Section 9, 15 U.S.C. 1960) (Accountants allegedly induced corporation to go through with a merger (a securities transaction) by preparing false financial statements and making other misrepresentations). 808, 823 (E.D.Wisc.1962) (dictum), aff'd, 319 F.2d 634 (7 Cir. Absent any clear indication of a legislative intention to require a showing of specific fraudulent intent, see Note, 63 Mich.L.Rev. at 291. 78n, the Commission has promulgated proxy rules setting forth information that must be sent to shareholders prior to their annual or other meetings. 1070, 1079. 1960), and cases there cited, it is likewise true that an isolated violation, especially in the absence of bad faith, does not require such relief. 9 (1934); S.E.C., Tenth Annual Report 50 (1944). They believe Conradt was informed by his roommate at the time in 2009. 2002) [2002 BL 100] . Significantly, however, the court below, while relying upon what these defense experts said the defendant insiders ought to have thought about the worth to TGS of the K-55-1 discovery, and finding that from November 12, 1963 to April 6, 1964 Fogarty, Murray, Holyk and Darke spent more than $100,000 in purchasing TGS stock and calls on that stock, made no finding that the insiders were motivated by any factor other than the extraordinary K-55-1 discovery when they bought their stock and their calls. Original Item: 1968) (en banc), cert. It is of course true, as the Commission points out, that the "in connection" clause has been given a broad construction by the courts in line with the remedial nature of securities legislation (see SEC v. Capital Gains Bureau, 375 U.S. 180, 195, 84 S.Ct. See Gann v. Bernz-Omatic, 262 F.Supp. But this must be recorded as one of the most impressive drill holes completed in modern times. [37] Hearings before the House Committee on Interstate and Foreign Commerce on H.R. They extend over a gamut between definite extremes. 275, and to insure uniformity of enforcement, see Note, 32 U.Chi.L.Rev. It was the intent of Congress that all members of the investing public should be subject to identical market risks, which market risks include, of course the risk that one's evaluative capacity or one's capital available to put at risk may exceed another's capacity or capital. To encourage compliance with these disclosure and reporting requirements, Congress enacted civil ( 18, 15 U.S.C. Feb. 26, 1968). Wanting the knowledge requisite to making our own appraisal of the significance of the core, we must depend upon the experts. 1968). 853 (1909), the Rule is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information, see Cary, Insider Trading in Stocks, 21 Bus.Law. When and how are promising results to be disclosed. 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. In each case, then, whether facts are material within Rule 10b-5 when the facts relate to a particular event and are undisclosed by those persons who are knowledgeable thereof will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity. The trial court stated only that "While, in retrospect, the press release may appear gloomy or incomplete, this does not make it misleading or deceptive on the basis of the facts then known." Dasho v. Susquehanna Corp., 380 F.2d 262 (7 Cir. 1961). A mill test hole, K-55-8, had been drilled and was complete by the evening of April 13 but its mineralization had not been reported upon prior to April 16. 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. 1009 (1965) and Arthur Fleischer, Jr., Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va. L. Rev. The Commission has carefully defined the scope of sampling required to justify even estimates, as follows: Id., Item 8(A) (c), 1 CCH Fed.Sec.L. 1968). 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. 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 addition 16(a), 15 U.S.C. But such a press release would have been highly misleading since the information necessary to draw such conclusions was not available on April 10 according to the TGS witnesses whom the District Court chose to believe. 1964), a decision that has not found favor with other circuits. [874] The Commission's position, consistent with its rules and regulations to protect the public from premature announcements which might well arouse speculative fervor are well expressed in its argument before this Court in its brief on appeal in Securities and Exchange Commission v. Great American Industries, Inc., et al., 259 F.Supp. 1961); SEC Sec.Exch.Act Rel. [25]Rule 10b-5(2) provides in pertinent part: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, * * *, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, * * *. [10] Thus, material facts include not only information disclosing the earnings and distributions of a company but also those facts which affect the probable future of the company and those which may affect the desire of investors to buy, sell, or hold the company's securities. And in the process, the court rewrote the insider trading playbook . 1963). The essence of the Rule is that anyone who, trading for his own account in the securities of a corporation has "access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone" may not take "advantage of such information knowing it is unavailable to those with whom he is dealing," i. e., the investing public. [1] Pursuant to a stipulation by all parties, the question of the appropriate remedies to be applied was deferred pending a final determination whether the defendants or any of them had violated Section 10(b) and Rule 10b-5 and therefore that question is not now before us. Whistleblower [849] supra at 1463. The consequences of holding that negligence in the drafting of a press release such as that of April 12, 1964, may impose civil liability on the corporation are frightening. 