In SEC v. Texas Gulf Sulphur Co. (1966), a federal circuit court stated that anyone in possession of inside . What constitutes a reasonable time depends on the circumstances of the dissemination. Our disagreement with the district judge on the issue does not, then, go to his findings of basic fact, as to which the "clearly erroneous" rule would apply, but to his understanding of the legal standard applicable to them. The Second Circuit . That being the case, I find it unnecessary to decide whether or not Kline was in "top management.". This visual estimate convinced TGS that it was desirable to acquire the remainder of the Kidd 55 segment, and in order to facilitate this acquisition TGS President Stephens instructed the exploration group to keep the results of K-55-1 confidential and undisclosed even as to other officers, directors, and employees of TGS. 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). See SEC v. North American Research & Development Corp., 280 F.Supp. The resolution, if such be possible, of the many problems presented in this field should be by rule, as definite as possible, formulated in the light of reality and not retroactive in effect as here. Either announcement might well have affected the market and would to those who bought or sold have seemed misleading and deceptive if the anticipated event did not come to pass. Although I see no reason why we could not affirm nevertheless, I am content to leave it for him to consider whether, although he has power to issue an injunction, there is equity in this portion of the bill. 707 (SD NY 1949), rev'd on other grounds, 188 F.2d 783, 786 (2 Cir. 1960), cert. 258 F.Supp. Conversely, we are not a jury of nine with no requirement of a unanimous verdict. That section was not meant to be an auxiliary disclosure device or a provision to punish those who issue inaccurate statements in newspapers or documents filed with the Commission unless they are fraudulent acts integrally connected with securities transactions. 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]? [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. silver. 1097 (1950): No more is it for this court to make an independent essay of the evidence or of the core. 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 approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in . [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. After a slight decline to 16 3/8 by Friday, November 22, the price rose to 20 7/8 by December 13, when the chemical assay results of K-55-1 were received, and closed at a high of 24 1/8 on February 21, the day after the stock options had been issued. 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. Thank you. No. There is therefore no inconsistency in the statements made and the conclusions reached in the two releases. Whether merger discussions in any particular case are material therefore depends on the facts. 301 (S.D.N.Y. 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. I am unimpressed with the argument that Stephens, Fogarty and Kline could not perform this duty on the peculiar facts of this case, because of the corporate need for secrecy during the land acquisition program. Insider trading laws in India - Legal Services India What Just Happened to SEC Insider Trading Disgorgement? - LinkedIn 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 approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent . The majority approve of this interpretation because "the investing public may be injured as much by one's misleading statement containing inaccuracies caused by negligence as by a misleading statement published intentionally to further a wrongful purpose." The Securities Act, 1933 prohibited fraud in the sale of securities. 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.". Tamar Frankel, Insider Trading, 71 SMU L. REV. SEC v. Texas Gulf Sulphur Co. - Wikipedia Indeed, any such conclusions from a first drill core, if so announced by TGS, would undoubtedly have had a substantial effect on the market price of TGS stock and would have immediately brought forth both the wrath of, and injunction papers from, the Commission charging TGS with issuing false, misleading and unsupported statements to boost the price of the stock. 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. 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. 1965). 1961). Co., 259 F.Supp. Thank you. (Emphasis supplied.) An insider is not, of course, always foreclosed from investing in his own company merely because he may be more familiar with company operations than are outside investors. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. 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. H.Rep.No.85, 73dCong., 1st Sess. 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. Held: sufficient allegation of fraud under 10b-5); Brennan v. Midwestern United Life Ins. Texas Gulf Sulphur Co. (1966), a federal circuit court stated ,that anyone in the possession of inside information must either disclose information or . 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. 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. 872, 895 (1967). It would be unrealistic to include any of these purchases as having been made by other than the defendants, and unrealistic to include them as having been made by members of the general public receiving "tips" from insiders. 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. See Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 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 Fighting insider trading is clearly at the top of law enforcement's agenda. 