401 F.2d, at 849
This action was commenced by the Securities and Exchange Commission against Texas Gulf Sulphur Company and several of its officers, directors, and employees in the United States District Court for the Southern District of New York pursuant to Section 21(e) of the Securities Exchange Act of 1934.1
The complaint alleged that certain individual defendants had purchased TGS stock or calls on the basis of material inside information concerning drilling results in Timmins, Ontario, while such information remained undisclosed, that some had divulged the information to others, that some had accepted stock options without disclosure, and that TGS had issued a deceptive press release on April 12, 1964.2 The case was tried before Judge Bonsal sitting without a jury.3
TGS began exploratory activities on the Canadian Shield in 1957.4 In March 1959, aerial geophysical surveys detected anomalies including on the Kidd 55 segment near Timmins, Ontario.5 On October 29 and 30, 1963, a ground survey confirmed an anomaly, leading to diamond core drilling of hole K-55-1 commencing November 8 and terminating November 12 at 655 feet.6 Visual estimates by Holyk indicated an average copper content of 1.15% and an average zinc content of 8.64% over a length of 599 feet.7 The core was shipped to Utah for chemical assay which, when received in early December, revealed an average mineral content of 1.18% copper, 8.26% zinc, and 3.94 ounces of silver per ton over a length of 602 feet.8 TGS kept results confidential to facilitate land acquisition.9
Between November 12, 1963 and April 9, 1964, certain individual defendants purchased TGS stock or calls, increasing their holdings from 1135 shares and no calls to 8235 shares and 12,300 calls.10 On February 20, 1964, TGS issued stock options to officers including Stephens, Fogarty, Mollison, Holyk, and Kline, none of whom disclosed the drilling results to the Stock Option Committee or Board.11
Drilling resumed March 31, 1964.12 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.13 On April 7, drilling of K-55-4 was commenced and mineralization was encountered over 366 of its 579-foot length.14 Rumors that a major ore strike was in the making had been circulating throughout Canada, leading TGS to issue a press release on April 12, 1964, stating that drilling had led to preliminary indications requiring more drilling and that statements as to size and grade would be premature.15 Drilling continued, and on April 16, 1964, TGS made an official announcement of a major discovery of at least 25 million tons of ore.16
After the April 12 release, Clayton purchased 200 shares on April 15, Crawford ordered 600 shares on April 15 and 16, and Coates ordered 2000 shares on April 16 after the official announcement but before full dissemination.17 Judge Bonsal found violations only by Clayton and Crawford after April 9, dismissed the rest. Clayton and Crawford appealed, and the SEC appealed the dismissals.18
Whether the results of drill hole K-55-1 constituted material information that insiders were required to disclose before purchasing TGS stock or calls between November 12, 1963 and April 9, 1964?19
Under Rule 10b-5, an insider in possession of material inside information must either disclose it to the investing public or abstain from trading while the information remains undisclosed.20 Materiality exists when a reasonable investor would attach importance to the fact in determining his choice of action.21 This depends on a balancing of the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of company activity.22
Yes. The visual estimates and chemical assay of K-55-1 revealed unusually high mineral content of 1.15% copper and 8.64% zinc over 599 feet, exciting the interest of those who knew about it.23 This information was kept confidential to facilitate land acquisition.24 Defendants Fogarty, Mollison, Holyk, Darke, and Huntington purchased TGS stock or calls during this period while in possession of the results.25
Their holdings increased from 1135 shares and no calls to 8235 shares and 12,300 calls, without disclosure to the public or sellers.26
The results of K-55-1 constituted material information, and the insider purchases violated Rule 10b-5.27
Related opinions on this issue
Joined by Chief Judge Lumbard
The trial court correctly found that the results of K-55-1 were too remote to have had any significant impact on the market. All experts agreed that one drill core does not establish an ore body, much less a mine.28 The majority improperly substituted its own judgment for that of the trial court and the experts by holding that knowledge of the possibility of a mine might well have affected the price of TGS stock.29
The purchases by insiders were motivated by hopes rather than by material facts that ought to have been disclosed to the public.30
