Gen. Practically all TGS stock in question here was purchased between November 12, 1963 and April 8, 1964. Hindsight, however, is not the test. b (1932); and the common law concept of constructive fraud still available to private plaintiffs, see Trussell v. United Underwriters, Ltd., 228 F.Supp. The experts which the trial court credited were of the opinion that Kidd 55 was accurately portrayed as a prospect which required further exploration. 587, 88 L.Ed. Read in context it seems clear that 10 (b) was only meant to be a supplement to the specific prohibitions contained in 9 and 10(a). 31, 2023 LAW OF CORPORATE MANAGEMENT AND FINANCE LGST 2020 / 8020 Spring 2023 Prof. Vince We analyze not only the published opinions in Texas Gulf Sulphur, but also the judges' internal memoranda. 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. Indeed, if the correct standard is applied, the finding of the trial court requires the conclusion that the press release was misleading: The evidence in the record in support of this finding is overwhelming. They would only point more directly to the conclusion that an injunction here would not only violate fundamental legal principles which for centuries have restricted the injunctive grant but would not be justified by any sufficient factual showing in this case. 91,317 (N.D.Ill. 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. 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. 239 (SDNY 1962). No. Turning first to the question of whether the release was misleading, i. e., whether it conveyed to the public a false impression of the drilling situation at the time of its issuance, we note initially that the trial court did not actually decide this question. Yet the requirement of hourly bulletins to the press from the conference room would not be compatible with common [876] sense. 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. 1959), relative to an interpretation of the words contained within a congressional statute, that "* * * unless they explicitly forbid it, the purpose of a statutory provision is the best test of the meaning of the words chosen. 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. Insider Trading in India-an Analysis of Yesterday, Today and Tomorrow United States of America was the first country who introduced the laws on insider trading, immediately after their market crashed during the Great Depression. To render the Congressional purpose ineffective by inserting into the statutory words the need of proving, not only that the public may have been misled by the release, but also that those responsible were actuated by a wrongful purpose when they issued the release, is to handicap unreasonably the Commission in its work. at 288. 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. 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. In any event, the normal motivation induced by stock ownership, i. e., the identification of an individual with corporate progress, is ill-promoted by condoning the sort of speculative insider activity which occurred here; for example, some of the corporation's stock was sold at market in order to purchase short-term calls upon that stock, calls which would never be exercised to increase a stockholder equity in TGS unless the market price of that stock rose sharply. If the facts are to be reappraised by an appellate court, they should be measured mutatis mutandis in accordance with the standard set for himself by an experienced and learned trial judge who stated his approach in a case charging directors with wrongdoing, as follows: More, specifically, the Court in Marco said: The Securities and Exchange Commission (referred to as the "SEC" and "Commission"), as an agency of government, has the responsibility of prosecuting persons who, and corporations which, in its judgment have violated laws which the Congress has enacted for the praiseworthy purpose of protecting the public from securities frauds. 78j(b) and Rule 10b-5, and remand, pursuant to the agreement of all the parties, for a determination of the appropriate remedy. 1097 (1950): No more is it for this court to make an independent essay of the evidence or of the core. 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. 19, supra, could not reasonably have expected the official release to have been disseminated when he placed his order before 10:20 for immediate execution nor were the Canadian disclosures relied on by Crawford sufficient to render the conduct of Coates permissible under the circumstances.[23]. [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. They call it "a major factor in determining whether the K-55-1 discovery was a material fact" and say that this "virtually compels the inference that the insiders were influenced by the drilling results." The requirement that a statement may not be found misleading unless its issuance is actuated by a "wrongful purpose" might well have the effect of permitting the issuers of misleading statements to seek an advantage but to escape liability if the advantage fails to materialize to the degree contemplated, or cannot be demonstrated. Therefore it seems clear from the legislative purpose Congress expressed in the Act, and the legislative history of Section 10(b) that Congress when it used the phrase "in connection with the purchase or sale of any security" intended only that the device employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation's securities. Between April 12 and April 15 five additional holes had been drilled, K-55-5, 6, 7, 8 and 10 and by April 15 at 7:00 p. m. 5198 feet of core had been drilled compared with 2776 feet on April 10. The Commission's arsenal of weapons for fighting misleading statements has certainly not been shown to be insufficient for it to carry out the tasks that Congress assigned to it. On November 12, 1963 drilling of K-55-1 was terminated at 655 feet. L.Rev. 1437 (1967). Drilling of the initial hole, K-55-1, at the strongest part of the anomaly was commenced on November 8 and terminated on November 12 at a depth of 655 feet. 