The trial court's finding that "he sought to, and did, `beat the news,'" 258 F.Supp. But such a statement could be made of almost any fact related to TGS. 1962). bonds or stock options) by the individuals with potential to access to non-public information about company. I, Form 1-A, Reg. [12] On April 16, The Northern Miner, a trade publication in wide circulation among mining stock specialists, called K-55-1, the discovery hole, "one of the most impressive drill holes completed in modern times. #2- What is your assessment of the Texas Gulf Sulphur press release of April 12? L.Rev. Wanting the knowledge requisite to making our own appraisal of the significance of the core, we must depend upon the experts. TGS. 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. REGULATING INSIDER TRADING THROUGH TEXAS GULF SULPHUR James D. Cox* ABSTRACT Data summarized in the opening of this article document shows that in- . Implied . The issue here, however, is the different one of an injunction. The reading of a news release, which prompted Coates into action, is merely the first step in the process of dissemination required for compliance with the regulatory objective of providing all investors with an equal opportunity to make informed investment judgments. [8] By that Act Congress [848] purposed to prevent inequitable and unfair practices and to insure fairness in securities transactions generally, whether conducted face-to-face, over the counter, or on exchanges, see 3 Loss, Securities Regulation 1455-56 (2d ed. 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." The insider trading prohibition found a new home in the flexible confines of Rule 10b-5. It read in pertinent part as follows: The release purported to give the Timmins drilling results as of the release date, April 12. 321, 322-325 (S.D.N.Y.1965) (Wyatt, J. 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. Indeed, the Commission has been charged by Congress with the responsibility of policing all misleading corporate statements from those contained in an initial prospectus to those contained in a notice to stockholders relative to the need or desirability of terminating the existence of a corporation or of merging it with another. 521, 53 L.Ed. Thus, the legislative history of Section 10(b) does not support the proposition urged upon us by Texas Gulf Sulphur [860] that Congress intended the limited construction of the "in connection with" phrase applied by the trial court. Counsel, David Ferber, Sol., Roger S. Foster, Sp. In, "Securities and Exchange Com'n v. Texas Gulf Sulphur Co.". At the very least, if TGS felt compelled to respond to the [864] spreading rumors of a spectacular discovery, it would have been more accurate to have stated that the situation was in flux and that the release was prepared as of April 10 information rather than purporting to report the progress "to date." 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. 670 (S.D.N.Y. In order to acquire the other three-quarters of the K-55 segment, further drilling was discontinued except for one hole drilled to produce a barren core and the site was camouflaged. Question 2. [23] Coates's violations encompass not only his own purchases but also the purchases by his son-in-law and the customers of his son-in-law, to whom the material information was passed. A. PR. See Baranow v. Gibraltar Factors Corp., 366 F.2d 584, 587 (2 Cir. ), cert. 548, 19 L.Ed.2d 564 (1967)), but no case supports the Commission's position that it is in effect meaningless. See Stockwell v. Reynolds & Co., 252 F.Supp. Section 10(b) was certainly not intended to be a mandate to the Commission to erect a comprehensive regulatory system policing all corporate publicity, as the majority now contend. at 282 n. 10. [849] supra at 1463. One of the most famous instances of insider trading was Charles F. Fogarty's purchase of Texas Gulf Sulphur shares during 1963 and 1964. Moreover, the formal announcement could not reasonably have been expected to be disseminated by the time of the opening of the exchanges on the morning of April 16, when Crawford must have expected his orders would be executed. [16] As Darke's "tippees" are not [853] defendants in this action, we need not decide whether, if they acted with actual or constructive knowledge that the material information was undisclosed, their conduct is as equally violative of the Rule as the conduct of their insider source, though we note that it certainly could be equally reprehensible. [33] In re Cady, Roberts & Co., 40 SEC 907 (1961). Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547, quoting from SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 193, 84 S.Ct. 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. The Report of the Senate Committee which presented S. 3420 to the Senate summarized Section 10(b) as follows: Indeed, from its very inception, Section 10(b), and the proposed sections in H.R. 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. 2, supra, and persons listed in fn. 78j(b). cit. 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. 239 (SDNY 1962). Manipulative and deceptive devices, It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . 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. 9-10 (1933). 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. 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. 1966), appeal pending. 