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. Milton Cohen, Truth in Securities Revisited, 79 Harv. The SEC does not contest the alternative holding below that Holyk and Mollison, not being members of TGS's top management, had no duty of disclosure prior to acceptance of stock options. However, whether the case before us is treated solely as an SEC enforcement proceeding or as a private action,[20] proof of a specific intent to defraud is unnecessary. 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. In so holding, they confuse the inducing motive of the individual purchaser with knowledge of material [877] facts which ought to be revealed to the public at large. See Bromberg, Securities Law: SEC Rule 10b-5, p. 19 (1967). Texas Gulf Sulphur Co.[6], a federal circuit court stated that anyone in possession of inside . Co. v. Linde Air Prods. This, of course, encompasses any fact "* * * which in reasonable and objective contemplation might affect the value of the corporation's stock or securities * * *." Although the authority for the Rule comes from 10(b) of the Securities and Exchange Act of 1934, the draftsmen turned their backs on the language of that section and borrowed the words of 17 of the Securities Act of 1933, simply broadening these to include frauds on the seller as well as on the buyer. TGS felt it had a responsibility to protect would-by buyers of its shares from what it regarded as exaggerated rumors first in the Canadian and then in the New York City press, and none of the individual defendants sought to profit from the decline in the price of TGS stock caused by the release. 1978) (affirming first criminal insider trading case conviction), rev'd on other grounds, 445 U.S. 222 (1980). 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. The trial court did not find it necessary to decide whether TGS exercised such diligence and has not yet attempted to resolve this issue. View syllabus [LGST 2020-8020 s2023 v.4] (1).pdf from LGST 2020 at University of Pennsylvania. 99 (S.D.N.Y.1966), appeal pending; Heit v. Weitzen, 260 F.Supp. "Shadow Trading" Becomes Insider Trading By Stephen J. Crimmins March 28, 2022 1 Comment On January 14, 2022, the U.S. District Court in San Francisco denied a motion to dismiss charges filed by the Securities and Exchange Commission under an expansive new theory of insider trading liability. Beyond this, a rule imposing civil liability in such cases would work directly counter to what the SEC has properly called "a commendable and growing recognition on the part of industry and the investment community of the importance of informing security holders and the public generally with respect to important business and financial developments." (8) As to Darke, as one who passed on information to tippees, we reverse the dismissal of the complaint and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy. As of that time SEC experts estimated ore reserves of over 8 million tons at a gross assay value (excluding costs) of over $26 a ton. 8720, 73rd Cong., 2d Sess. However, this release was based on more information of significance than was available on April 10 at 7:00 p.m. [10] The House of Representatives committee that reported out the bill which eventually became the Act did so with the observation that "no investor, no speculator,can safely buy and sell securities upon exchanges without having an intelligent basis for forming his judgment as to the value of the securities he buys or sells." 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). The foregoing discussion demonstrates that Congress intended to protect the investing public in connection with their purchases or sales on Exchanges from being misled by misleading statements promulgated for or on behalf of corporations irrespective of whether [861] the insiders contemporaneously trade in the securities of that corporation and irrespective of whether the corporation or its management have an ulterior purpose or purposes in making an official public release. 215 (S.D.N.Y. 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 212 (9 Cir. Commenting on the disclosure purposes of the House bill (H.R. 168 (1953), that cannot be done without an appreciation of the illegality of the conduct proposed to be excused, cf. 95 (S.D.N.Y. 1009 (1965) and Arthur Fleischer, Jr., Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va. L. Rev. 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. [19] The record reveals that news usually appears on the Dow Jones broad tape 2-3 minutes after the reporter completes dictation. Texas Gulf Sulphur 1 in transforming insider trading law. Texas Gulf Sulphur has chalked up a brilliant exploration success in its field program north of the Porcupine area. 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. See id. [849] supra at 1463. As was pointed out by the trial court, 258 F.Supp. The next morning the 137 foot mark had been reached, fifty feet of which showed mineralization. Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act. Mollison and Holyk were in New York for the weekend, and there was no telephone at the site the only way to communicate with the site was to go there. The District Court characterized the press release as an accurate portrayal of the situation as it was known at that time. In an enforcement proceeding for equitable or prophylactic relief, the common law standard of deceptive conduct has been modified in the interests of [855] broader protection for the investing public so that negligent insider conduct has become unlawful. Thomas Conradt and David Weishaus bought shares of SPSS Inc. after illegally discovering about their near future acquisition of IBM. Faberge, Inc., 45 S.E.C. So far as concerns paragraphs (1) and (3), this is not very important since these are clearly within the ambit of 10(b) and relate to frauds that would give rise to civil liability in any event. 