The construction given the "in connection" clause by the District Court has been followed in the many cases that have considered the point. A offerings under the 1933 Act): Item 8(A) (b), 1 CCH Fed.Sec.L.Rep. 182, 98 L.Ed. 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. As the SEC moved to regulate insider trading, academic and legal voices argued that the SEC action was misplaced. Kline had known since November 1962 that K-55-1 had been drilled, that the drilling had intersected a sulphide body containing copper and zinc, and that TGS desired to acquire adjacent property. 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. Throughout this litigation TGS has supported the legality of the actions of all the defendants the company's counsel having represented, among others, Stephens, Fogerty and Kline. (Emphasis supplied.). [21] Even at common law, the essentially private remedy of rescission which is sought here does not require more than a showing of negligence and frequently even less than that, see Restatement, Contracts, 476, comm. 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. 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. Significantly, however, the court below, while relying upon what these defense experts said the defendant insiders ought to have thought about the worth to TGS of the K-55-1 discovery, and finding that from November 12, 1963 to April 6, 1964 Fogarty, Murray, Holyk and Darke spent more than $100,000 in purchasing TGS stock and calls on that stock, made no finding that the insiders were motivated by any factor other than the extraordinary K-55-1 discovery when they bought their stock and their calls. 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. This conclusion is fortified by the provisions of the Act dealing with manipulation since the more specific prohibitions make it clear what evils Congress intended to eradicate by 10(b). Visual estimates revealed an average content of 0.82% copper and 4.2% zinc over a 525-foot section. (1934); H.R.Rep.No. contemporaneous assessments of early insider trading law include William Cary, Insider Trading in Stocks, 21 Bus. 78j reads in pertinent part as follows: 78j. (4) As to Stephens and Fogarty, as recipients of stock options, we reverse the dismissal of the complaint and remand for a further determination as to whether an injunction, in the exercise of the trial court's discretion, should issue. -Schedule & execute hydrocarbon movements effectively to meet demand, inventory & service level targets for refined products, components . 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. 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. Its area was then limited to its one-quarter segment. [33] In re Cady, Roberts & Co., 40 SEC 907 (1961). The Act and the Rule apply to the transactions here, all of which were consummated on exchanges. 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.". at 296. 1962); Dack v. Shanman, 227 F.Supp. Court decisions Much of the development of insider trading law has resulted from court decisions. 972 (S.D.N.Y. By doing so, a person acts in violation of their duties and breaches the trust of the affected parties. We hold, therefore, that all transactions in TGS stock or calls by individuals apprised of the drilling results[14] of K-55-1 were made in violation of Rule 10b-5. His awareness of the contents of the April 12 release renders unreasonable any claim that he believed the news was truly public. Co., 259 F.Supp. (1934). They extend over a gamut between definite extremes. Its conclusion that "the Commission has failed to demonstrate that it was false, misleading or deceptive," 258 F.Supp. [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. Texas Gulf Sulphur Co. (1966), a federal circuit court stated ,that anyone in the possession of inside information must either disclose information or . 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. 1968) (en banc), cert. 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." Tager v. SEC, 344 F.2d 5, 8 (2 Cir. Insider Trading And its Legal Mechanism: Insider trading is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. The hole was concealed and a barren core was intentionally drilled off the anomaly. Defendant Crawford ordered 300 shares about midnight on April 15 and 300 more shares the following morning, to be purchased for himself, and his wife, and these purchases are treated as having been made by the defendant Crawford. 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. 1009 (1965) and Arthur Fleischer, Jr., Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va. L. Rev. View syllabus [LGST 2020-8020 s2023 v.4] (1).pdf from LGST 2020 at University of Pennsylvania. Under such circumstances, the most effective procedure is the quick and speedy denial of such rumors through a release to the public Press * * *". insider trading law by trading securities (without disclosure) based on material, non-public information. 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. Id. at 293, the intent of the Securities Exchange Act of 1934 is the protection of investors against fraud. I understand that the Commission has conducted, or is conducting, hearings to enable it to learn the views of the many persons and corporations affected. Original Item: 78u(e), a permanent injunction restraining the issuance of any further materially false and misleading publicly distributed informative items.[26]. 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. I do not think there is any objection to that kind of a clause. Thus, as to him, as one who purchased stock between November 12, 1963 and April 9, 1964, we reverse the implicit dismissal of the complaint, find that he violated 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy. However, at the time of Texas Gulf Sulphur , it was not yet clear that insider trading was punishable as a crime. 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 1968). It has been accepted for inclusion in SMU Law Review by an authorized administrator of SMU Scholar. By 7:00 p.m., April 10, the following data was available: The Commission's experts testified that because copper and zinc had been found in these five holes (although in varying percentages) it could reasonably be concluded that the mineralization was continuous between holes 400 feet apart and also 100 feet byond in each direction and to a depth of 600 feet, one hundred feet below the deepest hole. A close reading of 18 will demonstrate that a plaintiff proceeding under that section (as opposed to 10(b)) does not have to show that the misleading statement was issued by a person [or corporation] who engaged or participated in a securities transaction or even that the misstatement was intended to influence securities transactions as part of some fraudulent scheme. Rep. 7327. Question: Develop the argument that Martha Stewart was not really in possession of inside information that was disclosed in a breach of a fiduciary duty. The only one of these defendants who came close to a showing of good faith was Coates. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. 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." Before further discussing this matter it seems desirable to state exactly what the SEC claimed in its complaint and what it seeks. 258 F.Supp. 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. 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. Id. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. [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. 10261 (1934). 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 Second Circuit embraced the SEC's view that this conduct violated Rule 10b-5. Foreign Corrupt Practices Act 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 ________. 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. Incorrect Mark 0 out of 1. 78u(e), against Texas Gulf Sulphur Company (TGS) and several of its officers, directors and employees, to enjoin certain conduct by TGS and the individual defendants said to violate Section 10(b) of the Act, 15 U.S.C. This assumption raises the question of what is material and who is to make such a determination. denied, 365 U.S. 814, 81 S.Ct. Such a deceptive or manipulative practice would be prohibited by 10(b) and Rule 10b-5. Agreeing with the result reached by the majority and with most of Judge Waterman's searching opinion, I take a rather different approach to two facets of the case. As was pointed out by the trial court, 258 F.Supp. unabridged 1960). 92,141 (S.D.N.Y. 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.