1437 (1967). The Commission should have the authority to deal with new manipulative devices." 2 of SEC Act, 15 U.S.C. 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. 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. 258 F. Supp. 8720, 73rd Cong., 2d Sess. Absent a securities transaction by an insider it is almost impossible to prove that a wrongful purpose motivated the issuance of the misleading statement. 258 F. Supp. The derivation of Rule 10b-5 is peculiar. 480, 19 L.Ed.2d 470 (1967); Pappas v. Moss, 393 F.2d 865 (3 Cir. 1356 (1952); Hooper v. Mountain States Sec. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. Securities Act Interpretation Release No. [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. 296. This means you can view content but cannot create content. SEC v Texas Gulf Sulphur - Harvard University Timeline: A History of Insider Trading - The New York Times It is not altogether certain from the present record that the draftsmen could, as the SEC suggests, have readily obtained current reports of the drilling progress over the weekend of April 10-12, but they certainly should have obtained them if at all possible for them to do so. See Pettit v. American Stock Exchange, 217 F.Supp. 16. SEC v. Texas Gulf Sulphur, in which officers of Texas Gulf Sulphur learned of their company's rich ore strike in Canada and traded on this information before the news became public. There is another group that is conceivably hurt by insider trading: the quasi-insiders known as stock market professionalsinvestment bankers, stock analysts, arbitrageurs, hedge fund managers, portfolio managerswho acquire public and nonpublic corporate information in the course of their work. They also suggest that "[s]uch an explicit disclosure would have permitted the investing public to evaluate the `prospect' of a mine at Timmins without having to read between the lines to understand that preliminary indications were favorable in itself an understatement." (5) As to Kline, as a recipient of a stock option, we reverse the dismissal of the complaint and remand with directions to issue an order rescinding the option and for a determination of any other appropriate remedy in connection therewith. 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). silver. 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. Securities and Exchange Commission v. Texas Gulf Sulphur Co The number of possibilities for Congressional legislation and Commission rulings are legion. United States vs. Newman 1983. (1934); S. Rep.No.1455, 73rd Cong., 2d Sess. ), cert. An even more striking illustration would be found within the structure of a large pharmaceutical company where discoveries of panaceas to cure human disease occupies the workdays of thousands of scientists. But the case stands differently as to paragraph (2). . 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. 1967), (emphasis supplied), sometimes defined as "fraud," Fischman v. Raytheon Mfg. 1383, 73rd Cong., 2d Sess. b. fiduciary duty. 1383, 73rd Cong., 2d Sess. Coates, Crawford and Clayton, who ordered purchases before the news could be deemed disclosed, claim, nevertheless, that they were justified in doing so because they honestly believed that the news of the strike had become public at the time they placed their orders. 1965), appeal pending; Gann v. BernzOmatic, 262 F.Supp. So, the trial court concluded, "There is no doubt that the drill core of K-55-1 was unusually [844] good and that it excited the interest and speculation of those who knew about it." 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). 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. Co., 339 U.S. 605, 70 S.Ct. 824, 839-44 (1965); Note, 63 Mich.L.Rev. The Texas Lawbook Free Speech, Due Process and Trial by Jury Appellate Bankruptcy Commercial Litigation Corp. Deal Tracker/M&A GCs/Corp. Texas Gulf, utilizing a geological survey, was conducting mining exploration in Canada. 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. On the morning of Saturday, April 11, Stephens at his home in Greenwich, Conn. read in the New York Herald Tribune and in the New York Times unauthorized reports of the TGS drilling which seemed to infer a rich strike from the fact that the drill cores had been flown to the United States for chemical assay. 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. denied, Bard v. Dasho, 389 U.S. 977, 88 S.Ct. 77l(2) "* * * [offers or] sells a security by means of * * *"; 17(a), 15 U.S.C. . 5 Surprising Facts About Insider Trading | FINRA.org Insider Trading | A History of Securities Law in the Supreme Court Find many great new & used options and get the best deals for Postcard Railroad Train Texas Beaumont TX Gulf Sulphur Company 1970s Chrome at the best online prices at eBay! Hindsight, however, is not the test. We conclude, then, that, having established that the release was issued in a manner reasonably calculated to affect the market price of TGS stock and to influence the investing public, we must remand to the district court to decide whether the release was misleading to the reasonable investor and if found to be misleading, whether the court in its discretion should issue the injunction the SEC seeks. Defendant Crawford ordered 300 shares about midnight on April 15 and 300 more shares the following morning, to be purchased for himself, and his wife, and these purchases are treated as having been made by the defendant Crawford. 7.25). 