A. PR. 1961). 1964)." (258 F.Supp. at 296. at 282 n. 10. Whistleblower 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. In summary, the most disturbing aspect of the majority opinion is its utterly unrealistic approach to the problem of the corporate press release. 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. An attempt has been made to understand how these Indigenous laws impact the Market and how they curtail these illegal activities from it. Gulf traded its sulfur rights on the Texas and Louisiana Gulf Coast for $3 million and half of the net profits of the Boling Dome production. The term "insider trading" describes the illegal use of con-fidential, material' information by an individual for personal profit in the stock market. Fair To All People: The SEC and the Regulation of Insider Trading 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy. at 229-30, 100 S.Ct. Export Reading mode BETA. 1963); Note, 32 U.Chi. In adjudicating upon the relationship of this phrase to the case before us it would appear that the court below used a standard that does not reflect the congressional purpose that prompted the passage of the Securities Exchange Act of 1934. The group included defendant Holyk, TGS's chief geologist, defendant Clayton, an electrical engineer and geophysicist, and defendant Darke, a geologist. See also 9(a) (4), 15(c) (1), (2), 15 U.S. C. 78i(a) (4); 78o(c) (1), (2). Texas Gulf Sulphur represented the first time a federal court held that insider trading violated federal securities law and remained the leading case on insider trading for a decade. Lines, 360 F.2d 774 (2 Cir. For an example of the effective use of this latter power see SEC Sec.Exch.Act Rel. 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. THROUGH TEXAS GULF SULPHUR - Duke University It can, indeed, be argued that, even on this basis, Rule 10b-5(2), absent the reading in of a scienter requirement, goes beyond the authority granted by 10(b) of the 1934 Act. This is probably an overstatement because by the time of the TGS April 16, 1964 press release, exploration had advanced to a point where an estimate of the extent of the tonnage might have been rather accurately made. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. 1555, 12 L.Ed.2d 423 (1964), violation of Rule 10b-5(2) may not do so under all circumstances, including those presented by the April 12 press release. If corporations were literally to follow its implications, every press release would have to have the same SEC clearance as a prospectus. 78j(b) and Rule 10b-5, and remand, pursuant to the agreement of all the parties, for a determination of the appropriate remedy. 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." While we certainly agree with the trial court that "in retrospect, the press release may appear gloomy or incomplete,"[28] 258 F. [863] Supp. 754 (1944). Timeline: A History of Insider Trading - The New York Times According to Corcoran these five ideas were (1) control on the amount of credit, (2) control of manipulations, (3) control of insider trading [ 16(b)], (4) elimination of abuses in the market machinery, and (5) the establishment of the Securities Exchange Commission to administer the Act. Texas Gulf Sulphur Co.[6], a federal circuit court stated that anyone in possession of inside . The case began in 1959 when the Texas Gulf Sulphur Company purchased some property in Timmins, Ontario, to check for ore deposits. 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. We hold, therefore, that all transactions in TGS stock or calls by individuals apprised of the drilling results[14] of K-55-1 were made in violation of Rule 10b-5. 1964) (Trust company alleged to be a participant in a fraudulent scheme whereby loans were made to plaintiff by [888] a factor who converted the stock when it was pledged as collateral for the loan. A myriad of reasons would be given hope that a commercially profitable mine would be found if further exploration proved the ore to be as promising as the core of K-55-1 (November 12, 1963); the development of a phosphate project and potash mine (November 15, 1963); the prediction of security analysts that there would be a turnabout in the price of sulphur stocks; the acquisition of Canadian oil properties (December 16, 1963); the new high level of free world sulphur use and output (December 30, 1963); the launching of the world's largest liquid sulphur tanker (December 30, 1963); the entry into service of a large liquid sulphur tanker for domestic shipments (January 18, 1964); the sulphur expansion program in Canada (February 8, 1964); the new four-year high in sales reached in 1963 (February 20, 1964); and the $2 per ton price increase for sulphur (April 1, 1964). Insider Trading And Recent Cases In India - Desi Kaanoon at 288; his defense was rather a belief that the law required him only to await its issuance. 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. Here, notwithstanding the trial court's conclusion that the results of the first drill core, K-55-1, were "too `remote' * * * to have had any significant impact on the market, i. e., to be deemed material,"[11] 258 F.Supp. At one extreme is a rule that no officer or employee or any member of their families shall own stock of the company for which they work or purchase stock if he possesses "material" inside information. 