# Appendix — Texas Gulf Sulphur Co. v. Securities & Exchange Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0081%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1971 - **Citation:** 404 U.S. 1005 ## Text Re POITIER ae EIS STH 6) SUPRr IN THE Suysene Gourt of the United October Term, 1971 Texas Guir SutpHur Company, a Texas Corporation, Cuartes F’. Focarty, Ricnarp D. Mo.iison, Ricnarp H. Cuayton, Waiter Hotyk, Kenneto H. Darke, Davm M. CrawForD, CLauDE QO. STEPHENS, Earn L. Huntineron and Haroip B. Kinz, Petitioners, v. SecurRITIEs anD ExcHance CoMMISSION, Respondent. APPENDICES SEP 3 1971 COND el ge ILM LO ett a AE ELLEN ae BLOX CELA LEAL LLL LAE LNA EL rth es D> PRR eet tee SP ee a INDEX TO APPENDICES PAGE Appendix A Opinion of the District Court (Dated August 16,1966) la Judgment of the District Ceurt (Entered August 22, ARRON it tubal niu ara EMO a eCT SERIE . SID th 64a Opinion of the Court of Appeals (Decided August 13, I ia esta ti oak ential eaesial aac eadiscocabsteoeeaomcagens 66a Judgment of the Court of Appeals (Entered August ate aR Rests NN apt RE ONO lee a Ir 172a Second Opinion of the District Court ‘Dated Febru- Os ere TaN PR ICI See Dea dete Poe Raden aa 175a Second Judgment of the District Court (Entered I I i auanitical etl decdiaincnctarisaavecenions 215a Second Opinion of the Court of Appeals (Decided TE, LAURER aR ener cee CMC SESS Po PORE ome 220a Second Judgment of the Court of Appeals (Entered SE iat cal satis asa easege tdvashonschikeimamanivctvidoion 234a Appendix B Constitutional Provisions, Statutes and Rules In- EAR OR av aos Sen eae ie ducgadanidvisee sean 235a APPENDIX A Opinior of the District Court UNITED STATES DISTRICT COURT SouTHERN District or New York 65 Civ. 1182 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, against Texas Gutr SucpHur Company, a Texas corporation, CHarirs F. Focarty, Ricuarp D. Motrison, RicHarp H. Crayton, Warter Hoiyk, Kennetu H. Darke, Davin M Crawrorp, THomas S. Lamont, Francis G. Coates, Craupe O. Sternens, Tuomas P. O'Nemt, Jonn A. Murray, Eart L. Huntincton and Harotp B. K LIne, Defendants. (5436) Bonsat, D. J. Plaintiff, Securities and Exchange Commission (Com- mission), has instituted this action charging each of the defendants with violations of Section 10(b) of the Securi- ties Exchange Act (15 U.S.C. 78j(b)) and Rule 10b-5 (17 C.F.R. 240; 10b-5) promulgated thereunder by the Com- mission. All parties waived a jury and agreed that trial should first be had on the issue of whether the defendants or any of them had violated Section 10(b) and Rule 10b-5, . reserving for later hearing the issue of the remedy to be applied in the event such violations are found. The Commission’s action arises out of the exploratory activities of defendant Texas Gulf Suiphur Company (TGS) on the Kidd 55 segment near Timmins, Ontario, be- tween November 12, 196% and April 16, 1964. TGS is (5437) alleged to have violated Section 10(b) and Rule 10b-5 by issuing a false press release regarding these ac- tivities on April 12, 1964. Each of the individual defen- dants was a director, officer or employee of TGS. Individ- ual defendants who purchased stock or calls on stock of TGS between November 12, 1963 and April 16, 1964, or recommended such purchases to others, are charged with violations of Section 10(b) and Rule 10b-5 on the ground that they used to their own advantage material informa- tion as to TGS’s exploratory activities on the Kidd 55 seg- ment, which material information had not been disclosed to or absorbed by the stockholders or the public. Five of the individual defendants who accepted stock options granted on February 20, 1964 are charged with violations of Section 10(b) and Rule 10b-5 on the ground that they 2a Appendix A —Opinion of the District Court were in possession of such material information which they used to their own advantage by failing to disclose it to the Directors’ Committee which granted the stock options.’ Texas Gutr SutpHur Company (TGS) In 1962 54 TGS (which was organized in 1909) was the world’s largest supplier of sulphur. Its authorized capital stock was 15,000,000 shares, without par value. (5438) 11,520,000 shares had been issued (including 1,504,101 shares held in the Company’s treasury). On December 31, 1963, there were issued and outstanding in the hands of the public in excess of 10,000,000 shares held by some 65,000 shareholders. The stock of TGS was listed on the New York Stock Exchange and was admitted to unlisted trading privileges on the Midwest Stock Exchange. TGS’s total assets, less current liabilities, had a book value of over 169,000,000 as of Dezember 31, 1963, and over $210,000,000 as of December 31, 1964. The stockholders’ equity was stated to be in excess of $129,000,000 as of December 31, 1963, and in excess of $137,000,000 as of December 31, 1964. Its annual sales were in excess of $62,000,000 for 1963 and in excess of $70,000,000 for 1964. Its working capital was approximately $47,000,000 as of December 31, 1963, and approximately $87,000,000 as of December 31, 1964. Its earnings per share for the period 1960-1964 were: 1960 1961 1962 1963 1964 $1.27 $1.26 $1.21 $0.93 $1.15 From i955 to 1963 TGS’s annual sales declined from $93,000,000 in 1955 to $62,000,000 in 1963 and its (5439) annual earnings from $32,000,000 in 1955 to $9,300,000 in 1963. This decline was attributed by TGS to the oversupply of sulphur, resulting in depressed prices during the period. 3a Appendix A —Opinion of the District Court The market price of TGS stock on the New York Stock Exchange declined from a high of $45 a share in 1955 to a low of $11 a share in 1962. In 1963 the price rose from 13% in March to 19%% in N ovember and to 21% at the end of the year. In 1964 the price rose from a low of 211% in January to a high of 3014 on April 15. On April 14, the day of TGS’s public announcement of the Kidd mine, the price rose from a low of 30% to a high of 37, closing at 363%. The price continued to rise during the balance of April 1964 to a high of 58% on April 30, on which day the stock closed at 5434. Between 1956 and 1963, despite a growth in the demand for sulphur, the price per ton of sulphur declined from around $28 in 1956 to under $20 in 1963. However, by late 1963 the turn-around had been reached. Sulphur became in short supply, and on April 1, 1964 TGS announced a $2 per ton increase in the price. TGS’s gross sales for (5440) 1963 were the highest in four years, up 5.56% from 1962. TGS’s 1963 earnings were adversely affected by the mys- terious loss of the S.S. Martne Sutpuur QUEEN early in that year. In January 1964 TGS put into service a larger liquid sulphur cargo vessel to replace the lost vessel and announced the launching of the world’s largest. liquid sul- phur tanker, which would make it possible to ship liquid sulphur to Europe, and on February 8, 1964 it announced plans to increase its Canadian production of sulphur by 900 tons per day. Apart from its primary sulphur business, TGS was en- aged in a diversification program in other fields, such as phosphate, potash, trona, oil and gas. Its entry into the phosphate and potash fields was important because phos- phate, potash and sulphur are the three basic components of fertilizers. On November 15, 1963, TGS announced the creation of a new division for its phosphate project and that its potash mine was near completion and was scheduled AAR RAMS BT aer SKF 4a Appendix A —Opinion of the District Court to go into production in the spring of 1964. On December 16, 1963, TGS announced that it had acquired the Canadian oil and gas properties of Delhi-Taylor Oil Company, and on April 3, 1964 announced plans (5441) to proceed with a 3,000,000 ton-per-year phosphate program in North Caro- lina at a cost of $45,000,000. TGS had been engaged in exploration for sulphide de- - posits on the Canadian Shield since 1957 and in 1963-64 undertook exploratory work on the Kidd 55 segment in Kidd Township near Timmins, Ontario, which is more fully de- © scribed hereafter. Tue InpivipvaL DEFENDANTS The individual defendants are directors, officers and em- ployees of TGS as follows: Defendant Position — Claude O. Stephens President and Director Charles F. Fogarty Executive Vice President* ard Director Thomas S. Lamont Director Francis G. Coates Director Harold B. Kline Vice President and General Counsel** Richard D. Mollison Vice President David M. Crawford Secretary*** Richard H. Clayton Engineer Walter Holyk Chief Geologist