texas gulf sulphur insider trading

The evidence as to the effect of this release on the investing public was equivocal and less than abundant. We point out, nevertheless, that the surrender of these options after the SEC commenced the case is not a satisfaction of the SEC claim, and a determination as to whether the issuance of injunctions against Stephens and Fogarty is advisable in order to prevent or deter future violations of regulatory provisions is remanded for the exercise of discretion by the trial court. What Is Insider Trading And Why Is It Illegal? - YouTube 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. 15. 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. 4, supra, said to have received "tips" from them, purchased TGS stock or calls thereon. Silence, when there is a duty to speak, can itself be a fraud. ", For the defendants, Dean Forrester, Dean of the College of Mines of the University of Arizona and Director of the Arizona Bureau of Mines, said that "one hole is evidence of what you encounter only in that hole" and that even after K-55-3 was drilled in April 1964, it was "much more likely that the materials exposed in those two holes will extend for, let's say two feet outside the limits of the hole than it is likely that it will extend 25 feet or that it will extend 50 feet. 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. The resolution, if such be possible, of the many problems presented in this field should be by rule, as definite as possible, formulated in the light of reality and not retroactive in effect as here. 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. 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. Factually, the premise posed by the majority is "clearly erroneous." Roche, a mining stock specialist, added that mines with significantly lower percentages of copper and with no zinc or silver, as here, were profitably operated. -Schedule & execute hydrocarbon movements effectively to meet demand, inventory & service level targets for refined products, components . The evidence of the actual effect of the release on investors was at best inconclusive. 1966), aff'd in part, rev'd in part 1555, 12 L.Ed.2d 423 (1964), violation of Rule 10b-5(2) may not do so under all circumstances, including those presented by the April 12 press release. See Gann v. Bernz-Omatic, 262 F.Supp. The President, Claude O. Stephens, the Executive Vice-President, Charles F. Fogarty, and the Exploration Vice President, Richard D. Mollison, were notified, and Fogarty and Mollison flew to the drill site. However, the ratification is irrelevant here, for we would hold with the district court that a member of top management, as was Kline, is required, before accepting a stock option, to disclose material inside information which, if disclosed, might affect the price of the stock during the period when the accepted option could be exercised. (5) The issuance of a final judgment permanently enjoining the defendant Texas Gulf from directly or indirectly, by use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of securities, making any untrue statement of material fact or omitting to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, namely, from issuing, publishing, distributing or otherwise disseminating materially false, misleading, inadequate or inaccurate press releases and other communications and reports concerning material facts about Texas Gulf's activities and operations. "); Milton Cohen, "Truth in Securities Revisited," 79 Harv. 1963) (Defendants caused plaintiff corporations, of which they were officers, to issue stock for property which was worth much less than the stock); cf. Primarily, our task should be to review errors of law. 1356 (1952); Hooper v. Mountain States Sec. 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. But this must be recorded as one of the most impressive drill holes completed in modern times. 22. a statement which under the circumstances and then known facts would have been the height of recklessness. This action was commenced in the United States District Court for the Southern District of New York by the Securities and Exchange Commission (the SEC) pursuant to Sec. 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. SEC L.Rep. All the information that was available upon the completion of the drilling, November 12, 1963, was contained in a core (denominated K-55-1) which was visually examined by Dr. Walter Holyk, Chief Geologist for TGS, and by Kenneth H. Darke, a TGS geologist. 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. I am unimpressed with the argument that Stephens, Fogarty and Kline could not perform this duty on the peculiar facts of this case, because of the corporate need for secrecy during the land acquisition program. at 271). Several brokers testified that they interpreted the release as affirmative and encouraging. 1271 (1965), both of which are cited in TGS. ", 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." Under the current insider trading regime in the United States, stiff penalties1are imposed for a crime that has never been defined by statute or regulation.2The principal statutory authority for insider trading liability is section 10(b) of the Securities Exchange Act of 1934, which prohibits the employment of "any manipulative or deceptive 249, 255 (1973), citing Texas Gulf Sulphur, 401 F.2d at 854. [849] supra at 1463. