denied, 385 U.S. 835, 87 S.Ct. One area, called Kidd 55, was deemed promising by the survey, and a hole was drilled with the resulting core analyzed. Texas Gulf Sulphur was a mother lode of legal issues. 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. See Freed v. Szabo Food Service, Inc., '61-'64 CCH Fed.Sec.L.Rep. The broad congressional purpose in passing the Securities Exchange Act of 1934 is set forth by Thomas G. Corcoran, one of the draftsmen of the bill that became the 1934 Act. (1934); Comment, 74 Yale L.J. 548, 19 L.Ed.2d 564 (1967)), but no case supports the Commission's position that it is in effect meaningless. silver. But such a statement could be made of almost any fact related to TGS. [33] In re Cady, Roberts & Co., 40 SEC 907 (1961). The Commission's whole argument appears to be that the release should have been more optimistic (if conclusions were to be used at all), and that it should have referred to Kidd 55 as having "proven" or "probable" ore. Stephens and Fogarty decided that the best course was to give their evaluation of the situation a reasonable business judgment that should not incur 10b-5 liability unless their evaluation was either false or misleading. Meanwhile, rumors that a major ore strike was in the making had been circulating throughout Canada. Gediman v. Anheuser Busch, Inc., 299 F.2d 537, 545 (2 Cir. No facts whatsoever were adduced which would have justified a finding that the release was issued for a fraudulent or manipulative purpose. [8]15 U.S.C. 22. denied, 391 U.S. 914, 88 S.Ct. Coates, however, placed his call no later than 10:20. By-passing momentarily the general knowledge possessed by the officers of TGS as to the far-flung nature of the company's operations, its heavy concentration in the sulphur field, its non-engagement in the field of copper mining, the adverse effect which low sulphur prices had had for many years on the company's earnings despite substantial sales and focusing attention solely upon the Timmins property, the participants in that exploration and the knowledge available to them, I find no factual disputes of importance. Although the core appears to have excellent mineral content `no body of commercial ore is known to exist on the property.'" Clayton, who was unaware of the April 16 disclosure announcement TGS was to make can, in support of his claim that the favorable news was public, rely only on the rumors and on the phone calls received by TGS prior to the placing of his order from those who seemed to have heard some version or rumors of the news. His awareness of the contents of the April 12 release renders unreasonable any claim that he believed the news was truly public. It would seem, by the same token, that if, to make the pill easier to swallow, he urged the directors to include others lacking the knowledge he possessed, he would be liable for all the resulting damage. See United States v. Chiarella, 588 F.2d 1358, 1362 (2d Cir. 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. Thus, even if TGS or its insiders had not engaged in securities transactions, if there were evidence from which it could be inferred that the press release was intentionally issued to depress the price of the stock as part of some fraudulent scheme, a 10b-5 violation would have been stated. See also Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2 Cir. 21(e) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. 1070, 1079. Instead, the court held that "the issuance of a false and misleading press release may constitute a violation of Section 10(b) and Rule 10b-5 if its purpose is to affect the market price of the company's stock to the advantage of the company or its insiders. More important, however, is the realization which we must again underscore at the risk of repetition, that the investing public is hurt by exposure to false or deceptive statements irrespective of the purpose underlying their issuance. Nor is it consonant with reality to suggest, as does the majority, that corporate executives may be motivated in accepting employment by the opportunity to make "secret corporate compensation * * * derived at the expense of the uninformed public." Firm Management White-Collar/Regulatory Pro Bono/Public Service/D&I Is ESG a Trade Secret? 9 It even raised in- triguing issues about the legality of an insider accepting stock options while in possession of material nonpublic information.' 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. Consequently, I agree with the majority in giving the Board's action no weight here. That being the case, I find it unnecessary to decide whether or not Kline was in "top management.". What constitutes a reasonable time depends on the circumstances of the dissemination. 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. And there are impressive, strong sections within this width which in themselves are quite spectacular. Whether predicated on traditional fiduciary concepts, see, e. g., Hotchkiss v. Fisher, 136 Kan. 530, 16 P.2d 531 (Kan.1932), or on the "special facts" doctrine, see, e. g., Strong v. Repide, 213 U.S. 419, 29 S.Ct. ", 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." at 296, and that the release was not "misleading or deceptive on the basis of the facts then known," 258 F.Supp. It closed at 30 the next day, and at 29 3/8 on April 15. 447, 458-59 (2016) (observing that . 1963); SEC v. Capital Gains, etc., Bureau, 375 U.S. 180, 193, 84 S.Ct. 557 (D.Ore.1966) (Plaintiff induced to sell his stock to the corporation for less than its true value because the defendants, stockholders and directors of the company fraudulently concealed material facts); New Park Mining Co. v. Cranmer, 225 F.Supp. 809, 830-33 (1968). Otherwise, insiders would be able to "beat the news," cf. 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. 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 . Therefore, when materially misleading corporate statements or deceptive insider activities have been uncovered, the courts, as they should, have broadly construed the statutory phrase "in connection with the purchase or sale of any security." S.E.C. In, "Securities and Exchange Com'n v. Texas Gulf Sulphur Co.". 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. Counsel, Donald M. Feuerstein, Atty., SEC, for Securities and Exchange Commission. 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. 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! 1965). Texas Gulf Sulphur Co., a federal circuit court supported the SEC's ruling, stating that anyone who has inside . To encourage compliance with these disclosure and reporting requirements, Congress enacted civil ( 18, 15 U.S.C. 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. Freed v. Szabo Food Serv., Inc., CCH Fed. 281. 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. However, companies listed on a national exchange can scarcely broadcast to the nation on a daily basis their hopes and/or expectations from the developments in, for example, their research departments. Any such procedure would have invited the initial question on cross-examination of TGS officials: How could any such "explicit disclosure" have permitted the investing public to evaluate the prospect of a mine, without the necessity of transmitting it for expert opinion to some School of Mines? 