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. See id. 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. The testimony was unanimous that no estimate of "magnitude" could be made. The text of the article was approved by Mollison in Timmins on April 15th. However, it does not necessarily follow that this is an appropriate case for granting an injunction as to future press releases. 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. Co., 9 F.R.D. [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. 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. Our disagreement with the district judge on the issue does not, then, go to his findings of basic fact, as to which the "clearly erroneous" rule would apply, but to his understanding of the legal standard applicable to them. There was no knowledge of the existence of a "mine." Its conclusion that "the Commission has failed to demonstrate that it was false, misleading or deceptive," 258 F.Supp. It seems to me clear that the injunction sought by the Commission should be granted. See Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 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. The only regulatory objective is that access to material information be enjoyed equally, but this objective requires nothing more than the disclosure of basic facts so that outsiders may draw upon their own evaluative expertise in reaching their own investment decisions with knowledge equal to that of the insiders. 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. In the event that it is found that the statement was misleading to the reasonable investor it will then become necessary to determine whether its issuance resulted from a lack of due diligence. 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. Therefore we reverse the dismissal of the action as to him and his personal transactions. The Commission has specifically declared (Sch. 1340, 1370 (1967). 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. Contrast such a statement with the April 12, 1964 release so criticized by the Commission. On the other hand, in view of the decline of the market price of TGS stock from a high of 32 on the morning of April 13 when the release was disseminated to 29 3/8 by the close of trading on April 15, and the reaction to the release by other brokers, it is far from certain that the release was generally interpreted as a highly encouraging report or even encouraging at all. United Hotels Co. v. Mealey, 147 F.2d 816, 819 (2 Cir. 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. 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 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. 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." If the only choices open to a corporation are either to remain silent and let false rumors do their work, or to make a communication, not legally required, at the risk that a slip of the pen or failure properly to amass or weigh the facts all judged in the bright gleam of hindsight will lead to large judgments, payable in the last analysis by innocent investors, for the benefit of speculators and their lawyers, most corporations would opt for the former. 33 (E.D.Pa.1964); Fischer v. Kletz, 266 F. Supp. denied, 394 U.S. 976 (1969). Premature announcements of important discoveries would be branded as false and misleading if unfulfilled and all stock purchases made during the course of the research, if ultimately successful would be said to have been made with the advantage of inside information. However, this release was based on more information of significance than was available on April 10 at 7:00 p.m. Before LUMBARD, Chief Judge, and WATERMAN, MOORE, FRIENDLY, SMITH, KAUFMAN, HAYS, ANDERSON and FEINBERG, Circuit Judges. The issuance of any injunction over four years after the alleged violation would place a large company and its many executive employees under the possibility, without even a Miranda warning, that anything they say may be held against them and place them under the danger of criminal sanctions; "destructive of fundamental rights" because the restraint constitutes not "double" jeopardy but "perpetual" jeopardy. I suppose it would be clear, under Ruckle v. Roto American Corp., 339 F.2d 24 (2 [865] Cir. 240.10b-5) which states: In determining whether the requisite "connection" to a securities transaction was present in this case, the District Court found: The District Court held that if TGS or its insiders had purchased TGS stock after issuing the allegedly misleading press release, the inference could be drawn that it was issued to reduce the price of the stock to facilitate purchases at bargain prices. Corp., 188 F.2d 783, 787 n. 2 (2 Cir. In any event, the permissible timing of insider transactions after disclosures of various sorts is one of the many areas of expertise for appropriate exercise of the SEC's rule-making power, which we hope will be utilized in the future to provide some predictability of certainty for the business community. 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 Securities Act, 1933 prohibited fraud in the sale of securities. 13 (1934); S.Rep.No. Several hundred of these were considered worthy of further study and options on the land around them were acquired. The term "insider trading" describes the illegal use of con-fidential, material' information by an individual for personal profit in the stock market. Feb. 8, 1968); Puharich v. Borders Electronics Co., Inc., 1968 Fed.Sec.L.Rep. 275, 11 L.Ed.2d 237 (1963). Since only K-55-1 had been drilled at that point, the District Court correctly held that there was no duty of disclosure on the part of those receiving the options. On October 29 and 30, 1963, Clayton conducted a ground geophysical survey on the northeast portion of the Kidd 55 segment which confirmed the presence of an anomaly and indicated the necessity of diamond core drilling for further evaluation. silver. [7] Mollison had returned to the United States for the weekend. at 294. 