"Shadow Trading" Becomes Insider Trading By Stephen J. Crimmins March 28, 2022 1 Comment On January 14, 2022, the U.S. District Court in San Francisco denied a motion to dismiss charges filed by the Securities and Exchange Commission under an expansive new theory of insider trading liability. 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. Held: cause of action stated under 10b-5). We analyze not only the published opinions in Texas Gulf Sulphur, but also the judges' internal memoranda. Silence, when there is a duty to speak, can itself be a fraud. The Securities Act, 1933 prohibited fraud in the sale of securities. Thus, but for a chemicial assay made in December 1963 of contents of this same core, no other knowledge of the nature and possible extent of the area was available during the acquisition program. 1961); SEC Sec.Exch.Act Rel. No. Indeed, even the abbreviated version of the release reported by Merrill Lynch over its private wire did not appear until 10:29. As of that time SEC experts estimated ore reserves of over 8 million tons at a gross assay value (excluding costs) of over $26 a ton. Rule 10b-5, 17 CFR 240.10b-5, on which this action is predicated, provides: Rule 10b-5 was promulgated pursuant to the grant of authority given the SEC by Congress in Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Albert R. Connelly, Donald I. Strauber, Cravath, Swaine & Moore, New York City, for Coates. The experts which the trial court credited were of the opinion that Kidd 55 was accurately portrayed as a prospect which required further exploration. 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. It has been accepted for inclusion in SMU Law Review by an authorized administrator of SMU Scholar. [25] TGS relies [858] on the holding of the court below that "The issuance of the release produced no unusual market action" and "In the absence of a showing that the purpose of the April 12 press release was to affect the market price of TGS stock to the advantage of TGS or its insiders, the issuance of the press release did not constitute a violation of Section 10(b) or Rule 10b-5 since it was not issued `in connection with the purchase or sale of any security'" and, alternatively, "even if it had been established that the April 12 release was issued in connection with the purchase or sale of any security, the Commission has failed to demonstrate that it was false, misleading or deceptive." 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. The trial court after hearing and seeing the witnesses has resolved these factual issues and in my opinion its decision should be sustained. 1968) (en banc). Absent any clear indication of a legislative intention to require a showing of specific fraudulent intent, see Note, 63 Mich.L.Rev. (Great American brief, pp. 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. 99 (S.D.N.Y.1966), appeal pending; Heit v. Weitzen, 260 F.Supp. 1009 (1965) and Arthur Fleischer, Jr., Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va. L. Rev. [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. The following case, Texas Gulf Sulphur is an early federal insider trading case. On Friday, November 8, when the drilling began, the stock closed at 17 3/8 on Friday, November 15, after K-55-1 had been completed, it closed at 18. Insider Trading If you decide to report an employer to a governmental entity for violating the law, you are a (n) ________. 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." If, as the majority say, the test of the news release is its impact on the "reasonable" investor (although they indicate that the unreasonable speculator, too, comes under their solicitous wing) to avoid the danger of injunction violation it would be necessary to seek a declaratory judgment from the courts (both trial and appellate because following the majority, Rule 52(a) would no longer apply). Gen. We disagree. of Policy Research, SEC, Frank E. Kennamer, Jr., Asst. I think the remand should make crystal clear that the issue whether this is a proper case for an injunction remains open, and that with 49 private actions pending in the District Court for the Southern District of New York, see 258 F.Supp. As to the sufficiency of the news release, the first issue would be what constitutes a "reasonable" investor. See S.Rep.No.792, 73rd Cong., 2d Sess. The specific SEC allegation in its complaint is that this April 12 press release "* * * was materially false and misleading and was known by certain of defendant Texas Gulf's officers and employees, including defendants Fogarty, Mollison, Holyk, Darke and Clayton, to be materially false and misleading. SEBI is the sole authority that deals with insider trading have strengthened the anti- insider trading laws by the 2002 amendment. Original Item: [27] See the discussion in footnotes 20, 21, and 22, supra, and in the accompanying text, dispensing with a fraudulent intent requirement in actions based on clause (3) of Rule 10b-5. The occurrences out of which this litigation arose are not set forth hereafter in as detailed a manner as they are set out in the published opinion of the court below, but are stated sufficiently, we believe, for the exposition of the issues raised by the several appeals to us. 26 (SD NY 1964); but see, e. g., Weber v. C. M. P. Corp., 242 F.Supp. 