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. [2] Over time, the U.S. Supreme Court embraced some of its holdings while rejecting others. Several other samples verified the findings. [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. 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. [31] Of course, 12(1)'s imposition of a liability almost absolute upon the seller of a security that has not been registered in violation of 5 of the 1933 Act is grounded on distinctive concerns. 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. Insider trading is one of the most violent crimes on the faith of fair dealing in a capital market. supra Table 1 at 16-17. 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. 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. at 296. While we have often said that "a cessation of the alleged objectionable activities by the defendant in contemplation of an SEC suit will not defeat the district court's power to grant an injunction restraining continued activity," SEC v. Boren, 283 F.2d 312 (2 Cir. 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. 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. Constructive Ambiguity and Judicial Development of Insider Trading However, this release was based on more information of significance than was available on April 10 at 7:00 p.m. . 1340, 1370 (1967). See Berko v. SEC, 316 F.2d 137, 141-142 (2 Cir. 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. The majority state that the K-55-1 drilling results were material because they "might well have affected the price of TGS stock." 258 F.Supp. TGS brought in its first well on March 20, 1929. cit. denied, 385 U.S. 835, 87 S.Ct. An attempt has been made to understand how these Indigenous laws impact the Market and how they curtail these illegal activities from it. . 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. Nor is an insider obligated to confer upon outside investors the benefit of his superior financial or other expert analysis by disclosing his educated guesses or predictions. at 296. 281. I concur in Judge Waterman's reasoned and thorough opinion and in the court's disposition of the instant appeal. 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. 1383, 73rd Cong., 2d Sess. ); cf. Such inequities based upon unequal access to knowledge should not be shrugged off as inevitable in our way of life, or, in view of the congressional concern in the area, remain uncorrected. 1967); we should not impose such expansive liability in a situation, markedly different from those considered in the cases just cited, where to do so would frustrate, not further, the larger goals of the securities laws. No. denied, 382 U.S. 811, 86 S.Ct. 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. 10261 (1934). On the basis of this information he, as an experienced mining engineer, did not feel that there was sufficient information to draw conclusions as to size and grade of ore, and he advised Fogarty accordingly. Some witnesses who testified at the hearing stated that they found the release encouraging. Practically all TGS stock in question here was purchased between November 12, 1963 and April 8, 1964. 1383 and S. 3420 from which it was derived, have always been acknowledged as catchalls. Finally, a major factor in determining whether the K-55-1 discovery was a material fact is the importance attached to the drilling results by those who knew about it. Therefore we reverse the dismissal of the action as to him and his personal transactions. 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. Russell G. Ryan, a former assistant director of enforcement at the Securities and Exchange Commission and former deputy chief of enforcement at the Financial Industry Regulatory Authority, is a. Insider Trading - Meaning, Examples, Cases, Is it Illegal? - WallStreetMojo [9] Congress intended by the Exchange Act to eliminate the idea that the use of inside information for personal advantage was a normal emolument of corporate office. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent . at 295 (emphasis supplied), that the draftsmen "exercised reasonable business judgment under the circumstances," 258 F.Supp. [881] The District Court aptly pointed out that in quelling the rumors TGS had to proceed with caution: While it thus might have been "safer" for TGS to have issued a sheaf of drilling results and mineral analyses (which the press would probably have declined to print), "they would have [thereby] encouraged the rumor mill which they were seeking to allay." No facts whatsoever were adduced which would have justified a finding that the release was issued for a fraudulent or manipulative purpose. 1965) (Broker induced plaintiff to purchase some stock and to finance the purchase through a factor without disclosing material facts concerning the risks of such a procedure. 2 Close C5P5 The rapid development of a broad insider trading prohibition under Rule 10b-5 would face a formidable obstacle, however, after Lewis Powell joined the . 