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. This is the old version of the H2O platform and is now read-only. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L.Ed. 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. On the basis of these findings relative to the foregoing drilling results, the trial court concluded that the vertical plane created by the intersection of K-55-1 and K-55-3, which measured at least 350 feet wide by 500 feet deep extended southward 200 feet to its intersection with K-55-4, and that "There was real evidence that a body of commercially mineable ore might exist." Crawford ordered 300 shares at midnight on the 15th and another 300 shares at 8:30 A. M. the next day, and these orders were executed over the Midwest Exchange in Chicago at its opening on April 16. 106 (S.D.N.Y. [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. And, by 7:00 A.M. on Sunday, April 10, eight hours before the release was issued to the press, 77.9% of the drilling in mineralization had been completed, 84.4% by 7:00 P.M. on the 12th, and 90.2% by 7 A.M. on April 13. 258 F.Supp. 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. [30] Though the Board of Directors of TGS ratified the issuance of the options after the Timmins discovery had been fully publicized, it obviously was of the belief that Kline had committed no serious wrong in remaining silent. Texas Gulf Sulphur, insider trading, U.S. securities laws, insider trades - disclosures, materiality, price impact, secondary trading markets - company liabilities, Securities Exchange Act - Section 16 . But such a statement could be made of almost any fact related to TGS. 2d 80 (1965); Esso Standard Oil, S.A. v. S.S. Gasbras Sul, 387 F.2d 573 (2 Cir. [856] Thus, the beliefs of Coates, Crawford and Clayton that the news of the ore strike was sufficiently public at the time of their purchase orders are to no avail if those beliefs were not reasonable under the circumstances. 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. In any event if the Commission feels that its arsenal should be augmented, Congress not the courts is the proper forum for its arguments. The speculators and chartists of Wall and Bay Streets are also "reasonable" investors entitled to the same legal protection afforded conservative traders. Under the majority's decision, an insider must perform the uncommon act of refusing such an option, promoting speculation as to the reasons therefor, or accept the option and face possible 10b-5 liability. 658, 681-82 (1965). 1964)." 1965). Section 78j(b), and Rule 10b-5 (17 CFR 240.10b-5) (the Rule), promulgated thereunder, and to compel the rescission by the individual defendants of securities transactions assertedly conducted contrary to law. Even the Commission's experts, Adelstein and Pennebaker, would not estimate what ore, if any, might lie beyond the 1 1/8 inch core. 258 F.Supp. Meanwhile, the core of K-55-1 had been shipped to Utah for chemical assay which, when received in early December, revealed an average mineral content of 1.18% copper, 8.26% zinc, and 3.94% ounces of silver per ton over a length of 602 feet. In TGS, the court starts from the position that insiders, as fiduciaries, have an obligation not to use the corporation's information for their personal benefit. Clayton ordered 200 shares of TGS stock through his Canadian broker on April 15 and the order was executed that day over the Midwest Stock Exchange. ", Dr. Park, former Dean of the School of Earth Sciences at Stanford, admitted that K-55-1 was "an interesting one, a good one" but that there was not "any evidence at all for any discussion of extent, from one drill hole." [7] The following morning, Sunday, Fogarty again telephoned Mollison, inquiring whether Mollison had any further information and told him to return to Timmins with Holyk, the TGS Chief Geologist, as soon as possible "to move things along." 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. Unfortunately, however, there was no definitive resolution below of Darke's liability in these premises for the trial court held as to him, as it held as to all the other individual defendants, that this "undisclosed information" never became material until April 9. I do not agree on the remand of the issue with respect to Stephens and Fogarty as recipients of stock options. 715-17 (3d ed. (1934); H.R.Rep.No. H.Rep.No.85, 73dCong., 1st Sess. 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). 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. The trial court, accepting the Commission's experts' version, fixed 7:00 p.m. on April 9, 1964 as the time when TGS had material information which "if disclosed, would have had a substantial impact on the market price of TGS stock" but also found that "the drilling results up to 7:00 p.m. on April 9th did not provide such material information." Whether merger discussions in any particular case are material therefore depends on the facts. These operations resulted in the detection of numerous anomalies, i. e., extraordinary variations in the conductivity of rocks, one of which was on the Kidd 55 segment of land located near Timmins, Ontario. 824, 832 n. 36 (1965), citing McClure v. Borne Chemical Co., 292 F.2d 824, 834 (3 Cir. Here there is no danger of repetition of an unduly gloomy press release like that of April 12. Thus any statement issued by a publicly listed company is made "in connection" with the purchase or sale of securities. 