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 paper includes a comparative overview of the difference between India's Insider trading laws and the U.S.'s Insider trading laws. Presumably the Commission will make recommendations to the Congress to give that body an opportunity to accept or reject after thoughtful debate such proposals as may be made. Prior to these transactions these persons had owned 1135 shares of TGS stock and possessed no calls; thereafter they owned a total of 8235 shares and possessed 12,300 calls. 757, 772 (D.Colo.1964), has been expanded from recklessness, see Prosser, Torts, 102, pp. Rep. 7327. The next morning the 137 foot mark had been reached, fifty feet of which showed mineralization. at 281-82. On November 12, 1963 drilling of K-55-1 was terminated at 655 feet. For purposes of insider trading law, insiders must wait a "reasonable" time after disclosure before trading. The High Powered Committee on Stock Exchange Reforms, 1986 (Ch. So recent has been the discovery, and so urgent the effort to accelerate the drill program (four machines have been moved in since the discovery hole was completed), that assays have been completed on only the discovery. On February 20, 1964, also during this period, TGS issued stock options to 26 of its officers and employees whose salaries exceeded a specified amount, five of whom were the individual defendants Stephens, Fogarty, Mollison, Holyk, and Kline. The trial court did not find it necessary to decide whether TGS exercised such diligence and has not yet attempted to resolve this issue. 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. 262, 269 (S.D.N.Y. Thank you. [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. The first five paragraphs read as follows: Should Make Substantial Open Pit Operation, TEXAS GULF SULPHUR COMES UP WITH A "MAJOR", See Big Tonnages Of Base Metals, Plus Silver. 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. The objective of protecting a corporation from selling securities to insiders at a price below their true worth [878] is fully served by requiring nondisclosing insiders to abstain, not from accepting the stock options, but merely from exercising them an event likely to occur after the inside information has become public. United Hotels Co. v. Mealey, 147 F.2d 816, 819 (2 Cir. 12: Insider Trading: Foundations and Merger News. 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. 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. So, it is perhaps safer to say that the Texas Gulf Sulphur em- However, the fact remains that 10(b) of the Securities Exchange Act was not passed to protect investors from the former type of injury, but leaves liability for such misrepresentation up to state law, which is well equipped to handle any such situation. 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. 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. Restatement, Torts 538(2) (a); accord Prosser, Torts 554-55; I Harper & James, Torts 565-66." in connection with the purchase or sale of any security. In June 2003, the SEC brought a civil action for insider trading, which was separate from the criminal charges of which Stewart was found guilty. An official detailed statement, announcing a strike of at least 25 million tons of ore, based on the drilling data set forth above, was read to representatives of American financial media from 10:00 A. M. to 10:10 or 10:15 A. M. on April 16, and appeared over Merrill Lynch's private wire at 10:29 A. M. and, somewhat later than [847] expected, over the Dow Jones ticker tape at 10:54 A. M. Between the time the first press release was issued on April 12 and the dissemination of the TGS official announcement on the morning of April 16, the only defendants before us on appeal who engaged in market activity were Clayton and Crawford and TGS director Coates. at 282-283. SMU LAW REVIEW 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. [4]The purchases made by "tippees" during this period were: In this connection, we point out that, though several of the Holyk purchases of shares and calls made between November 29, 1963 and March 30, 1964 were in the name of Mrs. Holyk or were in the names of both spouses, we have treated these purchases as if made in the name of defendant Holyk alone. 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. (1934); H.R.Rep.No. 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. Free shipping for many products! was "the first federal court decision to ad-dress insider trading of securities under 10(b) of the Securities Exchange Act of 1934 and 91,317 (N.D.Ill. at 295 (emphasis supplied), that the draftsmen "exercised reasonable business judgment under the circumstances," 258 F.Supp. 10, and the Commission wished to make it emphatically clear that the Rule was expected, inter alia, to close this loophole. That's somewhat ironic, because the whole concept of disgorgement was initially contrived through the SEC's early insider trading successes, beginning with SEC v. Texas Gulf Sulphur in 1968 . Most of the footage drilled by April 10 had been in a single plane (2400 S), but by April 15 drilling had established mineralization in a number of additional planes.
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