258 F.Supp. The SEC sought rescission of these options. As it is our holding that the information acquired after the drilling of K-55-1 was material, we, on the basis of the findings of direct and circumstantial evidence on the issue that the trial court has already expressed, hold that Darke violated Rule 10b-5 (3) and Section 10(b) by "tipping" and we remand, pursuant to the agreement of the parties, for a determination of the appropriate remedy. Ellis v. Carter, 291 F.2d 270, 272-274 (9th Cir. Obviously, a subjective approach presents difficulties. TGS brought in its first well on March 20, 1929. Our decision to expand the limited protection afforded outside investors by the trial court's narrow definition of materiality is not at all shaken by fears that the elimination of insider trading benefits will deplete the ranks of capable corporate managers by taking away an incentive to accept such employment. 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). 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. The majority approve of this interpretation because "the investing public may be injured as much by one's misleading statement containing inaccuracies caused by negligence as by a misleading statement published intentionally to further a wrongful purpose." But this must be recorded as one of the most impressive drill holes completed in modern times. Such an announcement would, of course, have been of no value to anyone except possibly a few graduates of Institutes of Technology and they, as the expert witnesses here, would have recognized that one drill hole does not reveal a commercially profitable mine. Friday morning, April 10, he had been on the Kidd tract "and had been advised by defendant Holyk as to the drilling results to 7:00 p.m. on April 10. 168 (1953), that cannot be done without an appreciation of the illegality of the conduct proposed to be excused, cf. In my opinion such a broad interpretation of the statute is unwarranted as a matter of statutory construction and unwise as a matter of policy. 1945). Therefore, the court below concluded that only directors Stephens and Fogarty, of the top management, would have violated the Rule by accepting stock options without disclosure, but it also found that they had not acted improperly as the information in their possession was not material. Texas Gulf Sulphur Co., 401 F.2d 833, 843 (2d Cir. 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy. The District Court found that "TGS had previously drilled 65 equally promising anomalies, but most of them had revealed either barren pyrite or graphite, while a few had shown marginal mineral deposits in insufficient quantities to be commercially mined." at 294. 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. 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. 91,317 (N.D.Ill. 33, 37 (E.D.Pa.1964); see Ruder, Corporate Disclosures Required by the Federal Securities Laws: The Codification Implications of Texas Gulf Sulphur, 61 Nw.U.L.Rev. Detailed information similar to that required by the 1933 Act has to be filed with the Commission for such registered securities, and this information is required by 13, 15 U.S.C. 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." contemporaneous assessments of early insider trading law include William Cary, Insider Trading in Stocks, 21 Bus. L.Rev. As we stated in List v. Fashion Park, Inc., 340 F.2d 457, 462, "The basic test of materiality * * * is whether a reasonable man would attach importance * * * in determining his choice of action in the transaction in question. 1951) is preserved. Thus under the Commission's own standards, TGS, if it revealed any information during the November 1963-April 1964 period, would have had to announce to the public in substance "TGS has drilled a 1 1/8" core on a one-quarter section owned by it in Timmins, Canada. 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. 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. The Commission also seeks court orders upon certain of the individual defendants that are essentially remedies of a private, rather than of a regulatory nature, court orders designed to have those individual defendants disgorge any profits they enjoyed from TGS stock transactions they or their "tippees" engaged in from November 12, 1963 to April 17, 1964. [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." The facts as established between the date of the resumption of drilling and the drafting of the release are as follows: On March 31, 1964 TGS moved four drill rigs onto the property, and by April 10th all were in operation. 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. 724 (E. D.Pa.1966) (Brokerage house liable to plaintiff if it failed to supervise adequately one of its employees who allegedly was guilty of "churning" or excessive turnover in plaintiff's account.). 754 (1944). The trial court based its opinion largely [871] upon the lack of materiality of such exploration results as were known between November 12, 1963 and April 9, 1964. The testimony was unanimous that no estimate of "magnitude" could be made. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. It read in pertinent part as follows: The release purported to give the Timmins drilling results as of the release date, April 12. Several other samples verified the findings. 1383, 73d Cong., 2d Sess. It then stated, purporting to give the true facts in contradiction to the rumors: "The facts are as follows." By 7:00 P. M. on April 15, the hole had been completed to a length of 707 feet but had only encountered additional mineralization during a 26-foot length between the 425 and 451-foot marks. [834] [835] [836] [837] [838] [839] Philip A. Loomis, Jr., Gen. The first is a situation that will not often arise, involving as it does the acceptance of stock options during a period when inside information likely to produce a rapid and substantial increase in the price of the stock was known to some of the grantees but unknown to those in charge of the granting. Faberge, Inc., 45 S.E.C. Before further discussing this matter it seems desirable to state exactly what the SEC claimed in its complaint and what it seeks. [2] Over time, the U.S. Supreme Court embraced some of its holdings while rejecting others. 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). 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. Generally, in order to assess the probability that the event will occur, a factfinder will need to look to indicia of interest in the transactions at the highest corporate levels. Implied . 1968), where corporate insiders bought stock BEFORE the company announced the discovery of the largest silver ore deposit in North America. Trading by an insider of a company in the shares of a company is not per se a violation of law.
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