1009 (1965) and Arthur Fleischer, Jr., Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va. L. Rev. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. [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. The legislative history clearly reveals that the statute was passed to prohibit deceptive and manipulative devices used in connection with securities transactions, and that the "connection" between the complained of conduct and the securities transactions must be a closer one than the majority now sanctions. 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. Insider Trading - Meaning, Examples, Cases, Is it Illegal? - WallStreetMojo 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9 Cir. 3230 (May 21, 1942); 10 SEC Ann.Rep. [1] The complaint alleged (1) that defendants Fogarty, Mollison, Darke, Murray, Huntington, O'Neill, Clayton, Crawford, and Coates had either personally or through agents purchased TGS stock or calls thereon from November 12, 1963 through April 16, 1964 on the basis of material inside information concerning the results of [840] TGS drilling in Timmins, Ontario, while such information remained undisclosed to the investing public generally or to the particular sellers[2]; (2) that defendants [841] Darke and Coates had divulged such information to others for use in purchasing TGS stock or calls[3] or recommended its purchase while the information was undisclosed to the public or to the sellers;[4] that defendants Stephens, Fogarty, [842] Mollison, Holyk, and Kline had accepted options to purchase TGS stock on Feb. 20, 1964 without disclosing the material information as to the drilling progress to either the Stock Option Committee or the TGS Board of Directors; and (4) that TGS issued a deceptive press release on April 12, 1964. The inconsistency of the majority's position is immediately apparent. United Hotels Co. v. Mealey, 147 F.2d 816, 819 (2 Cir. 1437 (1967). [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. 78n, the Commission has promulgated proxy rules setting forth information that must be sent to shareholders prior to their annual or other meetings. Finally, a major factor in determining whether the K-55-1 discovery was a material fact is the importance attached to the drilling results by those who knew about it. 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. TGS. 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. Some witnesses who testified at the hearing stated that they found the release encouraging. Tager v. SEC, 344 F.2d 5, 8 (2 Cir. 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. Another series of decisions involve a broker, dealer or financial institution which fraudulently induced plaintiff's purchase or sale. (4) As to Stephens and Fogarty, as recipients of stock options, we reverse the dismissal of the complaint and remand for a further determination as to whether an injunction, in the exercise of the trial court's discretion, should issue. Despite rumors in the Canadian press that TGS had made a major discovery, Lamont had advised Stephens "that TGS should take no action unless the rumors reached the New York press or until TGS had sufficient information available to issue an appropriate press release." That insider can be held liable by trading in the 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. 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. On the basis of this information he, as an experienced mining engineer, did not feel that there was sufficient information to draw conclusions as to size and grade of ore, and he advised Fogarty accordingly. The issue here, however, is the different one of an injunction. Although the problem of insider trading is not new, in recent years the extent of 1961). 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. The court below found: "There is no evidence that TGS derived any direct benefit from the issuance of the press release or that any of the defendants who participated in its preparation used it to their personal advantage." 165.". My concurrence in the disposition of the press release issue assumes that such consideration is permitted. Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547, quoting from SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 193, 84 S.Ct. 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. As to the sufficiency of the news release, the first issue would be what constitutes a "reasonable" investor. 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. This hole was drilled westerly at an angle of 60 and was intended to explore mineralization beneath K-55-1. All of the foregoing defendants accepted the options granted them. Therefore, it would seem elementary that the Commission has a duty to police management so as to prevent corporate practices which are reasonably likely fraudulently to injure investors. The stock purchases by Clayton, Crawford and Coates on April 16, 1964, are considered later. supra Table 1 at 16-17. See Baranow v. Gibraltar Factors Corp., 366 F.2d 584, 587 (2 Cir. Court Decision: Texas Gulf Sulfer Co. guilty for acting on insider information Attempts at Aligning the Interests of Shareholders with Those of Officers Stock Options: a compensation system that gives employees the right to purchase shares of stock at a set price, even if the value of the stock increases above that price 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. Its area was then limited to its one-quarter segment. 