6 . It was then said that, as of April 12, the release date, "* * * any statement as to size and grade of ore would be premature and possibly misleading." Forthcoming: 42 Quinnipiac Law Review (2023) (Symposium Issue), SMU Dedman School of Law Legal Studies Research . It was obviously thought that sections outlawing devices that had been shown at great length to be deleterious did not require any lengthy explication. The TGS opinion rested on a policy of equality of access to information. If they are not disclosed, the corporation is concealing information; [889] if disclosed and hoped-for results do not materialize, there will always be those with the advantage of hindsight to brand them as false or misleading. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. Its conclusion that "the Commission has failed to demonstrate that it was false, misleading or deceptive," 258 F.Supp. He then balances these risks against the apparent opportunities for capital gains and makes his decision accordingly. [30] [866] Since that issue is not before us, I merely make the reservation of my position clear. 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. Matter of Cady, Roberts & Co., 40 SEC 907, 912 (1961). 78l, requires the registration of securities traded on a stock exchange and of certain other widely held securities. 258 F.Supp. In the upper part of the hole, for example, a core length of 82 ft. ran 7.1% copper, 9.7% zinc and 2.4 ozs. 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. List v. Fashion Park, Inc., supra at 462, quoting from Kohler v. Kohler Co., 319 F.2d 634, 642, 7 A.L.R.3d 486 (7 Cir. Texas Gulf Sulphur was a mother lode of legal issues. 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. The rumors of a major ore strike which had been circulated in Canada and, to a lesser extent, in New York, had been disclaimed by the TGS press release of April 12, which significantly promised the public an official detailed announcement when possibilities had ripened into actualities. [11] We are not, of course, bound by the trial court's determination as to materiality unless we find it "clearly erroneous" for that standard of appellate review is applicable only to issues of basic fact and not to issues of ultimate fact. They contend, however, that their purchases were not proscribed purchases for the news had already been effectively disclosed. at 282 n. 10. Tex. 25 When first notified of the discovery of a large and very valuable copper deposit, mine employees bought stock in the company while keeping the information secret. 78b, see Kohler v. Kohler Co., 319 F.2d 634, 642 (7 Cir. Cady, Roberts, supra. Visual estimates of K-55-3 revealed an average mineral content of 1.12% copper and 7.93% zinc over 641 of the hole's 876-foot length. The case logically and chronologically can be divided into two parts: (1) the purchase of TGS stock by individual defendants and stock options issued to them between November 12, 1963 and April 9, 1964, and (2) the TGS press release of April 12, 1964. Such a deceptive or manipulative practice would be prohibited by 10(b) and Rule 10b-5. . The trial court found that as of 7:00 P.M. on Thursday, April 9, "There was real evidence that a body of commercially mineable ore might exist." That insider can be held liable by trading in the Further contrast it with a hypothetical November 1963 press release implicitly suggested by the majority "TGS as a result of drilling on its property in Canada has knowledge of the more than marginal possibility of a mine of magnitude over an extensive region of remarkably rich mineralization." The evidence of the actual effect of the release on investors was at best inconclusive. Moreover, it would have obviously been better to have specifically described the known drilling progress as of April 10 by stating the basic facts. Miller v. Bargain City, U. S. A., 229 F.Supp. [37] Hearings before the House Committee on Interstate and Foreign Commerce on H.R. This result undoubtedly "excited the interest" of the TGS exploration team. On April 13, the day on which the April 12 release was disseminated, TGS opened at 30 1/8, rose immediately to a high of 32 and gradually tapered off to close at 30 7/8. 1934 Act, 10(b) SEC Rule 10b-5 . 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. at 296. 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 testimony was unanimous that no estimate of "magnitude" could be made. 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. I would grant the application for an injunction. In summary, therefore, we affirm the finding of the court below that appellants Richard H. Clayton and David M. Crawford have violated 15 U.S.C. By March 27, 1964, TGS decided that the land acquisition program had advanced to such a point that the company might well resume drilling, and drilling was resumed on March 31. But the case stands differently as to paragraph (2). Of these, only Kline was unaware of the detailed results of K-55-1, but he, too, knew that a hole containing favorable bodies of copper and zinc ore had been drilled in Timmins. This is probably an overstatement because by the time of the TGS April 16, 1964 press release, exploration had advanced to a point where an estimate of the extent of the tonnage might have been rather accurately made. 91,317 (N.D.Ill. 168 (1953), that cannot be done without an appreciation of the illegality of the conduct proposed to be excused, cf. To hold that such a statement incurs 10b-5 liability is contrary to the intent of Congress in passing 10(b) and settled judicial construction. 258 F.Supp. 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. 