Nor is an insider obligated to confer upon outside investors the benefit of his superior financial or other expert analysis by disclosing his educated guesses or predictions. Selective Disclosure and Insider Trading - SEC.gov However, companies listed on a national exchange can scarcely broadcast to the nation on a daily basis their hopes and/or expectations from the developments in, for example, their research departments. But the case stands differently as to paragraph (2). Moreover, it should be possible for officers to communicate with directors, of all people, without fearing a breach of confidence. 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. ), cert. Rule 10b-5 remains a potent method of proceeding against fraudulent schemes which involve securities transactions for both the Commission and private investors. Constructive Ambiguity and Judicial Development of Insider Trading - SSRN Of course subsection (c) is a catch-all clause to prevent manipulative devices. 1965); Myzel v. Fields, 386 F.2d 718 (8 Cir. See the table at 258 F. Supp. 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." 258 F. Supp. 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. [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. 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. Timeline: A History of Insider Trading - The New York Times To go further than this, as [868] Professor Loss powerfully argues, Securities Regulation at 1785, would totally undermine the carefully framed limitations imposed on the buyer's right to recover granted by 12(2) of the 1933 Act. Similarly, corporate officers or directors may be liable for causing their corporation to engage in securities transactions. 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. [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." Wiles, a consulting mining engineer, conceded that K-55-1 was a remarkable drill hole but that he could not estimate therefrom the probabilities of finding a commercially mineable body of ore, adding that he had had "the misfortune of having found a very attractive first hole and after drilling 52 around it got no more ore." Walkey, the manager of the Kamkotia, a mine some 12 miles distant from the Timmins property, testified that the geological composition of the Kamkotia and TGS areas was similar but that he could neither estimate nor say the chances were good of proving a substantial body of ore as a result of K-55-1. This requirement is explicit in 10(b) of the Act (15 U.S.C. 99, (S.D. 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. See Fischman v. Raytheon Mfg. 78i provides that it shall be unlawful for any broker, dealer or other person to create a false or misleading appearance of activity in the market for a stock or to attempt to affect the price of a stock by certain specific manipulative devices. I agree with the majority as to Coates because for all practical purposes the information had not become public at the time of his purchase order. [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. supra, at 1366, he said: The majority opinion must also be considered in light of its overall impact before a decision can be reached as to its advisability (assuming that the power to interpret 10(b) is as unlimited as the majority apparently believe). 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. ); Thiele v. Shields, 131 F.Supp. Holyk left for New York Saturday morning and arrived that same day. 587, 88 L.Ed. If, as the majority say, the test of the news release is its impact on the "reasonable" investor (although they indicate that the unreasonable speculator, too, comes under their solicitous wing) to avoid the danger of injunction violation it would be necessary to seek a declaratory judgment from the courts (both trial and appellate because following the majority, Rule 52(a) would no longer apply). 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. 258 F.Supp. Finally, when faced with the repeated issuance of misleading press releases, the courts can without more proof draw the inference that they were purposefully distributed to affect the price of the issuer's securities, justifying injunctive relief under 10b-5 and possibly other remedies. The abbreviated announcement to the Canadian press at 9:40 A.M. on the 16th by the Ontario Minister of Mines and the report carried by The Northern Miner, parts of which had sporadically reached New York on the morning of the 16th through reports from Canadian affiliates to a few New York investment firms, are assuredly not the equivalent of the official 10-15 minute announcement which was not released to the American financial press until after 10:00 A.M. Crawford's orders had been [854] placed before that. For an example of the effective use of this latter power see SEC Sec.Exch.Act Rel. See Schedules 14A-14C, 17 C.F.R. 1963); Note, 32 U.Chi. Thank you. Implied . 