Kenneth H. Darke Geologist Earl L. Huntington Attorney John A. Murray Office Manager * Prior to February 20, 1964 Mr. Fogarty was Senior Vice Presi- dent. ** Prior to January 31, 1964 Mr. Kline was Vice President- Administration and Secretary. *** Mr. Crawford was employed by TGS in January 1964 and be- came Secretary on February 20, 1964. oa Appendix A —Opinion of the District Court (5442) Defendant Thomas P. O’Neill was an accountant with TGS. He was served wih a summons and complaint, but has failed to answer or appear. The Commission has moved for a default judgment against O’Neill in a separate Proceeding. Therefore he is not referred to hereafter. Summary or TGS’s Expioratory Activities ON THE Kopp 55 Secment Exploration on the Canadian Shield: In 1957 TGS initiated an exploration program for sul- phides? on the Canadian Shield, a vast area comprising most of eastern Canada. Much of the area is barren and flat with few outcroppings of rock and is covered with a Swampy material known as muskeg. The subsurface struc- ture consists of Pre-Cambrian rocks, dating from an early geologic time, and is complex and distorted. (5443) Beginning in March, 1959, an exploration group— headed by defendant Mollison, a mining engineer, and con- sisting of defendant Holyk, the chief geologist; defendant Clayton, an electrical engineer and seophysicist; and de- fendant Darke, a geologist—conducted aerial geophysical Surveys over more than 15,000 miles of the Canadian Shield area. Sulphides conduct electricity better than most other rock types and can be detected if they are in sufficient quan- tity and concentration and are not too deeply buried be- neath the earth’s surface. In the course of this aerial exploration, TGS detected sev- eral thousand anomalies—unusual variations in the conduc- tivity of rocks. In the opinion of the exploration group several hundred of these anomalies were (5444) worthy of further investigation, and rights to land around them were MAT PDA LT? TROL Tee Oa We pe TRAC Reh Ieee thy MP er, ae CHOOT: 6a Appendix A —Opinion of the District Court acquired. One of these anomalies, detected as early as 1959, was located near Timmins, Ontario, and was designated as the Kidd 55 segment. On June 6, 1963, TGS acquired an option to purchase the northeast quarter section (160 acres) of the Kidd 55 segment. Between November 8, 1963 and April 16, 1964 TGS drilled K-35-1, K-55-3, K-55-4, IX-55-35, K-55-6, K-55-7 and K-55-10 at the locations shown on the accompanying Plan Map of the Kidd 55 segment. Drill Hole K-55-1 On October 29 and 30, 1963, defendant Clayton conducted a ground geophysical survey on the northeast quarter sec- tion which confirmed the existence of the anomaly previ- ously detected by the aerial survey. Defendant Clayton in- terpreted the survey as indicating three separate conductors of electricity tending in a north-south direction with an undetermined width and steep dip. Since the survey only indicated the presence of conductive material and not whether the material consisted of worthless or valuable minerals and since there was little geological evidence as to the makeup of the subsurface structure (the (5446) near- est outcroppings of rock were located more than 1,000 feet from the property), diamond core drilling was necessary for (3445) Plan Map Kipp TowNsHip PROPERTY PHOTOPRINT (Mounted Opposite) VR EY FPO TELLS OST 7a Appendix A —Opinion of the District Court — ° oo o—————+. - ANOMALY LiMITs 2200S ee \ K-55-3 2400S Rs Ad 2600S --—— K-55- ef 95-10 2800 S PLAN MAP KIDD TOWNSHIP PROPERTY t: - 2 1 Weta 1 t a 8a Appendix A —Opinion of the District Court further evaluation of the anomaly. 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 quanti- ties to be commercially mined. On November 8, 1963, drilling of the initial hole (K-55-1) was begun on section line 2400 S. The location, direction, and angle of the hole were determined by defendants Holvyk, Clayton and Darke, who considered the results of the geo- physical survey and the location of property boundaries. The collar of the hole was placed about 60 feet to the east of the easternmost conductor, as interpreted by defendant Clayton, and at the strongest part of the anomaly. The hole was drilled westerly at an angle of 60 degrees in the hope that it would cut through all three conductors. On November 12, 1963, drilling of K-55-1 was terminated at 655 feet. Defendant Holyk visually estimated that the core of K-33d-1 indicated an average copper.content of 1.15% and an average zine content of 8.64% over a length of 599 feet. The percentages of copper and zine (5447) mineraliza- tion at any given point in the core fluctuated markedly, but the copper mineralization appeared to be concentrated more on the eastern edge of the anomaly. Property Acquisition As a result of the Visual examination of the core, TGS determined to acquire the three other quarter sections mak- ing up the Kidd 55 segment. Therefore, following the usual practice in the mining industry, security measures were put into effect. Further drilling on the anomaly was sus- pended and members of the exploration group were in- structed to keep the results of K-55-1 confidential. The drill rig at the site of K-55-1 was moved away and cut sap- 9a Appendix A —Opinion of the District Court lings were stuck in the ground in the area of the hole to conceal its location. A second drill hole (K-55-2) was drilled off the anomaly in order to produce a barren core. The core from K-55-1 was split longitudinally and shipped to the Union Assay House, Salt Lake City, Utah, for chem- ical assay. In mid-December, TGS received reports from the assay which revealed an average metal content of ap- proximately 1.18% copper and 8.26% zinc, as well as 3.94 ounces of silver per ton over a 602-foot length of the core. These were the only chemical assay reports on any drill hole which TGS received prior to April 16, 1964. (5448) In the meantime, negotiations for the three other quarter sections comprising the Kidd 55 segment had been undertaken. TGS purchased one quarter-section outright for $7,500 and acquired options for $7,000 to purchase the other two for approximately $45,000. On March 27, TGS decided that the land acquisition program had advanced sufficiently to permit the company to resume drilling. Drill Hole K-55-3 On March 31, the drilling of K-55-3 was commenced on section line 2400 S approximately 75 feet west of the west- ern limits of the anomaly and approximately 510 feet west of K-55-1. It was drilled easterly at an angle of 45 degrees, and therefore crossed K-55-1 in a vertical plane on section 2400 S. K-55-3 was completed by 7:00 p.m. on April 7 and visual estimates of the core indicated an average copper content of 1.12% and an average zine content of 7.93% over 641 feet of the hole’s 876-foot length. Like K-55-1, K-55-3 indicated substantial copper mineralization on the eastern edge of the anomaly. Daily reports of the progzess of K-05-3 and of the subsequent drill holes were made by de- fendants Mollison and Holyk to defendants Stephens and Fogarty. a 10a Appendix A —Opinion of the District Court (5449) Drill Hole K-55-4 On April 7, drilling of K-55-4 was commenced slightly to the east of the eastern edge of the anomaly on section line 2600 S, 200 feet to the south of K-d5-1, and was drilled westerly on an angle of 45 degrees, parallel to K-53-1. By 7:00 p.m. on April 9, K-55-4 had encountered mineralization over 366 feet of its 420-foot length, but had entered a stretch of barren material at the 420-foot mark. The hole was com- pleted to a length of 579 feet on April 10 at 7:00 p.m. with- out encountering further mineralization. Visual estimates of the 366 feet of mineralized core recovered from K-55-4 indicated an average copper content of 1.14% and an aver- age zinc content of 8.24%. Like K-55-1 and K-55-3, K-55-4 encountered substantial copper mineralization on the east- ern eage of the anomaly. Drill Holes K-55-6 and K-55-5 On April 8, drilling of K-55-6 was commenced with a sec- ond drill rig* on section 2400 S, 300 feet to the east of K-55-1. It was drilled westerly at an angle of 60 degrees and was intended to explore mineralization beneath hole K-55-1. Due to the absence of geologists from the drill site on April 8 and 9,5 no immediate visual estimates of the core were available. It was apparent, (5450) however, by the evening of April 10 that the hole had encountered substantiai copper mineralization over the last 