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. 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). At that time drill holes K-55-1, K-55-3 and K-55-4 had been completed; drilling of K-55-5 had started on Section 2200 S and had been drilled to 97 feet, encountering mineralization on the last 42 feet; and drilling of K-55-6 had been started on Section 2400 S and had been drilled to 569 feet, encountering mineralization over the last 127 feet." Some witnesses who testified at the hearing stated that they found the release encouraging. 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. Consequently, I agree with the majority in giving the Board's action no weight here. The Commission is presently arguing that 10b-5 is applicable to all corporate statements disseminated to the public or filed with the Commission. 1966) (by implication). It would therefore appear that the Commission has failed in its burden of proof, unless it can be said that TGS was negligent in not obtaining later data from Timmins before issuing the release.[35]. At 3:00 P.M. on April 12, 1964, evidently believing it desirable to comment upon the rumors concerning the Timmins project, TGS issued the press release quoted in pertinent part in the text at page 845, supra. SEC v. Texas Gulf Sulphur Co. Wikipedia Republished // WIKI 2 In fact, the Commission itself indulges in the very speculation it condemns for, after conceding that "the trial court correctly stated that one drill hole does not establish the existence of a commercially mineable mineral deposit," it straightway contends that the information which arose after the drilling of this first and only (for 4 months) drill hole revealed such "chances of imminent success, viewed in the light of the magnitude of the potential economic benefit to Texas Gulf" as to require disclosure by insiders desiring to buy TGS securities. By doing so, a person acts in violation of their duties and breaches the trust of the affected parties. at 296 (emphasis supplied) it applied an incorrect legal standard in appraising whether TGS should have issued its April 12 release on the basis of the facts known to its draftsmen at the time of its preparation, 258 F.Supp. bonds or stock options) by the individuals with potential to access to non-public information about company. 1937). d. pay secrecy Feedback The correct answer is: insider trading. 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. 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. 1965) (Broker induced plaintiff to purchase some stock and to finance the purchase through a factor without disclosing material facts concerning the risks of such a procedure. Thus, anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. As to the sufficiency of the news release, the first issue would be what constitutes a "reasonable" investor. If a labor strike had kept its plants idle for months, encouraging news of a possible settlement hoped for by the TGS labor negotiators might cause the negotiators to buy. As to manipulation, he testified that: It is therefore not surprising that there is little discussion in the legislative history as to the meaning of the language in the anti-manipulation provisions. In my opinion the evidence establishes as a matter of law that the press release was misleading. A rule requiring a minor officer to reject an option so tendered would not comport with the realities either of human nature or of corporate life. 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. 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. Solved Develop the argument that Martha Stewart was not - Chegg 258 F.Supp. In the House Committee hearings on the proposed House bill, Thomas G. Corcoran, Counsel with the Reconstruction Finance Corporation and a spokesman for the Roosevelt Administration, described the broad prohibitions contained in 9(c), the section which corresponded to Section 10(b) of S. 3420 and eventually to Section 10(b) of the Act, as follows: "Subsection (c) says, `Thou shalt not devise any other cunning devices' * * *. Texas Gulf, utilizing a geological survey, was conducting mining exploration in Canada. Therefore we reverse the dismissal of the action as to him and his personal transactions. Therefore, in a case where disclosure to the grantors of an option would seriously jeopardize corporate security, it could well be desirable, in order to protect a corporation from selling securities to insiders who are in a position to appreciate their true worth at a price which may not accurately reflect the true value of the securities and at the same time to preserve when necessary the secrecy of corporate activity, not to require that an insider possessed of undisclosed material information reject the offer of a stock option, but only to require that he abstain from exercising it until such time as there shall have been a full disclosure and, after the full disclosure, a ratification such as was voted here. Clayton, who was unaware of the April 16 disclosure announcement TGS was to make can, in support of his claim that the favorable news was public, rely only on the rumors and on the phone calls received by TGS prior to the placing of his order from those who seemed to have heard some version or rumors of the news. 281. 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. 1966) (dictum); Heit v. Weitzen, 260 F.Supp.
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