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." Materiality must depend upon the facts and their resolution is for the fact-finder, court or jury. They should not be forced, despite an exercise of the best judgment, to act at their peril or refrain in terrorem from acting. at 1294-95, if such assertions are false or misleading or are so incomplete as to mislead irrespective of whether the issuance of the release was motivated by corporate officials for ulterior purposes. The High Powered Committee on Stock Exchange Reforms, 1986 (Ch. I, Form 1-A, Reg. See footnote 16, supra. It then stated, purporting to give the true facts in contradiction to the rumors: "The facts are as follows." 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. "); Milton Cohen, "Truth in Securities Revisited," 79 Harv. Defendant Mollison purchased 100 shares on November 15 in his name only and on April 8 100 shares were purchased in the name of Mrs. Mollison. 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. 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. 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 addition 16(a), 15 U.S.C. Those who purchased were apparently willing on the basis of the inconclusive first hole and other information to risk a certain amount of their funds in TGS stock, hopeful that future developments would be favorable. Mollison had been advised by Holyk as to the drilling results up to 7:00 p.m. on April 10th. Commenting on the disclosure purposes of the House bill (H.R. 1966) (dictum); Heit v. Weitzen, 260 F.Supp. Insider trading is one of the most violent crimes on the faith of fair dealing in a capital market. AS OF: MAR. An attempt has been made to understand how these Indigenous laws impact the Market and how they curtail these illegal activities from it. Co. v. Linde Air Prods. The only difference of substance between 17(a) and Rule 10b-5 is that the latter applies to purchasers as well as sellers. 77l(2) "* * * [offers or] sells a security by means of * * *"; 17(a), 15 U.S.C. At that time approximately 2/3 of the ore ultimately found to exist by the time of the preparation of the April 16 "major strike" release had been discovered by 5 holes placed so as to indicate continuity of mineralization within the large anomaly. L.Rev. 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. As evidence that the April 12 release was probably inaccurate, the majority point to the fact that only three days later TGS prepared the April 16 release which announced a major mineral discovery. We do intend to convey, however, that where a corporate purpose is thus served by withholding the news of a material fact, those persons who are thus quite properly true to their corporate trust must not during the period of non-disclosure deal personally in the corporation's securities or give to outsiders confidential information not generally available to all the corporations' stockholders and to the public at large. 7.25). Milton Cohen, Truth in Securities Revisited, 79 Harv. While I am not convinced that imposition of liability for damages under Rule 10b-5(2), absent a scienter requirement, even limited in the way just proposed, would not go beyond the authority vested in the Commission by 10(b) to act against "any manipulative or deceptive device or contrivance" and be so inconsistent with the general structure of the statutes as to be impermissible, it is at least clear that the April 12 press release would be the worst possible case for the award of damages for merely negligent misstatement, as distinguished from the kind of recklessness that is equivalent to wilful fraud, see SEC v. Frank, 388 F.2d 486, 489 (2 Cir. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent . Moreover, noting that the "in connection" clause has been broadly construed, the District Court did not require that stock purchases by TGS or insiders be shown. 2002) [2002 BL 100] . The importance of this opportunity to observe where technical or scientific problems are before the court, as here, has been succinctly stated by the Supreme Court in Graver Tank & Mfg. 1808, 20 L.Ed.2d 653 (May 21, 1968), I see no need for a remand on that score. Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir. 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." 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. In 1968, Securities and Exchange Commission v. Texas Gulf Sulphur Co. implicated the employees of a Texas mining company and was the first famous case example of _____. TGS. 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. I concur generally with Judge Waterman in his views as to the proper interpretation of Section 10(b) and Rule 10b-5 and as to the standards which are to be employed in the application of the statute and the rule. at 282-283. N.Y.1964). ), cert. SEC v. Texas Gulf Sulphur Co. is a case from the United States Court of Appeals for the Second Circuit which articulated standards for a number of aspects of insider trading law under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5.In particular, it set out standards for materiality of inside information, effective disclosure of such information, and what constitutes a . The Commission, however, impliedly suggests for affirmative answer the question: "Whether the chances of imminent success, viewed in the light of the magnitude of the potential economic benefit to Texas Gulf" did not require disclosure by insiders of the status of the drilling [then only the first hole, K-55-1]? (258 F.Supp. [35] Of course, even if TGS were negligent in not obtaining later data, a determination must still be made that the press release was misleading in light of this later information.
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