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. 78r) and criminal ( 32, 15 U.S.C. 1961). The only difference of substance between 17(a) and Rule 10b-5 is that the latter applies to purchasers as well as sellers. 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. The trial court also found that later, as of March 30, 1964, Darke not only used his material knowledge for his own purchases but that the substantial amounts of TGS stock and calls purchased by these outside individuals on that day, see footnote 4, supra, was "strong circumstantial evidence that Darke must have passed the word to one or more of his `tippees' that drilling on the Kidd 55 segment was about to be resumed." The next day the market closed at 30. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. Gulf traded its sulfur rights on the Texas and Louisiana Gulf Coast for $3 million and half of the net profits of the Boling Dome production. However, the importance of this case to the corporate and financial community centers around the news release, its timing and its content. 301 (SDNY 1966); Cochran v. Channing Corp., 211 F.Supp. . 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. Consequently, although Clayton is named only as an appellant our decision with respect to the materiality of K-55-1 renders it necessary to treat him also as an appellee. What's Insider Trading? See Cady, Roberts, supra at 912. 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. 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. [13]The April 16th article in The Northern Miner resulted from the reporter's April 13th visit to the drill site where he interviewed defendants Mollison, Holyk and Darke and looked at records of the drilling to that time. 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. However, as this suggestion was not presented to us, we do not consider it or make any determination with reference to it. SEC L.Rep. But in both cases the courts recognized that further factual and legal development was necessary for the proper resolution of the issue. Non-management directors would not normally challenge a recommendation for postponement of an option plan from the President, the Executive Vice President, and the Vice President and General Counsel. Moreover, a review of other sections of the Act from which Rule 10b-5 seems to have been drawn suggests that the implementation of a standard of conduct that encompasses negligence as well as active fraud comports with the administrative and the legislative purposes underlying the Rule. 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9 Cir. 78o(c) (1) "* * * effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security * * *") demonstrate that when Congress intended that there be a participation in a securities transaction as a prerequisite of a violation, it knew how to make that intention clear. 77q(a) "* * * in the [offer or] sale of any securities to obtain money or property by means of * * *"; [language in brackets was added in 1954 amendments]), and with the 1936 antifraud amendment of Section 15 of the Securities Exchange Act of 1934 ( 15(c) (1), 15 U.S.C. The evidence of the actual effect of the release on investors was at best inconclusive. Several other samples verified the findings. Abstract. 78u(e), a permanent injunction restraining the issuance of any further materially false and misleading publicly distributed informative items.[26]. . 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. d. pay secrecy Feedback The correct answer is: insider trading. Scores of day by day intra-company situations come to mind which in the individual opinions of company officers or employees might well affect the price of TGS stock, each individual reacting according to his own judgment. 1961). Factually, the premise posed by the majority is "clearly erroneous." 258 F. Supp. 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. 1968); see Jennings, Insider Trading in Corporate Securities: A Survey of Hazards and Disclosure Obligations under Rule 10b-5, 62 Nw.U.L.Rev. 1965). (Ibid.) 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. No. See Schedules 14A-14C, 17 C.F.R. TGS experts could name very few base metal mines with a greater assay value and the court observed that bodies of much lower assay value were commercially mined, 258 F.Supp. Hence, as one of the foregoing hypotheticals suggests, I am not at all sure that a company in the position of TGS might not have a claim against top officers who breached their duty of disclosure for the entire damage suffered as a result of the untimely issuance of options, rather than merely one for rescission of the options issued to them. a statement which under the circumstances and then known facts would have been the height of recklessness. 9323), the bill a Committee of Conference eventually integrated with a similar Senate bill (S. 3420) to make the bill passed by both Houses of Congress that became the Securities Exchange Act of 1934, the House Committee which reported out H.R. denied, 382 U.S. 811, 86 S.Ct. Milton Cohen, Truth in Securities Revisited, 79 Harv. "); Milton Cohen, "Truth in Securities Revisited," 79 Harv. Coates, however, placed his call no later than 10:20. "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. 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.
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