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. See 258 F.Supp. 2, supra, and persons listed in fn. at 282-283. Texas Gulf Sulphur Co. (1968), began with the discovery of the Kidd Mine and implicated the employees of Texas mining company. See Webster's New International Dictionary (2d ed. b (1932); and the common law concept of constructive fraud still available to private plaintiffs, see Trussell v. United Underwriters, Ltd., 228 F.Supp. However, this release was based on more information of significance than was available on April 10 at 7:00 p.m. H. L. Green Co. v. Childree, 185 F.Supp. The release, see p. 845, supra, began by referring to rumored reports that the company had made a substantial copper discovery and then continued: "These reports exaggerate the scale of operations, and mention plans and statistics of size and grade of ore that are without factual basis and have evidently originated by speculation of people not connected with TGS." Hindsight, however, is not the test. 240.14a-101-103. For reasons which appear below, we decide the various issues presented as follows: (1) As to Clayton and Crawford, as purchasers of stock on April 15 and 16, 1964, we affirm the finding that they violated 15 U.S.C. 548, 19 L.Ed.2d 564 (1967)), but no case supports the Commission's position that it is in effect meaningless. 2d 549 (S.D. 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. Only a relative handful of holes has been completed since the discovery hole but on the basis of seven tests either completed or drilling it can be stated that a strike length of 600 ft. minimum has been established, showing an ore width of roughly 300 ft. which has been traced so far to a maximum vertical depth of about 800 ft. See Pettit v. American Stock Exchange, 217 F.Supp. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. Meanwhile, rumors that a major ore strike was in the making had been circulating throughout Canada. In addition 16(a), 15 U.S.C. Since I believe that the findings of the trial court are solidly founded and should be respected, I agree with its decision as to Crawford and Clayton. N.Y.1966), where it said: The conservative (and in my opinion proper) approach of the Commission in Great American is reflected in its statement that "The ore content of a property is never `known' until the ore has been completely removed and the minerals separated." Dasho v. Susquehanna Corp., 380 F.2d 262 (7 Cir. SEC v. Texas Gulf Sulphur Co. - Open Casebook The remedy of a permanent injunction against the company, its officers and agents, the issuance of which the majority leaves to the discretion of the trial court, would not only be inappropriate but would be destructive of fundamental rights "inappropriate" because based upon one "too-gloomy" press release on April 12, 1964, with no proof of continuing gloominess thereafter. The Exchange Act was passed after the 1929 stock market crash with the intent, in part, to restore public trust in the markets. 215 (S.D.N.Y. 274 (S.D.N.Y. As was pointed out by the trial court, 258 F.Supp. The geologist Darke possessed undisclosed material information and traded in TGS securities. It closed at 30 the next day, and at 29 3/8 on April 15. The companies, the securities of which are listed on exchanges, their employees and investing public alike should have some knowledge of the rules which will govern their actions. Chiarella v. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. United States Court of Appeals Second Circuit. By-passing momentarily the general knowledge possessed by the officers of TGS as to the far-flung nature of the company's operations, its heavy concentration in the sulphur field, its non-engagement in the field of copper mining, the adverse effect which low sulphur prices had had for many years on the company's earnings despite substantial sales and focusing attention solely upon the Timmins property, the participants in that exploration and the knowledge available to them, I find no factual disputes of importance. If a fraud of this kind may ever be cured by ratification, compare Continental Securities Co. v. Belmont, 206 N.Y. 7, 99 N.E. This, of course, encompasses any fact "* * * which in reasonable and objective contemplation might affect the value of the corporation's stock or securities * * *." at 294, seems to have derived from its views that "The defendants are to be judged on the facts known to them when the April 12 release was issued," 258 F.Supp. (Emphasis supplied.). Counsel, Donald M. Feuerstein, Atty., SEC, for Securities and Exchange Commission. SEC L.Rep. 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. 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." At the other extreme is an equally easy-to-resolve Cady, Roberts[33] situation where a definite fact (the reduction of the dividend) was known by an insider, who participated in the meeting where the decision had already been made, whose knowledge of the probable reaction of the market to such an announcement, namely, a substantial sell-off, caused him to leave the meeting ahead of everyone else and before the potential buyers learned of the bad news to foist his selling orders on the market and his stock on uninformed purchasers. 