Whether defendants who accepted TGS stock options on February 20, 1964 had a duty to disclose the results of K-55-1 to the Stock Option Committee or Board of Directors?31
Yes. Stephens, Fogarty, and Kline, as senior officers with knowledge of the K-55-1 results, accepted options on February 20 without informing the Stock Option Committee or Board of the material drilling information.34 Kline, as general counsel present when options were granted and in charge of issuance mechanics, possessed knowledge that a hole containing favorable copper and zinc ore had been drilled and failed to disclose it.35
Stephens, Fogarty, and Kline violated Rule 10b-5 by accepting the options without disclosure, requiring rescission of Kline's option and discretionary consideration of injunctions against Stephens and Fogarty.36
Related opinions on this issue
A rule requiring a minor officer to reject an option would not comport with the realities either of human nature or of corporate life.37 If the SEC had appealed the ruling as to Holyk and Mollison, dismissal would be upheld.38 Stephens, Fogarty and Kline stand on an altogether different basis.39
As senior officers they had an obligation to inform the Committee that this was not the right time to grant options at 95% of the current price.40 Silence, when there is a duty to speak, can itself be a fraud.41 Non-management directors would not normally challenge a recommendation for postponement from the President, the Executive Vice President, and the Vice President and General Counsel.42
Whether the April 12, 1964 TGS press release was false or misleading to a reasonable investor under Rule 10b-5?43
Rule 10b-5(2) is violated when a corporation issues a statement in a manner reasonably calculated to influence the investing public if the assertions are false, misleading, or so incomplete as to mislead.44 The test is whether the reasonable investor in the exercise of due care would have been misled.45
No. The record does not permit a definitive conclusion that the release was misleading to the reasonable investor.46 The release stated that drilling had led to preliminary indications requiring more drilling and that statements as to size and grade would be premature.47 Yet at the time of issuance TGS possessed drilling results through April 10 showing substantial mineralization in multiple holes.48 The trial court applied an incorrect legal standard by focusing on whether the release was issued for a wrongful purpose rather than its effect on a reasonable investor.49
Newspaper reactions and market price movements from 32 to 29 3/8 provide equivocal evidence requiring remand.50
Remand is required for the district court to determine whether the release was misleading to the reasonable investor under the proper standard.51
Related opinions on this issue
The release did not properly convey the information in the hands of the draftsmen on April 12.52 To say that the drilling at Timmins had afforded only preliminary indications that more drilling would be required for proper evaluation of this prospect was a wholly insufficient statement of what TGS knew.53 The three-point drop in market price following issuance in the face of press reports that would normally have led to a large and justified increase supplies sufficient proof that a reasonable investor would have been misled.54
There is no need for a remand on the negligence issue because the text of the release and the market reaction are sufficient.55
The evidence establishes as a matter of law that the press release was misleading.56 The district court's own finding states that at 7:00 p.m. on April 9 those with knowledge of the drilling results had material information which it was reasonably certain, if disclosed, would have had a substantial impact on the market price of TGS stock.57 Fogarty and those who assisted him in the preparation of the press release were aware of the drilling results to which the district court's finding refers.58
They obviously did not use due diligence in the preparation of the misleading press release.59 The application for an injunction should be granted.60
Whether the issuance of the April 12, 1964 press release satisfied the 'in connection with the purchase or sale of any security' requirement of Section 10(b) when TGS and its insiders did not contemporaneously trade in TGS securities?61
Section 10(b) and Rule 10b-5 are violated when a device is employed that would cause reasonable investors to rely thereon and in connection therewith cause them to purchase or sell a corporation's securities.62 The phrase requires only that the misleading statement be issued in a manner reasonably calculated to influence the investing public, irrespective of whether the issuer or insiders contemporaneously trade.63