127 feet of its 569-foot length. On April 10, drilling of K-55-5 was commenced with a third driil rig on section 2200 S, 200 feet north of K-55-1. The hole was started on the eastern edge of the anomaly and was drilled westerly at an angle of 45 degrees, parallel to the holes previously drilled. By the evening of April 10, K-55-5 had been drilled 97 feet and, although no immediate visual estimates of the core were available, it was apparent S00 IRE OE ——— — ee ee ee a PrP errr SF wer lla Appendix A —Opinion of the District Court that the hole had intersected substantial copper mineraliza- tion over the last 42 feet of its length. The results of drilling through the evening of April 10 were available to TGS when it issued its April 12 press release. Core Drilling between 7:00 p.m. April 10 and 7:00 a.m. April 13 Drilling of K-55-5 and K-55-6 continued, and by the morn- ing of April 13, K-55-5 had encountered mineralization to the 580-foot mark. It was subsequently drilled to a length of 757 feet without encountering further mineralization. Visual estimates of the core indicated that over a 525-foot section the drill hole had intersected an average (5451) cop- per mineralization of 0.82% and an average zinc mineraliza- tion of 4.2%. By 7:00 a.m. on April 13, K-55-6 had en- countered mineralization to the 946-foot mark. It was subsequently drilled to a length of 1180 feet without inter- secting any further mineralization. Visual estimates of a 504-foot section of the core indicated an average copper content of 1.72% and an average zinc content of 6.60%. On April 12 drilling of K-55-7 was commenced with a fourth drill rig on section 2000 S at the eastern edge of the anomaly. It was drilled westerly at an angle of 45 degrees and by the morning of April 13 had encountered 50 feet of mineralization over the 137 feet drilled. The drilling of a mill test hole, K-55-8, was also commenced by April 11 and completed by the evening of April 13. The core was 21, inches in diameter as compared with the 11% inch diameters of the other holes, and was intended to be used for metal- lurgical testing to determine the amenability to milling of the material that had been encountered. No geologist’s log or visual estimates were made of K-55-8 and no metal- lurgical tests of the core were reported prior to April 16, LL ' 12a alppendix 1 —Opinion of the District Court (5452) Core Drilling between 7:00 a.m. April 13 and 7:00 p.m. April 15 On April 14 drilling of K-55-10 was commenced on section 2800 S on the eastern edge of the anomaly and was drilled westerly at an angle of 45 degrees. By 7:00 p.m. on April 15, it had encountered mineralization over the last 231 feet of the 249 feet of drilling. Drilling of K-55-7 was completed to a iength of 707 feet, but encountered only 26 more feet of mineralization between the 425-foot and the 451-foot marks. Purcuass or TGS Stock anp Catuts on TGS Stock BY CERTAIN DEFENDANTS AND ‘‘TIPPEES’’ BETWEEN NovEMBER 12, 1963 anp Apriz 16, 1964 The evidence established that all of the individual de- fendants except Stephens and Kline purchased shares of TGS and/or calls on TGS stock between November 12, (5453) 1963, when the first drill hole on the Kidd property was completed (K-55-1), and the close of business on April 16, 1964, the day on which TGS issued a press release announcing the discovery of a copper mine on the Kidd 55 segment at a press conference called for the purpose. The evidence also shows that certain persons who were referred to by counsel at the trial as ‘‘tippees’’ purchased shares of TGS and/or calls on TGS stock on the basis of advice re- ceived directly or indirectly from defendants Darke, Coates and Lamont. The following table lists these purchases (in- cluding those of defendant Holyk’s wife), but does not include the shares covered by stock options granted by TGS to certain defendanis on February 20, 1964. Appendix 4 —Opinion of the District Court Calls Exercise Number Price 200 21 300 22% 100 235% 400 23% 200 221%4-22% 200 233% 1000 2334-2354 200 24% 200 23% 300 2334-23% 200 2334 1000 2254-223%4 500 2214-2254 100 22% 300 23% 200 23% 1000 24% ; é Shares Purchase Date Purchaser Number Price Hote K-55-1 Compretep Novemser 12, 1963 1963 Nov 12 Fogarty 300 1734-18 15 Clayton 200 17% 15 Fogarty 700 = 17%-17% 15 Mollison 100 17% © 19 Fogarty 500 «18% 26 Fogarty 20). 17% 29 Holyk ( Mrs.) 50 18 CuHeEmicay Assays oF Dritt Core or K-55-1 RECEIVED DECEMBER 9-13, 1963 Dec 10 Holyk (Mrs. ) 100 20% 12 Holyk (or wife) 13 Mollison i100 21% 30 Caskey* 30 Fogarty 200 22 31 Fogarty 100 23% 1964 Jan 6 Holyk (or wife) 8 Murray 16 Westreich* 2000 2114-21% 24 Holyk (or wife) Feb 10 Fogarty 300 221%-221% 17 Atkinson* 50 23% 17 Westreich* 50 23% 20 Darke 300 24% 24 Clayton 400 23% 24 Holyk (or wife) 24 Miller* 25 Miller* 26 Holyk (or wife) 26 Hunti: ston 50 23% 27 Darke (Moran as nominee ) Mar 2 Holyk ( Mrs.) 200 22% 3 Clayton 100 22% 3 IX. W. Darke* 16 Huntington 16 Holyk (or wife) 17 Holyk (Mrs.) 100 23% 17 E. W. Darke* . 23 Darke 26 Clayton 200 25 14a Appendix A —Opinion of the District Court Shares Calls Purchase Exercise Date Purchaser Number Price Number Price LAND Acquisition CoMPLETED Marcu 27, 1964 Mar 30 Atkinson* 400 2534-25% 30 Caskey* 100 25°. 1000 2534-25% 30 Darke 1000 25% 30 E. W. Darke* 200 25% 30 Holyk (Mrs.) 100 25% 30-31 Klotz* 2000 25'%-26% 30 Miller* 500 2514-25% 30 Westreich* 500 25% Core Drittinc oF Kipp 55 SEGMENT RESUMED MarcH 31, 1964 Apr 1 Clayton 60 26% 1 Fogarty 400 26% 2 Clayion 100 26% 6 Fogarty 400 28%-28% 8 Mollison (Mrs.) 100 28% 421 Feet Kipp-55-4 CoMPLetep Apri 9, 1964, 7 P.M. TGS Press RELEASE Issuep Aprit 12, 1964 Apr 15 Clayton 200 29% 16 Crawford (and wife) 600 30%-30% TGS Press RELEASE AND Press CONFERENCE APRIL 16, 1964, 10 A.M. Apr 16 Coates 2,000 31-315% (for family trusts) 16 Haemisegger** 300 324 16 Robt. L. Armstrong** 200 31%4-34% 16 Charles Callery** 300 32% 16 James A. Baker III** 200 32% 16 Malcolm G. Baker Jr.** 500 3414-35 16 Morgan Guaranty Trust Co.*** 10,000 3254-34 16 Lamont and family**** 3,000 34% * Darke visited Mrs. Caskey and her daughter Miss Atkinson ‘n Washington between Dec. 25 and Dec. 30, 1963 and recommended TGS. They in turn recommended TGS directly or indirectly to others marked with *, with the exception of E. W. Darke, Darke’s brother, who purchased calls on Darke’s recommendation. ** Purchased Haemisegger, Coates’ son-in-law, for himself and customers (**) following telephone call from Coates before 10 :20 a.m. aad Purtees for its customers’ accounts following call from Lamont to Hinton at about :40 am. **¢* Purchased through Morgan Guaranty Trust Co. after 12:33 p.m. lida Appendix A —Opinion of the District Court (5456) Tue Securities Excnance Act or 1934 (THE Act) AND Ruts 10s-5 The Commission has instituted this action pursuant to Section 27 of the Act (15 U.S.C. 78aa) which confers upon the District Courts of the United States exclusive juris- diction of violations of the Act or of the rules and regula- tions promulgated thereunder and of ‘‘all suits in equity and actions at law brought to enforce any liability or duty created by’’ the Act or the rules and regulations there- under. | The preamble of the Act states that it is “to provide for the regulation or securities exchanges and of over-the- counter markets operating in interstate and foreign com- merce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.’’ Section 2 (15 U.S.C. 78b) provides that: ‘“*. . . transactions in securities as commonly con- ducted upon securities exchanges and over-the-coun- ter markets are affected with a national public in- terest which makes it necessary to provide for regulation and control of such transactions and of practices and matters related thereto, including transactions by officers, directors, and priucipal se- curity holders, ... and to impose requirements neces- sary to make such regulation and control reasonably complete and effective, (5457) in order to protect interstate commerce . . . and to insure the mainte- nance of fair and honest markets in such trans- actions. ...’’ 16a Appendix A —Opinion of the District Court Section 2(2) (15 U.S.C. 78b(2)) provides: ‘‘The prices established and offered in such trans- actions are generally disseminated and quoted throughout the United States and foreign countries and constitute a basis for determining and estab- lishing the prices at which securities are bought and oobd,...