2, supra, and persons listed in fn. (Emphasis supplied.). Also by 7:00 A. M. on April 13, K-55-6 had found mineralization to the 946-foot mark. 258 F.Supp. The primary legal issue in substance is what duty, if any, rested upon the purchasers to disclose the knowledge they possessed at the time of purchase. Historical Timeline - Insider Trading by Congress - ProCon.org The "large anomaly" did not suggest "an extensive region of mineralization" and furthermore TGS did not own or control it in any event. This requirement, whether it be termed lack of diligence, constructive fraud, or unreasonable or negligent conduct, remains implicit in this standard, a standard that promotes the deterrence objective of the Rule. 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. 1070, 1079-81 (1965). [34]The New York Stock Exchange Company Manual provides: "Dealing with Rumors Affecting the Market: Occasions may also arise when rumors have been circulated which have no basis in fact or which require clarification or interpretation and which also result in unusual activity or price changes in a particular security. 1808, 20 L.Ed.2d 653 (May 21, 1968), I see no need for a remand on that score. Freed v. Szabo Food Serv., Inc., CCH FED.SEC.L.REP. A offerings under the 1933 Act): Item 8(A) (b), 1 CCH Fed.Sec.L.Rep. 23 (E.D.N.Y. Feb. 8, 1968); Puharich v. Borders Electronics Co., Inc., 1968 Fed.Sec.L.Rep. But even he did not act on the belief that the second press release had in fact reached the market, see 258 F. Supp. Absent much clearer language than is found in the 1934 Act, the entitlement of a plaintiff to an injunction thereunder remains subject to principles of equitable discretion. (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. 1271, 1289. We disagree. Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act. Holyk left for New York Saturday morning and arrived that same day. 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. May the Future, the Congress or possibly the SEC itself be able to bring some semblance of order by means of workable rules and regulations in this field so that the corporations and their stockholders may not be subjected to countless lawsuits at the whim of every purchaser, seller or potential purchaser who may claim he would have acted or refrained from acting had a news release been more comprehensive, less comprehensive or had it been adequately published in the news media of the 50 States. In May 2011, Raj Rajaratnam, the former head of the Galleon Group hedge fund, received an eleven-year prison sentence for insider trading, the longest ever imposed. 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. For example, the company had spent some $7,000,000 to purchase an underwater dome off the coast of Texas and an additional $1,000,000 to drill 21 holes before concluding that there was not enough sulphur in the dome to be of commercial interest. 2. His awareness of the contents of the April 12 release renders unreasonable any claim that he believed the news was truly public. Postcard Railroad Train Texas Beaumont TX Gulf Sulphur Company - eBay It seems clear, however, that if corporate management demonstrates that it was diligent in ascertaining that the information it published was the whole truth and that such diligently obtained information was disseminated in good faith, Rule 10b-5 would not have been violated. 3230 (May 21, 1942); 10 SEC Ann.Rep. 321 (SDNY 1965); Thiele v. Shields, 131 F.Supp. The trial court also found, 258 F.Supp. 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. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in . Tager v. SEC, 344 F.2d 5, 8 (2 Cir. at 282 n. 10. ); cf. 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. Short answer: Insider trading regulations are laws that aim to prevent individuals with access to non-public information from using it to trade securities, thus gaining an unfair advantage. 1962); Dack v. Shanman, 227 F.Supp. The price went up and the shareholders were impressed with this indication of the opinion of the financial community as to the proposed merger. The evidence of the actual effect of the release on investors was at best inconclusive. That's somewhat ironic, because the whole concept of disgorgement was initially contrived through the SEC's early insider trading successes, beginning with SEC v. Texas Gulf Sulphur in 1968 . d. pay secrecy Feedback The correct answer is: insider trading. The cases to date have involved defendants who if not actually purchasing or selling securities at least participated in a direct manner in a securities fraud. Define insider trading; Discuss bribery and its legal and ethical consequences; Employees may face ethical dilemmas in the area of finance, especially in situations such as bribery and insider trading in securities. In the field of speculation, it would be interesting to know the position the Commission would have taken if TGS had announced that K-55-1 was "one of the most impressive drill holes completed in modern times" and that it "is just beyond your wildest imagination" (SEC Brief, p. 25). Obviously, a subjective approach presents difficulties. 78j) which provides: [882] Pursuant to this authority the Commission in 1942 promulgated Rule 10b-5 (17 C.F.R. I think the remand should make crystal clear that the issue whether this is a proper case for an injunction remains open, and that with 49 private actions pending in the District Court for the Southern District of New York, see 258 F.Supp. See Fischman v. Raytheon Mfg. I find it equally plain, as Judge Waterman's opinion convincingly demonstrates, that the release did not properly convey the information in the hands of the draftsmen on April 12, even granting, as I would, that in a case like this a court should not set the standard of care too high.