Mollison and Holyk expected it to be released over the airways at 11 P. M. on April 15th, but, for undisclosed reasons, it was not released until 9:40 A. M. on the 16th. The testimony was unanimous that no estimate of "magnitude" could be made. 77q(a), provides that it "shall be unlawful for any person in the offer or sale of any securities" to engage in fraudulent activity. 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. He added, however, that it "is a natural thing to buy more stock once they give you the first drill hole." 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. 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. Therefore, the statements in the legislative history applicable to the reporting and disclosure provisions have no bearing on the correct interpretation of 10 (b). The mere fact that an insider did not engage in securities transactions does not negate the possibility of wrongful purpose; perhaps the market did not react to the misleading statement as much as was anticipated or perhaps the wrongful purpose was something other than the desire to buy at a low price or sell at a high price. 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. This core was unusually good in mineral content. Shortly after the appeal was argued defendant Lamont passed away, and by agreement of the parties an order was entered discontinuing his appeal and directing that the judgment below dismissing the action against him be severed from the judgment as to the other defendants. [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. 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. Nor did he find the release to be "gloomy." 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. What specific features of the information that she obtained make her case different Congress has made it clear in the other antifraud provisions of general application that its concern was not with allegedly misleading corporate publicity but rather with purposeful schemes to deceive and defraud the public by means of manipulative and deceptive devices which directly involve purchases or sales of securities. 12: Insider Trading: Foundations and Merger News. The majority read the record as conclusively establishing "that knowledge of the results of the discovery hole, K-55-1, would have been important to a reasonable investor and might have affected the price of the stock." Since the option granted to Kline had not been exercised prior to its ratification by the Texas Gulf directors on July 15, 1965, after full disclosure, there can be no 10b-5 violation as to him, and rescission of the option he received should not be ordered. We do not believe that Congress intended that the proscriptions of the Act would not be violated unless the makers of a misleading statement also participated in pertinent securities transactions in connection therewith, or unless it could be shown that the issuance of the statement was motivated by a plan to benefit the corporation or themselves at the expense of a duped investing public. That is too slim a basis to support a judicial excursion over such uncharted seas. 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. See Sections 2 and 16 of the Act; H.R.Rep.No. See Freed v. Szabo Food Service, Inc., '61-'64 CCH Fed.Sec.L.Rep. 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. at 295, and in assuming that disclosure of the full underlying facts of the Timmins situation was not a viable alternative to the vague generalities which were asserted. If the SEC had appealed the ruling dismissing this portion of the complaint as to Holyk and Mollison, I would have upheld the dismissal quite apart from the special circumstance that a refusal on their part could well have broken the wall of secrecy it was important for TGS to preserve. L.Rev. 1965), appeal pending; Gann v. BernzOmatic, 262 F.Supp. Meanwhile, drilling operations continued. They should not be forced, despite an exercise of the best judgment, to act at their peril or refrain in terrorem from acting. The text of the article was approved by Mollison in Timmins on April 15th. Absent any clear indication of a legislative intention to require a showing of specific fraudulent intent, see Note, 63 Mich.L.Rev. "Shadow Trading" Becomes Insider Trading | CLS Blue Sky Blog Mollison had been advised by Holyk as to the drilling results up to 7:00 p.m. on April 10th. While additional drilling was done on Saturday and Sunday, April 11 and 12, the cores had not been seen by the geologists advising management, and there was no way of communicating with the drill site even if someone had been available there to give a reliable appraisal. (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. [15] Inasmuch as the visual evaluation of that drill core (a generally reliable estimate though less accurate than a chemical assay) constituted material information, those advised of the results of the visual evaluation as well as those informed of the chemical assay traded in violation of law. at 271). Thank you. The first five paragraphs read as follows: Should Make Substantial Open Pit Operation, TEXAS GULF SULPHUR COMES UP WITH A "MAJOR", See Big Tonnages Of Base Metals, Plus Silver. 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). "[13] Roche, a Canadian broker whose firm specialized in mining securities, characterized the [851] importance to investors of the results of K-55-1. 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. Texas Gulf Sulphur Co., 401 F.2d 833,843-47 (2d Cir. The drilling done to date has not been conclusive but the statements made by many outside quarters are unreliable." I agree with Judge Friendly, however, that we should provide guidance to the District Courts with respect to pending private claims for damages based upon Rule 10(b) (5) arising out of the transactions now before us. 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. So, it is here no justification for insider activity that disclosure was forbidden by the legitimate corporate objective of acquiring options to purchase the land surrounding the exploration site; if the information was, as the SEC contends, material,[9] its possessors should have kept out of the market until disclosure was accomplished. Cf. 