+.” Section 2(3) (15 U.S.C. 18b (3)) states that: ‘‘Frequently the prices of securities on such ex- changes and markets are susceptible to manipula- tion and control... .”’ Section 4(a) (15 U.S.C. 78d(a)) provides for the establish- ment of the Commission as the agency charged with the administration of the Act. Section 10 of the Act (15 U.S.C. 78}) provides: ‘‘Tt shall be unlawful for any person, directly or in- directly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange— ‘‘(b) To use or employ, in connection with the pur- chase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appro- priate in the public interest or for tue protection of investors.’’ (5458) Pursuant to the authority conferred on the Com- mission by Section 10(b), in May, 1942 the Commission bk 17a Appendix A —Opinion of the District Court promulgated Rule 10b-5 (17 C.F.R. 240 3 10b-5), which pro- vides : ‘‘It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, (1) to employ any device, scheme, or artifice to defraud, , (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.’’ In Rule 10b-5 the Commission adapted the language of Section 17(a) of the Securities Act of 1933 (15 U.S.C. 77q) relating to fraudulent interstate transactions. Similar !an- guage was also used in Section 206 of the Investment Ad- visers Act of 1940 (15 U.S.C. 80b-6).° The Commission has the responsibility of administering the Act and of securing compliance therewith. To carry out this responsibility, it has been given, among other powers, authority under Sections 21( e) and 27 (15 U.S.C. 78u, 78aa) to institute actions in the district courts to (5459) enjoin existing or prospective violations of the Act and to enforce any liability or duty created by the Act or the rules and regulations promulgated pursuant thereto. The Commis- sion contends that the defendants engaged in a ‘‘course of 18a Appendix .1—Opinion of the District Court business’’ which operated ‘‘as a fraud or deceit’’ on the stockholders of TGS in violation of Section 10(b) and Rule 10b-5.’ The defendants assert that the Commission must establish the elements of common law fraud—misrepresentation or nondisclosure, materiality, scienter, intent to deceive, re- liance, and causation—citing decisions in private actions brought under Section 10(b) requiring proof of one or more of these traditional elements as a condition precedent to relief. Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 786 (2d Cir. 1951) (‘‘proof of fraud is required in suits under §10(b) of the 1934 Act... .’’); Weber v. C.M.P. Corpora- tion, 242 F. Supp. 321, 324 (S.D.N.Y. 1965) (scienter) ; Bar- nett v. Anaconda Company, 238 F.Supp. 766, 771 (S.D.N.Y. 1965) (causation). See, Comment, ‘‘Civil Liability Under Section 10(b) and Rule 10b-5: A Suggestion for Replacing the Doctrine of Privity,’’ 74 Yale L. J. 658 (1965). (5460) However, recent decisions, even in private suits, do not require proof of these elements in actions charging violations of Rule 10b-5. Royal Air Properties, Inc. v. Smith, 312 F. 2d 210 (9th Cir. 1962); Ellis v. Carter, 291 F. 2d 270 (9th Cir. 1961). In Stevens v. Voweill, 343 F. 2d 374, 379 (10th Cir. 1965), the court stated: ‘*Tt is not necessary to allege or prove common law fraud to make out a case under the statute and rule. It is only necessary to prove one of the prohibited actions such as the material misstatement of fact or the omission to state a material fact.’’ In a regulatory or enforcement proceeding under Sec- tion 27 of the Act, the Commission is not required to prove these common law elements. In S.E.C. v. Capital Gains Bureau, 375 U.S. 180 (1963), the defendant was an invest- RST Ae SEER Ee 19a Appendix A —Opinion of the District Court ment advisor who published a monthly report, mailed to approximately 5,000 customers, which recommended cer- tain securities for long term investment. Before mailing the report, the defendant would purchase the recommended securities on the market and when the price rose after customers received the report, defendant would sell at a profit. The Commission sought an injunction under Sec- tion 206 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-6) (8) (5461) to compel defendant to disclose this practice to customers. The district court denied a pre- liminary injunction on the ground that ‘‘fraud’’ was used in the Investment Advisers Act of 1940 in its technical common law sense and that the Commission had failed to establish an intent to injure clients or an actual loss to clients. (191 F. Supp. 897, 898.) The Second Circuit Court of Appeals, sitting en banc, affirmed the district court by a 5-to-4 vote. (306 F. 2d 606.) In reversing, the Supreme Court held that: ‘*It would defeat the manifest purpose of the In- vestment Advisers Act of 1940 for us to hold, there- fore, that Congress, in empowering the courts to enjoin any practice which operates ‘as a fraud or de- ceit,’ intended to require proof of intent to injure and actual injury to clients. (375 U ‘S., at 192.) ‘‘Congress intended the Investment Advisers Act of 1940 to be construed like other securities legislation ‘enacted for the purpose of avoiding frauds,’ not technically and restrictively, but flexibly to effectu- ate its remedial purposes. (375 US., at 195.) (Em- phasis supplied) SSS 20a Appendix —Opinion of the District Court Since there is a direct parallel between the language of Rule 10b-5(3) and Section 206 of the Investment Advis- ers Act of 1940, both in wording and in intent, the use of ‘‘fraud’’ in Rule 10b-5(3) cannot be interpreted in its narrow common (5462) law sense. Cf.. Berko v. Securities and Exchange Commission, 316 F. 2d 137 (2d Cir. 1963). The suggestion made by the defendants that Section 16 of the Act (15 U.S.C. 78p), relating to directors, officers, and principal stockholders, defines ‘‘insiders’’ and limits the liabilities of insiders to the sanctions provided in Section 16, is equally without merit. A Section 16 action can be brought only by the corporation itself or derivatively by an existing security holder against officers, directors or beneficial owners of ten per cent or more of the corpora- tion’s listed equity securities. It covers only short-swing profits realized within a six-month period, and any recov- ery inures to the corporation. Profits are recoverable re- gardless of any intent to defraud and without proof that they were realized by reason of inside information. In short, Section 16 was enacted as a ‘‘crude rule of thumb’’ to make unprofitable all short-swing speculation by a spe- cifically defined group of insiders. See, Blau v. Lamb, F.2d (2d Cir., June 27, 1966). A Section 10(b) action, on the other hand, may be brought pursuant to Section 27 by the Commission or by any party claiming to have been defrauded. The section (5463) applies to ‘‘any person,’’ not merely to the persons encompassed by Section 16. H. L. Green Co. v. Childree, 185 F. Supp. 95 (S.D.N.Y. 1960) (accountants) ; Cady, Rob- erts & Co., 40 S.E.C. 907 (1961) (broker). Section 16 re- quires both a purchase and a sale of a listed security, while Section 10(b) applies to a purchase or sale of any security. The numerous differences between Section 16 and Section 21a Appendix A —Opinion of the District Court 10(b) clearly indicate that the provisions of the former impose no limitation en the enforcement of the latter. See, 3 Loss, Securities Regulation, 1473, 1474 (2d ed. 1961) ; Comment, ‘‘The Prospects for Rule X-10B-3- An Emerg- ing Remedy for Defrauded Investors,’’ 59 Yale L. J. 1120, 1140-42 (1950). To establish violations of Section 10(b) and Rule 10b- 9(3), the Commission must prove that the defendants en- gaged in a ‘‘course of business’’ which operated as a “fraud or deceit . . . in connection with the purchase or sale of any security.’’ Questions arise therefore as to whether insider purchases based on material, undisclosed information constitute violations of Section 10(b) and Rule 10b-5(3) ; if so, who are insiders; whether the statute and rule are limited to ‘*face-to-face’’ transactions; and, fi- nally, what constitutes materia] information. (5464) The statute and rule go at least as far as the federal common law rule. Iist v. Fashion Park, Inc., 340 F.2d 457, 461-2 (2d Cir. 1965). As long ago as 1909, the Supreme Court held in Strong v. Rapide, 213 U.S. 419 (1909), that the failure of the director and general manager of a corporation to disclose “*special facts’’ in purchasing its securities operated as a fraud on the seller. The Court Stated that: “‘Tf it were conceded, for the purpose of the argu- ment, that the ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any from a shareholder, yet there are cases where, by reason of the special facts, such duty exists.”