258 F.Supp. (3) As to Mollison and Holyk, as recipients of certain stock options, we affirm the dismissal of the complaint. The Second Circuit embraced the SEC's view that this conduct violated Rule 10b-5. Thank you. Such benefits, in essence, are forms of secret corporate compensation, see Cary, Corporate Standards and Legal Rules, 50 Calif.L.Rev. [8]15 U.S.C. Here, notwithstanding the trial court's conclusion that the results of the first drill core, K-55-1, were "too `remote' * * * to have had any significant impact on the market, i. e., to be deemed material,"[11] 258 F.Supp. Their motive for purchase does not establish the materiality of the facts which influenced them. Plaintiff, the Securities and Exchange Commission, brought this suit against Defendants, Texas Gulf Sulphur Co., et al., after Defendants bought shares . The SEC sought rescission of these options. 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. 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." at 292. 261 (S.D.N.Y. (1934), p. 11. Crawford points to the scattered rumors of the discovery which had been circulating for some time before April 15, to the release of the information to The Northern Miner on April 15 to be published by it on the 16th, to the arrangement made by TGS with the Ontario Minister of Mines for the release of an abbreviated report on the evening of the 15th (which did not eventuate until 9:40 A.M., April 16), and to the corporation's official announcement at 10:00 A.M. on the 16th, all of which transpired prior to an anticipated execution of his purchase orders that had been placed by him after trading had closed on the Midwest Exchange on April 15. 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. 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 connection with the purchase or sale of any security. These findings are clearly supported by the proof upon which the court relied. Milton Cohen, Truth in Securities Revisited, 79 Harv. [36] Whether the release had any such effect would, of course, be irrelevant. 972 (S.D.N.Y. 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. It would therefore appear that the Commission has failed in its burden of proof, unless it can be said that TGS was negligent in not obtaining later data from Timmins before issuing the release.[35]. During this period, from November 12, 1963 when K-55-1 was completed, to March 31, 1964 when drilling was resumed, certain of the individual defendants listed in fn. 1968) (en banc), cert. 275, 11 L.Ed.2d 237 (1963), that the elements of a cause of action for "fraud" vary "with the nature of the relief sought" and that "It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for money damages." 1961). Other situations and problems of an equally reductio ad absurdum character can easily be conjured up. No clear and present danger, no continuing wrongful acts and no likelihood thereof are to be found in the record before this court. See, e. g., Note, Accountant's Liabilities for False and Misleading Statements, 67 Colum.L.Rev. See also Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2 Cir. I do not think there is any objection to that kind of a clause. 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." No one has asserted, or reasonably could assert, that the purpose for issuing a release was anything but good. 23, 15 L.Ed.2d 60 (1965); Cochran v. Channing Corp., 211 F.Supp. The following case, Texas Gulf Sulphur is an early federal insider trading case. See Freed v. Szabo Food Service, Inc., '61-'64 CCH Fed.Sec.L.Rep. . Markham v. Cabell, 326 U.S. 404, 66 S.Ct. (Emphasis supplied.) The geologist Darke possessed undisclosed material information and traded in TGS securities. 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." (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. PRIVATE RIGHTS OF ACTION 403 R A. From this testimony, the trial court found: Despite the experts' virtually uncontradicted testimony, despite Rule 52(a) and despite the Supreme Court's statement of the law, the majority choose to reject the trial court's findings as to the results of the first drill core, K-55-1, and to substitute their own expertise in the mining engineering field by holding that "knowledge of the possibility which surely was more than marginal of the existence of a mine of the vast magnitude indicated by the remarkably rich drill core located rather close to the surface (suggesting mineability by the less expensive open-pit method) within the confines of a large anomaly (suggesting an extensive region of mineralization) might well have affected the price of TGS stock and would certainly have been an important fact to a reasonable, [873] if speculative, investor in deciding whether he should buy, sell or hold.". 1964) (Corporation, as part of a campaign to boost the value of its stock to achieve stockholder approval of a merger, deliberately issued statements misrepresenting future combined earnings. The event that changed it all was the SEC's 1966 suit against Texas Gulf Sulphur Company and thirteen of its employees and directors.

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