1963); SEC v. Capital Gains, etc., Bureau, 375 U.S. 180, 193, 84 S.Ct. See SEC v. Electrogen Industries, Inc., 68 Civ. However, it cannot be doubted that one of the most important purposes of the securities legislation was to prevent improper information being circulated by the issuer, and I therefore am not disposed to hold that Congress meant to deny a power whose use in appropriate cases can be of such great public benefit and do so little harm to legitimate activity. [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. Commenting on the section that became 10(b), Corcoran stated: Since the manipulative devices outlawed by 9 all involve fraudulent activities integrally related to securities transactions, the conclusion necessarily follows that the "other cunning devices" sought to be prohibited by 10(b) and Rule 10b-5 are those which also involve securities transactions as an integral part of the fraud. 1070, 1075, 1076 n.29 (1965), the securities laws should be interpreted as an expansion of the common law[21] both to effectuate the broad remedial design of Congress, see SEC v. Capital Gains Research Bureau, supra, 375 U.S. at 195, 84 S.Ct. The Commission in that case also stated two truisms (1) that "it is extremely important that all facts relevant to an estimate of the value of such property be disclosed," and (2) that "the judgment of the `value' of this property is dependent upon the results of exploratory work * * *." 215 (SDNY 1965); Cooper v. North Jersey Trust Co., 226 F.Supp. Even this procedure would not suffice if future events should prove the facts to have been over or understated or too gloomy or optimistic because the courts will always be ready and available to substitute their judgment for that of the business executives responsible therefor. His statement was 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." 2Andrew Beattie, "Top 4 Most Scandalous Insider Trading Debacles . What were the motives behind each of the purchases? Court decisions Much of the development of insider trading law has resulted from court decisions. 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. [14] The trial court found that defendant Murray "had no detailed knowledge as to the work" on the Kidd-55 segment. United States vs. Newman 1983. Nor is there any inconsistency between the release and the District Court finding that as of April 9, 1964, "there was real evidence that a body of commercially mineable ore might exist." By the evening of April 10 in this hole, too, substantial copper mineralization had been encountered over the last 42 feet of its 97-foot length. 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). 1968). This core was unusually good in mineral content. We will shortly be exploring this issue in the in banc consideration of Schoenbaum v. Firstbrook, 2 Cir., 405 F.2d 215. 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. All of the foregoing defendants accepted the options granted them. 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. 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. 91,317 (N.D.Ill. 1964) (Corporation allegedly defrauded into issuing securities to its President through the failure or refusal of some of its directors fully to disclose to the remaining directors material facts concerning the transactions or the financial condition of the company); Bredehoeft v. Cornell, 260 F. Supp. for an injunction to private damage actions. There was no knowledge of the existence of a "mine." Co., 339 U.S. 605, 70 S.Ct. A close reading of 18 will demonstrate that a plaintiff proceeding under that section (as opposed to 10(b)) does not have to show that the misleading statement was issued by a person [or corporation] who engaged or participated in a securities transaction or even that the misstatement was intended to influence securities transactions as part of some fraudulent scheme. Certain newspaper accounts of the release viewed the release as confirming the existence of preliminary favorable developments, and this optimistic view was held by some brokers, so it could be that the reasonable investor would have read between the lines of what appears to us to be an inconclusive and negative statement and would have envisioned the actual situation at the Kidd segment on April 12. TGS. at 295 (emphasis supplied), that the draftsmen "exercised reasonable business judgment under the circumstances," 258 F.Supp. 301 (S.D.N.Y. 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. For an example of the effective use of this latter power see SEC Sec.Exch.Act Rel. [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. b (1932); and the common law concept of constructive fraud still available to private plaintiffs, see Trussell v. United Underwriters, Ltd., 228 F.Supp. I would grant the application for an injunction. v. Texas Gulf Sulphur became the first insider trading case to be litigated in federal courts in American history, making the beginning of disgorgement in S.E.C. 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. 91,317 (N.D.Ill. 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." The derivation of Rule 10b-5 is peculiar. 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.". The District Court held that Holyk, Mollison and Kline were not in top management and that Kline was ignorant of the details of the drilling results, so as to them no violation of 10b-5 had been made out. 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.