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 Commission argues that there was a failure to disclose material information. View syllabus [LGST 2020-8020 s2023 v.4] (1).pdf from LGST 2020 at University of Pennsylvania. Thus any statement issued by a publicly listed company is made "in connection" with the purchase or sale of securities. Solved Develop the argument that Martha Stewart was not - Chegg REGULATING INSIDER TRADING THROUGH TEXAS GULF SULPHUR James D. Cox* ABSTRACT Data summarized in the opening of this article document shows that in- . Assuming the majority's and the Commission's full disclosure theory, would the facts as then developed have given the buying or selling public the so-called advantages possessed by the insiders? 14. Of course subsection (c) is a catch-all clause to prevent manipulative devices. They extend over a gamut between definite extremes. See United States v. Chiarella, 588 F.2d 1358, 1362 (2d 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. 77q(a) (2) and (3), which are virtually identical to the provisions of Rule 10b-5(2) and (3) and were, in fact, the model therefor, see Birnbaum v. Newport Steel Corp., 193 F.2d 461, 463 (2 Cir. 7327. Texas Gulf Sulphur Co. (1966), a federal circuit court stated ,that anyone in the possession of inside information must either disclose information or . 8:403. . supra Table 1 at 16-17. 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. 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." While the alleged fraudulent acts were committed before plaintiff sold his stock (he had not at the time of suit), he was about to be forced to sell his part of a single fraudulent scheme.). Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir. Readings. The derivation of Rule 10b-5 is peculiar. 6 . 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. As to the sufficiency of the news release, the first issue would be what constitutes a "reasonable" investor. On April 13, a previously-invited reporter for The Northern Miner, a Canadian mining industry journal, visited the drillsite, interviewed Mollison, Holyk and Darke, and prepared an article which confirmed a 10 million ton ore strike. Of necessity the April 12 press release had to be issued on the basis of the drilling results through 7:00 p. m., April 10, and it seems clear that the trial court determined that it would not be reasonable to charge TGS with knowledge of later information. He stated at a 1934 House hearing that "this bill has at bottom five ideas in it, and all 36 pages tie in around the five ideas." In Dirks v. SEC, 463 U.S. 646, 662, 103 S.Ct. Furthermore, even if some investors considered the release to be discouraging compared to the rumors afloat, if the facts and conclusions presented were accurate (as they were) and if they were not presented in a manner that would mislead a reasonable investor (which they were not) then there can be no violation of 10b-5. 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. The essence of the SEC's case is that Timmins was a once-in-a-lifetime affair; the company's motive in issuing the release was laudable; and the defect was solely a pardonable one of execution. denied, 394 U.S. 976 (1969). Texas Gulf Sulphur 1 in transforming insider trading law. The statement was released Sunday afternoon and Mollison and Holyk were asked "to return to Timmins as promptly as possible and to move things along." 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. 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. [31] But there is unanimity among the commentators, including some who were in a peculiarly good position to know, that 17(a) (2) of the 1933 Act indeed the whole of 17 was intended only to afford a basis for injunctive relief and, on a proper showing, for criminal liability, and was never believed to supplement the actions for damages provided by 11 and 12. Whistleblower 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. at 296. 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. 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. Appellant Crawford, who ordered[17] the purchase of TGS stock shortly before the TGS April 16 official announcement, and defendant Coates, who placed orders with and communicated the news to his broker immediately after the official announcement was read at the TGS-called press conference, concede that they were in possession of material information. Transactions in Shares: Rule 10b-5, Insider Trading and Securities Fraud. 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. [8]15 U.S.C. At this time, neither the TGS Stock Option Committee nor its Board of Directors had been informed of the results of K-55-1, presumably because of the pending land acquisition program which required confidentiality. 78b, see Kohler v. Kohler Co., 319 F.2d 634, 642 (7 Cir. Obviously if such a resumption were to have any meaning to such "tippees," they must have previously been told of K-55-1. 854, 94 L.Ed. SEC v. Torr, 87 F.2d 446 (2 Cir. PRIVATE RIGHTS OF ACTION 403 R A. Therefore, the court below concluded that only directors Stephens and Fogarty, of the top management, would have violated the Rule by accepting stock options without disclosure, but it also found that they had not acted improperly as the information in their possession was not material. On April 10, a third drill rig commenced drilling yet another hole, K-55-5, 200 feet north of K-55-1, parallel to the prior holes, and slanted westerly at a 45 angle. And still deeper, a strong zinc section of better than 100 ft. averaged out to in excess of seven ounces of silver in addition to ore-grade zinc values. 1968); SEC v. Texas Gulf Sulphur Co., 258 F. Supp. Similarly, corporate officers or directors may be liable for causing their corporation to engage in securities transactions. [18] Although the only insider who acted after the news appeared over the Dow Jones broad tape is not an appellant and therefore we need not discuss the necessity of considering the advisability of a "reasonable waiting period" during which outsiders may absorb and evaluate disclosures, we note in passing that, where the news is of a sort which is not readily translatable into investment action, insiders may not take advantage of their advance opportunity to evaluate the information by acting immediately upon dissemination.
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