Yes. TGS issued the April 12 release to quell rumors circulating in the press about the Timmins project.64 The release was disseminated through financial media in a manner calculated to affect the market price of TGS stock.65 The congressional purpose to protect the investing public from being misled by false or deceptive corporate statements applies even when the corporation itself does not trade.66 Investors may be injured by negligent inaccuracies regardless of the issuer's motive.67
The 'in connection with' requirement is satisfied by issuance of the release to the investing public.68
Whether a negligence standard applies to violations of Rule 10b-5 in an SEC enforcement action seeking injunctive relief?69
In an SEC enforcement proceeding for equitable or prophylactic relief, the common-law standard of deceptive conduct is modified so that negligent insider conduct or negligent misstatement by a corporation violates Rule 10b-5.70 Proof of specific intent to defraud is unnecessary.71 Lack of due diligence is sufficient for injunctive relief.72
Yes. The beliefs of Coates, Crawford, and Clayton that the news was public are unavailing if not reasonable.73 The securities laws expand the common law to effectuate Congress's broad remedial design.74 A standard encompassing negligence promotes the deterrence objective without requiring fraudulent intent.75 This is consistent with the legislative history of Section 10(b) and related provisions.76
A negligence standard governs SEC actions for injunctive relief under Rule 10b-5.77
Related opinions on this issue
I concur in Judge Waterman's reasoned and thorough opinion and in the court's disposition of the instant appeal.78 I agree with Judge Friendly, however, that we should provide guidance to the District Courts with respect to pending private claims for damages based upon Rule 10(b)(5) arising out of the transactions now before us.79 I concur in as much of 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 SEC for an injunction to private damage actions.80
Judge Anderson joined the majority opinion authored by Judge Waterman in full. He also joined the legal analysis set forth in Part II of Judge Friendly's concurring opinion concerning the proper interpretation of Rule 10b-5(2) and the application of a negligence standard in SEC enforcement proceedings seeking injunctive relief rather than damages. His concurrence underscores the importance of the majority's approach to corporate press releases and insider trading obligations while aligning with the equitable principles articulated by Judge Friendly.
Whether material information is effectively disclosed so as to permit insider trading only after it has been disseminated through media of widest circulation such as the Dow Jones broad tape?81
Before insiders may act upon material information, it must have been effectively disclosed in a manner sufficient to insure its availability to the investing public.82 Where a formal announcement to the entire financial news media has been promised, all insider activity must await dissemination of the promised official announcement through media of widest circulation.83
Yes. Crawford placed orders at midnight on April 15 and 8:30 a.m. on April 16 before the official announcement at 10:00 a.m. and before dissemination over the Dow Jones tape at 10:54 a.m.8485 Coates placed his order shortly before 10:20 a.m. after the announcement was read but before it could reasonably be expected to appear over the Dow Jones broad tape.86 The abbreviated Canadian disclosures and Northern Miner report did not constitute effective public dissemination.87
Insiders may not trade until the information has been disseminated through the media of widest circulation.88
Whether defendants Clayton, Crawford, and Coates violated Rule 10b-5 by purchasing TGS stock on April 15 and 16, 1964 before the official announcement had been fully disseminated?89
Yes. Clayton ordered 200 shares on April 15 after the April 12 release but before the official announcement.92 Crawford ordered 600 shares on April 15 and 16 before the announcement had been disseminated over American financial media.93 Coates ordered 2000 shares on April 16 after the announcement was read but before it appeared on the Dow Jones tape.94 Their beliefs that the news was public were unreasonable given the prior gloomy release and the timing of dissemination.95
Clayton, Crawford, and Coates violated Rule 10b-5 by trading before effective public disclosure.96
Related opinions on this issue
Joined by Chief Judge Lumbard
Since the findings of the trial court are solidly founded and should be respected, I agree with its decision as to Crawford and Clayton.97 I agree with the majority as to Coates because for all practical purposes the information had not become public at the time of his purchase order.98 The trial court correctly held that the purchases by Crawford and Clayton were not made on the basis of material undisclosed information.99
The majority improperly reappraised the facts and substituted its own judgment for that of the experienced trial judge.100