge and the then existing factual situation. 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. 408, 409-10 (1962), derived at the expense of the uninformed investing public and not at the expense of the corporation which receives the sole benefit from insider incentives. contemporaneous assessments of early insider trading law include William Cary, Insider Trading in Stocks, 21 Bus. [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. Stephens immediately contacted Fogarty at his [845] home in Rye, N. Y., who in turn telephoned and later that day visited Mollison at Mollison's home in Greenwich to obtain a current report and evaluation of the drilling progress. 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. [22] Liability under 12(2) of the Securities Act of 1933, 15 U.S.C. For purposes of insider trading law, insiders must wait a "reasonable" time after disclosure before trading. Sec. 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. [8]15 U.S.C. The Commission can suspend trading for successive periods of 10 days in any security which it feels is being affected by misleading press releases ( 15 (c) (5), 19(a) (4), 15 U.S.C. Contrast such a statement with the April 12, 1964 release so criticized by the Commission. Texas Gulf Sulphur, insider trading, U.S. securities laws, insider trades - disclosures, materiality, price impact, secondary trading markets - company liabilities, Securities Exchange Act - Section 16 . July 28, 2022 David Bissinger 2023 The Texas Lawbook. The majority state that the K-55-1 drilling results were material because they "might well have affected the price of TGS stock." [24]The options granted on February 20, 1964 to Mollison, Holyk, and Kline were ratified by the Texas Gulf directors on July 15, 1965 after there had been, of course, a full disclosure and after this action had been commenced. 261 (S.D.N.Y. The experts which the trial court credited were of the opinion that Kidd 55 was accurately portrayed as a prospect which required further exploration. The scope and stringency of the violation and penalties differ wildly from country to country. 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." 2 of SEC Act, 15 U.S.C. The group included defendant Holyk, TGS's chief geologist, defendant Clayton, an electrical engineer and geophysicist, and defendant Darke, a geologist. Firm Management White-Collar/Regulatory Pro Bono/Public Service/D&I Is ESG a Trade Secret? 670 (S.D.N.Y. Read in context it seems clear that 10 (b) was only meant to be a supplement to the specific prohibitions contained in 9 and 10(a). D. Rule 10b-5 Occupies the Field: Texas Gulf Sulphur 396 R E. Insider Trading Retrenchment and Renewal 402 R II. (1934), p. 11. Tager v. SEC, 344 F.2d 5, 8 (2 Cir. Its area was then limited to its one-quarter segment. What constitutes a reasonable time depends on the circumstances of the dissemination. SEC L.Rep. Id. 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. 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. Case (Aug. 14, 1968) . [10] The House of Representatives committee that reported out the bill which eventually became the Act did so with the observation that "no investor, no speculator,can safely buy and sell securities upon exchanges without having an intelligent basis for forming his judgment as to the value of the securities he buys or sells." The inconsistency of the majority's position is immediately apparent. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. b (1932); and the common law concept of constructive fraud still available to private plaintiffs, see Trussell v. United Underwriters, Ltd., 228 F.Supp. This means you can view content but cannot create content. 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. I, Form 1-A, Reg. 673 (N.D.Indiana 1966) (Defendant corporation allegedly aided and abetted an alleged violation of 10b-5 by its brokerage firm because of its failure to report the improper activities of said firm to the proper authorities. It therefore cannot be said that TGS was negligent in not obtaining more current data, and it is certainly not negligent simply because it decided to issue the statement when it did. See Pettit v. American Stock Exchange, 217 F.Supp. 78 Cong.Rec. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. 854, 94 L.Ed. was "the first federal court decision to ad-dress insider trading of securities under 10(b) of the Securities Exchange Act of 1934 and As the SEC moved to regulate insider trading, academic and legal voices argued that the SEC action was misplaced. This assumption raises the question of what is material and who is to make such a determination. And, I concur in as much as Part II of Judge Friendly's opinion as discusses the origins of the rule and the relevance of today's decision involving only an application by the S.E.C. 77l(2) "* * * [offers or] sells a security by means of * * *"; 17(a), 15 U.S.C. LaThis article found in the Wall Street Journal applies to insider trading. Even the Commission's experts, Adelstein and Pennebaker, would not estimate what ore, if any, might lie beyond the 1 1/8 inch core. [849] supra at 1463. The expression "in connection" is used elsewhere in the Act, including 9(b), as a shorthand method of indicating that the activity sought to be made illegal is that having a direct relation to securities transactions. 