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." United States vs. Newman 1983. After all, TGS had prior experience in exploration where initially promising situations turned out to be "duds." Transactions in Shares: Rule 10b-5, Insider Trading and Securities Fraud. Factually, the premise posed by the majority is "clearly erroneous." The trial court's finding that "he sought to, and did, `beat the news,'" 258 F.Supp. [869] The Supreme Court made this clear beyond peradventure in the leading case of Hecht Co. v. Bowles, 321 U.S. 321, 64 S.Ct. Mollison had been advised by Holyk as to the drilling results up to 7:00 p.m. on April 10th. I concur in Judge Waterman's majority opinion and I concur in the discussion of law set forth in Part II of Judge Friendly's concurring opinion. 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. Albert R. Connelly, Donald I. Strauber, Cravath, Swaine & Moore, New York City, for Coates. Jun 2013 - Jun 20152 years 1 month. The consequences of holding that negligence in the drafting of a press release such as that of April 12, 1964, may impose civil liability on the corporation are frightening. Ellis v. Carter, 291 F.2d 270, 272-274 (9th Cir. Hindsight, however, is not the test. Insider trading is one of the most violent crimes on the faith of fair dealing in a capital market. 658, 681-82 (1965). [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." 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. The speculator then examines the facts to discover and evaluate the risks that are present. 1340, 1364 (1966). Wanting the knowledge requisite to making our own appraisal of the significance of the core, we must depend upon the experts. There is no indication that Congress intended that the corporations or persons responsible for the issuance of a misleading statement would not violate the section unless they engaged in related securities transactions or otherwise acted with wrongful motives; indeed, the obvious purposes of the Act to protect the investing public and to secure fair dealing in the securities markets would be seriously undermined by applying such a gloss onto the legislative language. 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. The majority support their action in part by a long quotation from H.R.Rep. An insider is not, of course, always foreclosed from investing in his own company merely because he may be more familiar with company operations than are outside investors. Cady, Roberts, supra. ), cert. 10 (1942). The only remedy the Commission seeks against the corporation is an injunction, see footnote 26, supra, and therefore we do not find it necessary to decide whether just a lack of due diligence on the part of TGS, absent a showing of bad faith, would subject the corporation to any liability for damages. 168 (1953), that cannot be done without an appreciation of the illegality of the conduct proposed to be excused, cf. 78j(b). He then balances these risks against the apparent opportunities for capital gains and makes his decision accordingly. 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 . The trial court's finding as to this fact is unassailable: This conclusion is amply supported by the record. Materiality must depend upon the facts and their resolution is for the fact-finder, court or jury. By morning of April 13, in K-55-5, the fifth drill hole, substantial copper mineralization had been encountered to the 580 foot mark, and the hole was subsequently drilled to a length of 757 feet without further results. Texas Gulf Sulphur Co. Brian JM Quinn. The final question to be answered is: were these officers and employees disqualified as the result of possessing information gleaned by the first drill core from purchasing TGS stock? 26 (SD NY 1964); but see, e. g., Weber v. C. M. P. Corp., 242 F.Supp. This insider trading activity, which surely constitutes highly pertinent evidence and the only truly objective evidence of the materiality of the K-55-1 discovery, was apparently disregarded by the court below in favor of the testimony of defendants' expert witnesses, all of whom "agreed that one drill core does not establish an ore body, much less a mine," 258 F.Supp. 1964), a decision that has not found favor with other circuits. The market opened at 30 1/8 on the 13th (when the release became public) and closed at 30 7/8 scarcely a sign of public pessimism. 1356 (1952); Hooper v. Mountain States Sec. Thus, anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. The Exchange Act was passed after the 1929 stock market crash with the intent, in part, to restore public trust in the markets. There is no proof here that the purchases of the defendants, even if motivated by hopes not then solidly grounded, raised or lowered the market or were manipulative, misleading, deceptive or were accomplished by false or fraudulent devices. 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." If the SEC had appealed the ruling dismissing this portion of the complaint as to Holyk and Mollison, I would have upheld the dismissal quite apart from the special circumstance that a refusal on their part could well have broken the wall of secrecy it was important for TGS to preserve. . The novel problem in the instant case is to define the responsibility of officers when a directors' committee administering a stock option plan proposes of its own initiative to make options available to them and others at a time when they know that the option price, geared to the market value of the stock, did not reflect a substantial increment likely to be realized in short order and was therefore unfair to the corporation.