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. 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 Commission should have the authority to deal with new manipulative devices." If there is no such connection, investors are relegated to 18 or state law to recover their losses and the Commission must use its other remedies, discussed infra. On October 29 and 30, 1963, Clayton conducted a ground geophysical survey on the northeast portion of the Kidd 55 segment which confirmed the presence of an anomaly and indicated the necessity of diamond core drilling for further evaluation. (Emphasis supplied.) Gen. 78o(c) (5), 78s(a) (4)). Foreign Corrupt Practices Act 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 ________. Absent any clear indication of a legislative intention to require a showing of specific fraudulent intent, see Note, 63 Mich.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. 757, 772 (D.Colo.1964), has been expanded from recklessness, see Prosser, Torts, 102, pp. Moreover, the formal announcement could not reasonably have been expected to be disseminated by the time of the opening of the exchanges on the morning of April 16, when Crawford must have expected his orders would be executed. Indeed, at times the purpose may be so manifest as to override even the explicit words used. 77l(2) "* * * [offers or] sells a security by means of * * *"; 17(a), 15 U.S.C. The experts which the trial court credited were of the opinion that Kidd 55 was accurately portrayed as a prospect which required further exploration. Insider Suit Names Texas Gulf Sulphur Aides (April 20, 1965) Texas Gulf Aides Lose in S.E.C. The "large anomaly" did not suggest "an extensive region of mineralization" and furthermore TGS did not own or control it in any event. 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. Securities and Exchange Commission v. Texas Gulf Sulphur Co 1965). ); Thiele v. Shields, 131 F.Supp. Coates left the TGS press conference and called his broker son-in-law Haemisegger shortly before 10:20 A. M. on the 16th and ordered 2,000 shares of TGS for family trust accounts of which Coates was a trustee but not a beneficiary; Haemisegger executed this order over the New York and Midwest Exchanges, and he and his customers purchased 1500 additional shares. b. fiduciary duty. 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. 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. 16. But disclosure of the "results", namely, preliminary visual inspection of the contents, would have violated the Commission's own rules and standards. at 291. See Stockwell v. Reynolds & Co., 252 F.Supp. 1961); SEC Sec.Exch.Act Rel. 521, 53 L.Ed. While I am not convinced that imposition of liability for damages under Rule 10b-5(2), absent a scienter requirement, even limited in the way just proposed, would not go beyond the authority vested in the Commission by 10(b) to act against "any manipulative or deceptive device or contrivance" and be so inconsistent with the general structure of the statutes as to be impermissible, it is at least clear that the April 12 press release would be the worst possible case for the award of damages for merely negligent misstatement, as distinguished from the kind of recklessness that is equivalent to wilful fraud, see SEC v. Frank, 388 F.2d 486, 489 (2 Cir. Orison S. Marden, White & Case, William D. Conwell, Edward C. Schmults, P. R. Konrad Knake, Thomas McGanney, Peter G. Eikenberry, New York City, for Texas Gulf Sulphur, Fogarty, Mollison, Holyk, Darke, Stephens, Murray, Huntington and Kline, for Crawford and Clayton. It, too, was drilled at the anomaly's eastern edge. 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. 658, 681-82 (1965). 262 at 280, in the sense that the materiality of facts is to be assessed solely by measuring the effect the knowledge of the facts would have upon prudent or conservative investors. A remand on this point is therefore not justified. 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. We should have in mind the wise words of Judge Learned Hand in Cawley v. United States, 272 F.2d 443, 445 (2 Cir. 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. To render the Congressional purpose ineffective by inserting into the statutory words the need of proving, not only that the public may have been misled by the release, but also that those responsible were actuated by a wrongful purpose when they issued the release, is to handicap unreasonably the Commission in its work. 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. 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.
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