? 213 US., at 431. 22a Appendix A —Opinion of the District Court Applying this ‘‘special facts’’ doctrine to Section 10(b) and Rule 10b-5, trading by an insider on the basis of material undisclosed information constitutes a deceptive practice in violation of the statute and rule. See, Loss, supra, at 1445-73. In Strong v. Rapide, the defendant was a director and general manager of the corporation, and owned three- fourths of its outstanding shares. He was, therefore, an (5465) insider under any standard. Section 10(b) has been construed as imposing a similar liability on officers, direc- tors, and major stockholders. Cochran v. Channing Corpo- ration, 211 F. Supp. 239 (S.D.N.Y. 1962). Further, since Section 10(b) applies to ‘‘any person’’ it can include ‘‘in- siders’’ who are not officers, directors or major stockholders. Cady, Roberts € Co., supra, at 912. In Brophy v. Cittes Service Co., 70 A. 2d 5, 7 (Del. Ch. 1949), the court pointed out ‘‘if an employee in the course of his employment acquires secret information relating to his employer’s business, he occupies a position of trust and confidence toward it, analogous in most respects to that of a fiduciary, and must govern his actions accordingly.’’ Citing Brophy, the Commission in Cay, Roberts € Co., supra, found that the obligation to disclose material infor- mation rests on two grounds: ‘*. .. first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes ad- vantage of such information knowing that it is un- available to those with whom he is dealing.’’ 40 S.E.C., at 912. 23a Appendix A —Opinion of the District Court (5466) Therefore, insiders subject to the disclosure require- ments of Section 10(b) and Rule 10b-5 may include em- ployees as well as officers, directors, and controlling stockholders who are in possession of material undisclosed information obtained in the course of their employment. An insider’s liability for failure to disclose material in- formation which he uses to his own advantage in the pur- chase of securities extends to purchases made on national securities exchanges as well as to purchases in ‘‘face-to- face’’ transactions. List v. Fashion Park, Inc., supra, at 461-62. In Cochran v. Channing Corporation, supra, at 243, the court stated: ‘‘The Securities Exchange Act was enacted in part to afford protection to the ordinary purchaser or seller of securities. Fraud may be accomplished by false statements, a failure to correct a misleading im- pression left by statements already made or, as in the instant case, by not stating anything at all when there is a duty to come forward and speak. It is the use of inside information that gives rise to a violation of Rule 10b-5. [Citations omitted. |] Lack of com- munication between defendant and plaintiff does not eliminate the possibility that Rule 10b-5 has been violated.”’ And, as noted in Cady, Roberts, ‘‘it would be anomalous indeed if the protection afforded by the anti-fraud provi- sious were withdrawn from transactions effected on ex- changes, (5467) primary markets for Securities transac- tions.’’ 40 S.E.C., at 914. In response to the defendants’ contention that it would be impossible for an insider trading on a national exchange 24a Appendix A —Opinion of the District Court to seek out the other party .o the transaction and disclose material information to him (Goodwin v. Agassiz, 186 N.E. 659 (Mass. 1933)), it is clear that there are other ways of disclosing significant corporate developments. The New York Stock Exchange provides in its Company Manual that ‘‘important developments which might affect security values or influence investment decisions should be promptly disclosed.’’ (Listing Agreement at A-20.) If legitimate business reasons require a period of non-disclosure, the insider should forego transactions in his company’s securi- ties during that period. Cady, Roberts, supra, at 911. As stated by the court in Oliver v. Oliver, 45 S.E. 232, 234 (Ga. 1903) : ‘‘It might be that the director was in possession of information which his duty to the company re- quired him to keep secret; and, if so, he must not disclose the fact even to the shareholder, for his ob- ligation to the company overrides that to an indi- vidual holder of the stock. But if the fact so known to the director cannot be published, it does not follow that he may use it to his (5468) own advantage, and to the disadvantage of one whom he also represents. The very fact that he cannot disclose prevents him from dealing with one who does not know, and to whom material information cannot be made known.”’ However, to establish a violation of Section 10(b) and Rule 10b-5, the undisclosed information must. be material. List v. Fashion Park, Inc., supra. There is nothing in the Act which precludes insiders from purchasing stock of their company or from being beneficiaries of the company’s in- centive stock option plan. On the contrary, it is important, 25a Appendix A —Opinion of the District Court \ under our free enterprise system that insiders, including directors, officers, and employees, be encouraged to own se- curities of their company. The incentive that comes with stock ownership benefits both the company and its stc:k- holders. Moreover, it is obvious that any director, officer, or em- ployee will know more about his company or have more specialized knowledge as to at least some phase of its busi- ness than an outside stockholder can have or expect to have. Often this specialized knowledge may whet the specu- lative interest of the insider, particularly if he believes in the future of his company, and may lead him to purchase stock. Purchases under such circumstances are not encom- passed by Section 10(b) and Rule 10b-5. As Stated (5469) in Loss, supra, at 1463: ‘*. .. an insider is under no obligation to give the ordinary investor the benefit of his superior financial analysis. It has been aptly said that, ‘Even though a shrewd guess by an insider is often worth fifty ac- counting statements, it would be highly unfair to make him publicize his guess and then to hold him responsible if it turns out to be wrong.’ ’’ (Quoting, Comment, ‘‘The Prospects for Rule X-10b-5,’’ 59 Yale L. J., at 1148.) However, where an insider comes into possession of ma- terial information which he uses to his own advantage by purchasing stock or calls on the stock of his company prior to public disclosure, he violates Section 10(b) and Rule 10b-5. Information is not material merely because it would be of interest to the speculator on Bay Street or Wall Street. Material information has been defined as informa- tion ‘‘which in reasonable and objective contemplation 26a Appendix A —Opinion of the District Court might affect the value of the corporation’s stock or securi- ties....’’ List v. Fashion Park, Inc., supra, at 462, citing, Kohler v. Kohler Co., 319 F. 2d 624, 642 (7th Cir. 1963). It is information which, if known, would clearly affect ‘‘in- vestment judgment,’’ Cady, Roberts, supra, at 911, or which directly bears on the intrinsic value of a company’s stock. See, Kardon v. National Gypsum Co., 73 F. Supp. 798 (E.D. Pa. 1947); Speed v. Transamerica Corp., 99 F. Supp. 808 (5470) (D. Del. 1951); Ward Larrance Truck Corp., 13 S.E.C. 373 (1943). Material informaticn need not be limited to information which is translatable into earnings, as suggested by defend- ants. But the test of materiality must necessarily be a con- servative one, particularly since many actions under Section 10(b) are brought on the basis of hindsight. As stated by a former member of the steff of the Commission: ‘“‘It is appropriate that management’s duty of dis- closure under rule 10b-5 be limited to those situations which are essentially extraordinary in nature and which are reasonably certain to have a substantial effect on the market price of the security if disclosed. A more rigorous standard would impose an unrea- sonable burden on management in its securities trad- ing. Moreover, such a standard could involve the courts to an unrealistic degree in the determination of whether certain types of information might have an impact on the market. A finer web might well pre- vent some management trading that represents an abuse, but only at the cost of possibly exposing man- agement to meritless litigation in many other casvs.”’ (Fleischer, ‘Securities Trading and Corporate Infor- mation Practices: The Implications of the Texas Gulf Sulphur Proceeding,’ 51 Va. L. Rev. 1271, 1289 (1965).) 27a Appendix A —Opinion of the District Court (5471) AppLication or Section 10(b) or tHe Act axp Rute 10b-5 To PurcHAsES BY INDIVIDUAL DereNDANTS All of the individual defendants were direetors, officers or cuiployees of TGS. With the exceptions of Stephens and Kline, each purchased stock of TGS using the facilities of a national securities exchange. Accordingly, the jurisdic- tional requirements of the Act and Rule 10b-5 have been satisfied with respect to these purchases. The issue remains as to whether any of the defendants in purchasing TGS stock or calls on TGS stock were using for their own ad- vantage material information as to the drilling on the Kidd o0 segment not disclosed to the public. Defendants Hunt- ington and Murray had no detailed knowledge as to the work and hence were net in possession of material informa- tion. Huntington knew only that TGS was acquiring prop- erty rights in Kidd Township. Murray had no knowledge of the situation on the Kidd 55 segment at the time he made his purchases. In considering whether the remaining in- dividual defendants were in possession of material informa- tion when they made their purchases, the period from No- vember 12, 1963 to April 16, 1964 may be conveniently subdivided as follows: (1) November 12, 1963 to 7:00 p.m. April 9, 1964 (2) 7:00 p.m. April 9 to 10:00 a.m. April 16, 1964 (8) April 16, 1964 from 10:00 a.m. to the close ef business on that day. (5472) (1) November 12, 1963 to 7:00 p.m. April 9, 1964 K-55-1 was completed on November 12, 1963. Visual esti- mates at the drill site, which were subsequently confirmed 8a Appendix A —Opinion of the District Court by chemical assays received in mid-December, indicated substantial zine and copp°r mineralization over approxi- mately 600 feet of the core’s 657 foot length. On the basis of the visal estimates, TGS took customary security meas- ures to maintain the secrecy of the drilling results while it undertook to acquire the remaining quarter sections of the Kidd 55 segment. On March 31, 1964 drilling was resumed. K-55-3 was drilled and established that mineralization existed in a vertical plane over 350 feet wide and 500 feet deep. On April 7 drilling of K-55-4 was begun 200 feet south of K-55-1 and by 7:00 p.m. on April 9 it had been drilled to 421 feet and had encountered 366 feet of minerali- zation. K-55-1, K-55-3, ard K-55-4 intersected substantial copper mineralization on the eastern edge of the anomaly. According to the Commission’s experts, Adelstein® (the Commission’s chief mining engineer) and Pennebaker (con- sulting geologist to the Commission), K-55-4 established a third dimension to the mineralized zone, so that the (5473) drilling through 7:00 p.m. on April 9 established a mine.” The geologists called by tie defendants disputed the con- clusions reached by Adelstein and Pennebaker, unanimously agreeing that the drilling of the three holes to 7:00 p.m. on April 9 did noc establish that TGS had a mine. The Com- mission has taken the position with respect to registration statements filed under the Securities Act of 1933 that ‘‘three diamond drill holes‘are insufficient to determine whether a commercial ore body is present, even though they should encounter a gold bearing structure.’’ Pan-American Gold Ltd., 31 S.E.C. 141, 147-8 (1950). It is unnecessary to determine whether TGS had a mine since the drilling of K-55-4 to 7:00 p.m. on April 9 was a strong indication that the mineralization encountered on the vertical plane between K-55-1 and K-55-3 extended southward 200 feet. There was real evidence that a body — 29a Appendix A —Opinion of the District Court of commercially mineable ore might exist. 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 mar- ket price of TGS stock. Therefore, they were under a duty not to use such material information to their personal ad- vantage without first diselosing it to the public. (0474) However, the drilling results up to 7:00 p.m. on April 9 did not provide such material information. When considered in relation to the far-flung business of TGS at the time, it cannot be said that the drilling results of K-55-1 and K-55-3 constituted material information, the disclosure of which would have had a substantial impact on the market price of TGS’s 10,000,000 outstanding shares. K-55-1 There is no doubt that the drill core of K-55-1 was unusu- ally good and that it excited the interest and speculation of those who knew about it. However, all the experts agreed that one drill core does not establish an ore body, much less a mine. Defendants’ experts unanimously concluded that there is no way even to estimate the probabilities that one drill core will lead to the discovery of an ore body. Con- cededly, the geophysical survey conducted prior to the drill- ing of K-55-1 indicated a ‘first class”’ anomaly over a length of more than 1,000 feet, but the conductive materials evi- denced by the survey outside the first drill hole could have consisted of worthless pyrite or graphite, both of which materials were found in the core of K-55-1. As stated by Boniwell, a mining geophysicist, (5475) geophysics is of little help in predicting continuity. Moreover, the core of K-55-1 was not solid ore. The percentages of copper and zine mineralization fluctuated 30a Appendia A —Opinion of the District Court markedly. Although it appears this is not unusual due to the complex nature of the Pre-Cambrian subsurface rock structure, it supports the testimony of defendants’ experts that no predictions could be made as to how far rineral values encountered by K-55-1 extended beyond the 11% inch drill core. As was brought out by Walkey, a mining engi- neer employed by Kamkotia Mines 12 miles from the Kidd 03 segment, mineral deposits on the Canadian Shield tend to be highly irregular in structure, with wide variaticns in grade. Walkey, Boniwell and Wiles (a mining engineer with forty years’ experience) testified as to instances where one drill hole had produced a promising core but subsequent drilling had shown that the mineral values did not extend any appreciable distance beyond that core. Therefore, the first promising core may turn out to be a liability by induc- ing further drilling with negative results." Bellemore and Pearson, security analysts called by de- fendants, testified that from an investment point of (5476) view no significance could be attached to the results of a single drill hole, however rich. The most that can be said of the individual defendants’ knowledge after the drilling of K-55-1 is that they had ‘*hopes, perhaps with some reason,’’ that it would lead to a mine. James Blackstone Mem. Lib. Ass’n v. Gulf, M. € O. R. Co., 264 F. 2d 445, 450 (7th Cir. 1959). The results of K-55-1 were too ‘‘remote’’ when considered in light of the size of TGS, the scope of its activities, and the number of its outstanding shares, to have had any significant impact on the market, t.e., to be deemed material. List v. Fashion Park, Inc., supra. The Commission contends, however, that the results of K-55-1 were material because of the significance attached to sla AWpoudiv | —Opinion of the District Court those results by certain defendants. Between the comple- tion of K-55-1 on November 12, 1963 and the completion of K-55-3 on April 4, 1964, defendants Fogarty, Mollison, Holyk, Clayton and Darke Spent more than $100,000 in pur- chasing stock and ealls on the stock of TGS. These defend- ants could bring considerable expertise to bear in evaluating the results of K-55-1 and their purchases may have been prompted by an educated guess that K-55-1 would (5477) lead to the discovery of a mine. Therefore, a question is presented as to whether information which may have special significance to an insider because of his professional back- ground, is material. ¢ A similar question would be presented where an engineer in the research department of a publicly-held corporation believes that he may have invented a process which will substantially increase the corporation’s earnings or where a chemist in a large pharmaceutical firm thinks that he may have devised a chemical formula which can cure cancer. In these instances it ean be assumed that the insider, because of his educated Suess, will be enthusiastic and his enthu- siasm may lead him to purchase stock in his company