1945). [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. The next day the market closed at 30. Insider Trading If you decide to report an employer to a governmental entity for violating the law, you are a (n) ________. 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. 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. Obviously, a subjective approach presents difficulties. 1962); Kohler v. Kohler Co., 208 F.Supp. Rule 10b-5, 17 CFR 240.10b-5, on which this action is predicated, provides: Rule 10b-5 was promulgated pursuant to the grant of authority given the SEC by Congress in Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. With the exception of Stephens and Fogarty as recipients of stock options, I agree with the majority on the disposition of the cases involving individuals. 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. This hole was drilled westerly at an angle of 60 and was intended to explore mineralization beneath K-55-1. Finally, pursuant to 14, 15 U.S.C. 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." insider trading law by trading securities (without disclosure) based on material, non-public information. Visual estimates indicated an average content of 1.14% copper and 8.24% zinc. Otherwise, insiders would be able to "beat the news," cf. 12: Insider Trading: Foundations and Merger News. 2Andrew Beattie, "Top 4 Most Scandalous Insider Trading Debacles . The second point, to me transcending in public importance all others in this important case, is the press release issued by TGS on April 12, 1964. Texas Gulf, utilizing a geological survey, was conducting mining exploration in Canada. The Securities Act, 1933 prohibited fraud in the sale of securities. We have recently stated in a case involving a private suit under Rule 10b-5 in which damages and an injunction were sought, "`It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for monetary damages.'" What specific features of the information that she obtained make her case different 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. 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. 1009 (1965) and Arthur Fleischer, Jr., Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va. L. Rev. Counsel, David Ferber, Sol., Roger S. Foster, Sp. 1968). An insider's duty to disclose information or his duty to abstain from dealing in his company's securities arises only in "those situations which are essentially extraordinary in nature and which are reasonably certain to have a substantial effect on the market price of the security if [the extraordinary situation is] disclosed." It would seem, by the same token, that if, to make the pill easier to swallow, he urged the directors to include others lacking the knowledge he possessed, he would be liable for all the resulting damage. See Baranow v. Gibralter Factors Corp., 366 F.2d 584, 587-589 (2 Cir. 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. Erin Tade - Gulf States Distribution Operations Manager - LinkedIn Kidd 55 was only one of several thousand anomalies (areas where there is unusual variation in the electrical conductivity of rocks) that TGS detected in its aerial exploration of the Canadian shield. Nor is it any justification that such an explicit disclosure of the truth might have "encouraged the rumor mill which they were seeking to allay." (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. Insiders, as directors or management officers are, of course, by this Rule, precluded from so unfairly dealing, but the Rule is also applicable to one possessing the information who may not be strictly termed an "insider" within the meaning of Sec. See Stockwell v. Reynolds & Co., 252 F.Supp. 8:403. . Therefore, the issue of whether, by accepting, they violated the Act, is not before us, and the holding below is undisturbed. 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 "large anomaly" did not suggest "an extensive region of mineralization" and furthermore TGS did not own or control it in any event. 557 (D.Ore.1966) (Plaintiff induced to sell his stock to the corporation for less than its true value because the defendants, stockholders and directors of the company fraudulently concealed material facts); New Park Mining Co. v. Cranmer, 225 F.Supp. See also Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2 Cir. 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' * * *. The event that changed it all was the SEC's 1966 suit against Texas Gulf Sulphur Company and thirteen of its employees and directors. 275, 11 L.Ed.2d 237 (1965); cf. 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. 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. 2002) [2002 BL 100] . 792, 73rd Cong., 2d Sess. . Commenting on the disclosure purposes of the House bill (H.R. 26 (SD NY 1964); but see, e. g., Weber v. C. M. P. Corp., 242 F.Supp. 1967), (emphasis supplied), sometimes defined as "fraud," Fischman v. Raytheon Mfg. Where The Market Was No. Rule 52(a) should be given particular weight where expert testimony must of necessity play an important role.
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