1009, 1010 (1966), Fleischer, Securities Trading and Corporation Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L.Rev. ); Glickman v. Schweickart & Co., 242 F.Supp. Roche, a mining stock specialist, added that mines with significantly lower percentages of copper and with no zinc or silver, as here, were profitably operated. In view of other unrelated recent developments favorably affecting TGS, participation by an informed person in a regular stock-purchase program, or even sporadic trading by an informed person, might lend only nominal support to the inference of the materiality of the K-55-1 discovery; nevertheless, the timing by those who knew of it of their stock purchases and their purchases of short-term calls purchases in some cases by individuals who had never before purchased calls or even TGS stock virtually compels the inference that the insiders were influenced by the drilling results. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. In all of the above cases the defendants, unlike the defendant here, were clearly participants in a securities transaction and were guilty of or responsible for deceptive activities of which the securities transaction was an integral part. 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. L.Rev. 91,317 (N.D.Ill. But disclosure of the "results", namely, preliminary visual inspection of the contents, would have violated the Commission's own rules and standards. 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. 258 F.Supp. [15] Even if insiders were in fact ignorant of the broad scope of the Rule and acted pursuant to a mistaken belief as to the applicable law such an ignorance does not insulate them from the consequences of their acts. Nevertheless, the evidence shows that he knew about and participated in TGS's land acquisition program which followed the receipt of the K-55-1 drilling results, and that on February 26, 1964 he purchased 50 shares of TGS stock. They argue that the "connection" that has to exist between a corporate statement and a security transaction is supplied by the theoretical argument that every "material" corporate statement presumably affects the market price of the issuer's securities. The trial court also found, 258 F.Supp. Texas Gulf, utilizing a geological survey, was conducting mining exploration in Canada. We reverse the judgment order dismissing the complaint against Claude O. Stephens, Charles F. Fogarty, and Harold B. Kline as recipients of stock options, direct the district court to consider in its discretion whether to issue injunction orders against Stephens and Fogarty, and direct that an order issue rescinding the option granted Kline and that such further remedy be applied against him as may be proper by way of an order of restitution; and we reverse the judgment dismissing the complaint against Texas Gulf Sulphur Company, remand the cause as to it for a further determination below, in the light of the approach explicated by us in the foregoing opinion, as to whether, in the exercise of its discretion, the injunction against it which the Commission seeks should be ordered. Once it had been established, however, that an aggrieved buyer has a private action under 10(b) of the 1934 Act, there seemed little practical point in denying the existence of such an action under 17 with the important proviso that fraud, as distinct from mere negligence, must be alleged. The trial court after hearing and seeing the witnesses has resolved these factual issues and in my opinion its decision should be sustained. Instead he acted on the view, erroneous in the court's belief, that no violation of the Rule had occurred and he was thus without power to enjoin, 258 F.Supp. 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. We are to put ourselves so far as we can in the position of the legislature that uttered them, and decide whether or not it would declare that the situation that has arisen is within what it wishes to cover. Most of the footage drilled by April 10 had been in a single plane (2400 S), but by April 15 drilling had established mineralization in a number of additional planes. Texas Gulf Sulphur Co. 1967. The dominant congressional purposes underlying the Securities Exchange Act of 1934 were to promote free and open public securities markets and to protect the investing public from suffering inequities in trading, including, specifically, inequities that follow from trading that has been stimulated by the publication of false or misleading corporate information releases. 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.' Id. (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. 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. 78l, requires the registration of securities traded on a stock exchange and of certain other widely held securities.
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