and to recommend the stock to his associates and friends even though his educated guess may turn out to be wrong. It may be argued that such purchases are ‘‘unfair’’ to the outside stockholders and come within the ambit of Section 10(b) and Rule 10b-5. Purchases on the basis of educated guesses may be viewed as an attempt to secure additional corporate compensation. Cary, ‘“‘Corporate Standards and Legal Rules,’’ 50 Calif. L. Rev. 408 (1962). (5478) However, most insiders necessarily have educated guesses about the prospects of particular company pro- grams. If it is held that purchases made on the basis of educated guesses are proscribed by Section 10(b) and Rule 32a Appoudix A —Opinion of the District Court 10b-5, insiders who purchase stock in their company will do so at their peril. If they announce their educated guesses before purchasing and their guesses turn out to be wrong, they would be subject to suit; and if they purchase and keep their educated guesses to themselves and they turn out to be right, they would again be subject to suit. The creation of such a dilemma would result in insiders not buying at all although insiders should be encouraged to have a stake in the coiapanies for which they work. The outside stockholder can never match the knowledge of an insider who necessarily knows more about the com- pany and is in a better position to evaluate its prospects. It may be that the ‘‘fairness’’ overtones of Cady, Roberts indicate a trend toward the elimination of all insider pur- chasing. But even were the Court prepared to accept the proposition that all insider trading is unfair, a proposition of doubtful validity at best, it would be deterred by the admonition of Judge Learned Hand that it is not ‘‘desirable for a lower (5479) court to embrace the exhilarating oppor- tunity of anticipating a doctrine which may be in the womb of time, but whose birth is distant. . . .’’ Spector Motor Service Inc. v. Walsh, 139 F. 2d 809, 823 (2d Cir. 1944) (dissenting opinion) (reprinted in Bar Bulletin, N. Y. Co. Lawyers Assn, Vol. 23, No. 4, at 156, 1965-66). Therefore the purchases pricr to 7:00 p.m. on April 9 were not based on material undisclosed information even if the purchasers had educated guesses based on the results of the first drill hole. K-55-3 K-55-3 established that K-55-1 had not gone down dip, and indicated a vertical plane on section 2400 S containing mineralization. However there was no indication that the 33a Appendix A —Optnion of the District Court mineralization extended beyond the plane. Defendant Mol- lison testified that at Kamkotia a drill hole could produce substantial mineralization while another 50 feet away pro- duced a barren core. The results of K-55-3 added to the information previously known but did not constitute ma- terial information. If disclosed, it would not have had a substantial impact on the market price of the Company’s stock. Accordingly, the purchases made by certain defendants prior to 7:00 p.m. on April 9, 1964 were not based (5480) on material information. The fact that subsequent drill- ing established a major ore body is immaterial. As stated recently in Value Line Fund, Inc. v. Marcus, CCH Fep. Sec. L. Rep. 191,523,, at 94,956 (S.D.N.Y. 1965), ‘‘the court must be guided not by hindsight, but by the facts as they existed at the time of the. . . challenged transaction.’’ Similarly, purchases by Darke’s “‘tippees’’ prior to 7:00 p.m. on April 9 were not made on the basis of material undisclosed information. Toward the end of December, 1963, Darke visited Caskey and Atkinson in Washington. The evidence shows no more than that Darke indicated to them that he thought TGS was a good buy. There is no direct evidence that Darke again communicated with any of his ‘‘tippees,’’ but the record shows that on March 30, 1964 Darke and his ‘‘tippees,’’ Atkinson, Caskey, E. W. Darke, Klotz, Miller and Westreich, purchased substan- tial amounts of TGS stock and calls on TGS stock. As the Commission po‘nts out, this is strong circumstantial evi- lence that Darke must have passed the word to one or more of his ‘'1:j»pees’’ that drilling on the Kidd 55 segment was about te .. resumed. But, for the reasons hereinbefore stated, this 11 >rmation was not material. 0 EE 34a Appoudis A —Opinion of the District Court (5481) For the foregoing reasons, the Court finds no violations of Section 10(b) or Rule 10b-5 on the part of any of the individual defendants who purchased shares of TGS or calls on TGS stock or recommended such purchases to others prior to 7:00 p.m. on April 9, 1964. (2) 7:00 p.m. April 9, 1964 to 10:00 a.m. April 16, 1964 Defendant Clayton purchased 200 shares of TGS stock on April 15; defendant Crawford purchased 600 shares on April 16. These defendants (and defendants Coates and Lamont) raise the defense that even if they were in posses- sion of material information when they made their pur- chases, the material information had already become a matter of public knowledge. The trial developed that rumors of an ore discovery by TGS were flying around Canada during the early part of April and were being given wide circulation in the Cana- dian press. These rumors reached the New York press by April 11, on which day they were played up in both the New York Times and the New York Herald Tribune. At this point defendants Stephens and Fogarty agreed that a press release was necessary and this decision led to the issuance of the April 12 press release hereafter discussed. Fogarty (5482) also gave instructions that a reporter from The Northern Miner (an important Canadian publication on the mining industry in Canada), who had previously been invited to visit the Kidd 55 segment on April 21, be asked to come on April 13 instead. The Northern Miner reporter, Ackerley, visited the prop- erty on April 13, interviewed defendants Mollison, Holyk and Darke, looked at the records of the drilling to that time, and prepared an article for publication. The article stated in part that ‘‘The Northern Miner can say that u 35a Appendia 1 —Opinion of the District Court major new zine-copper-silver mine is definitely in the mak- ing, one that has all the earmarks of shaping into a substan- tial open pit operation . . . something in excess of 10,- 000,000 tons of ore is indicated.’? Ackerley delivered a copy of his proposed article to defendant Mollison in Tim- mins and it was agreed that it would not be published un- til cleared by Mollison. Defendants Mollison and Holyk read the article and though they felt that some of its con- clusions were too optimistic, they considered it Ackerley’s article and would not quibble with it. Defendant Mollison returned the article to The Northern Miner on the evening of April 15, and it was published in The Northern Miner’s April 16 edition. (5483) The Northern Miner had a small circulation—e— the United States—7,400 subscribers—including distribu- tion in the New York area to 1,412 subscribers, who pre- sumably received the paper on the morning of April 16. Lhe Northern Miner also had a small newsstand circulation in New York, but the evidence fails to establish when the April 16 edition reached the newsstands. Reports of The Northern Miner article were telephoned and telexed from Toronto to some brokers in New York early on the morn- ing of April 16 prior to the opening of the New York Stock Iixchange. The annual convention of the Canadian Institute of Min- ing and Metallurgy was held at the Queen Elizabeth Hotel in Montreal on April 13-15, attended by 500 to 600 repre- sentatives of the mining industry and of the business world, including some representatives from the United States. The rumors with respect to a copper discovery by TGS near Timmins were a leading subject of gossip in the corridors and bars of the hotel. The convention was attended by the Ontario Minister of Mines and his Deputy. Nel Rk Ae Si Rie Na RY I a Rh TE ROE IR EE INN SR ROY Rad OM Lt 36a Appendix A —Opinion of the District Court On the morning of April 15, defendants Mollison and Holyk met the Minister of Mines and his Deputy at the (5484) Montreal airport and flew them to Toronto, in- forming them during the course of the flight of the current developments on the Kidd 55 segment. The Minister indi- cated a desire to make a public statement and Mollison as- sisted him by drafting that statement. Mollison’s draft con- cluded by saying that ‘‘the information now in hand. . . gives the company confidence to allow me (the Minister) to announce that TGS has a minable body of Zn, Cu, Ag ore of substantia! dimensions that will be developed and brought to production as rapidly as possible.’’ Mollison and Holyk were under the impression that the Minister would issue the statement in Toronto over radio and television at 11:00 p-m. on the evening of April 15 and Mollison so informed defendants Stephens and Fogarty in New York. The Minister made no announcement on the evening of the 15th, but on the morning of the 16th, at about 9:40 a.m., he delivered the statement drafted by Mollison to the press gallery at the Ontario Parliament in Toronto. Members of the press gallery included representatives of both the Cana- dian and American news media, but there was no evidence as to who was in the press gallery at the time. The effect of the foregoing was that before the market opened on April 16, some brokers and some speculators (5485) had picked up information that TGS had made an ore discovery. However, no announcement had yet been made by TGS. Only the day vefore, defendants Stephens, Fogarty and Crawford were preparing the announcement which was to be made at 10:00 a.m. on April 16. They took steps to assure the attendance of appropriate representa- tives of the news media at the press conference where the announcement would be made. The officers of TGS knew 37a Appendix A —Opinion of the District Court about the rumors in Canada, the Northern Miner article and the pending announcement of the Ontario Minister of Mines. Had they thought that their effect was to make the material information public there would have been little purpose in making the arrangements for a press conference, and issuing a detailed announcement on April 16. The ma- terial information did not become public knowledge prior to TGS’s official announcement. Therefore, insiders who purchased stock prior to TGS’s announcement may not assert as a defense that the material information ha already become a matter of public knowledge. | Turning now to the two defendants who purchased shares of TGS after 7:00 p.m. on April 9, 1964 and before 10:00 a.m. on April 16: Ricnarp H. Ciayton Clayton was a geophysicist in the employ of TGS. His job was to conduct geophysical surveys, and he conducted such surveys on the Kidd anomaly. While he did not par- ticipate (5486) in the drilling, he spent a great deal of his time at Timmins and at the Kidd 55 segment, and the evi- dence establishes that he kept himself fully informed. He was in Timmins on April 12 and 13 and, according to Adel- stein, he told Adelstein (on June 3, 1964) that he thought TGS had a mine when he learned the results of K-55-4. While Clayton denied making this statement, he testified at a pre-trial examination that he thought that, with the results of K-55-6, TGS had a potential ore body. By 7:00 p.m. on April 13, K-55-6 had been drilled to 949 feet, encountering substantial mineralization. Indeed, no further mineraliza- tion was encountered by K-55-6 Three non-management directors, John H. Hill, Leslie M. Cassidy and defendant Coates, were the members of the Committee appointed by the Board. At the meet- ing of the Committee held on February 20, 1964, two mem- bers, Hilt and defendant Coates, were present. The min- utes disclose that the Board of Directors at its meeting on March 16, 1961 had directed that no shares should be (5499) optioned to any employee earning less than $24,000 annually. The Committee granted stock options to 21 offi- cers and employees earning $24,000 or more per annum (including defendants Stephens, Fogarty, Mollison and Kline) and recommended to the Board the granting of stock options to five employees (including defendant Holyk) whose annual salaries were in the $15,000 to $21,000 range, which recommendation was approved by the Board at its meeting later on the same day. The use of stock option plans is a commonly accepted device to provide incentive to officers and employees. Re- stricted stock options of the type authorized by the stock- 47a Appendix A —Opinion of the District Court holders of TGS are not uncommon in publicly-owned com- panies. As pointed out by Judge Weinfeld in Kornfeld v. Eaton, 217 F. Supp. 671, 677 (S.D.N.Y. 1963), aff’d 327 F. 2d 263 (2d Cir. 1964) : ‘* . . . Restricted stock options of the type here under consideration have their genesis in express approval by the stockholders of the corporation and are intended to enable its employees to benefit from an increase in the market value of the security. The corporate purpose is satisfied through the optionee’s services and his efforts to further its interests. In- deed it is in the corporate economic interest that its employees have an investment stake in it. Con- gress itself has recognized the salutary purpose of such plans by extending them favorable tax treat- ment.’’ (5500) The Committee necessarily relied on information furnished it by the higher echelon of TGS’s manage- ment (which would include defendants Stephens and Fo- garty, but not Mollison, Kline or Holyk). The Commit- tee did not inquire of the recipients what special knowledge they might have as to various phases of TGS’s business as it was entitled to rely on the information furnished by the maragement. The record shows that at the time they accepted their stock options, each of the five defendants (except Kline) knew of the situation on the Kidd 55 segment as it existed at the time. ‘Since the land acquisition program had not heen complciv t they had been instructed not to divulge this information. inueed, on February 20, 1964, neither the Board of Dir .« vs nor the Committee had been informed.'® Defenda ‘s:.ne was informed by defendants Stephens and Fogar:, i: }anch in November 1963 that TGS was ec - RN Rd PIES. ven OLS Oe Th a 7 48a Appendix A --Opinion of the District Court ducting explorations in the Timmins area and that the completion of tae first drill hole was a favorable develop- ment; that it was on the boundary of the TGS property and that TGS was interested in acquiring additional prop- erty. He knew no detai!s and his only information came from his (5501) superiors. Defendants Mollison and Holyk knew the results of K-55-1 and had reported these results to their superior, defendant Fogarty. Kline, Mollison and Holyk had no duty to iniorm the Committee of information already known to their superiors since they could assume that such information would be reported to the Committee by the management. Defendants Stephens and Fogarty as President and Ex- ecutive Vice President were management. Both were also Directors and potential recipients of stock options. They were under a duty to inform the Committee of material in- formation affecting the issuance of the stock. options. The Plan required that the option price be at least 95% of the fair market value of the stock on the date on which the options are to be granted. The Committee fixed the option price as ‘‘the average of the highest and lowest prices of the Company’s stock on the New York Stock Exchange during February 20, 1964.’’ Therefore, included in Steph- ens’ and Fogarty’s duty of disclosure was any material information bearing on the market value of TGS stock on that date. : A corporate officer may be guilty of fraud if he with- holds material information from his company to his own advantage. New Park Mining Co. v. Cranmer, 225 F. Supp. 261 (S.D.N.Y. 1963). Therefore, if the information known (5502) to defendants Stephens and Fogarty would have substantially affected the price of the TGS stock on the New York Stock Exchange, their receipt of stock options 49a Appendix A —Opinion of the District Court without disclosure to the Committee could have constituted a fraud on TGS. A stock option is a security (the Act, See- tion 3(a) (10); 15 U.S.C. 78c(a)(10)), so that such a fraud would have come within the ambit of Section 10(b) and Rule 10b-5. See Ruckle v. Roto American Corp., 339 F. 2d . 24 (2d Cir. 1964). On February 20, 1964, defendants Stephens and Fogarty knew (1) that K-55-1 had been completed; (2) that the drill core had been assayed and that the assay certificates showed substantial mineralization; and (3) that the land acquisition program was in progress and that further drill- ing would await its completion. However, the Court has already determined that the information as to developments on the Kidd 55 segment were not material until 7:00 p.m. on April 9, some seven weeks later. The same definition of materiality applies. Since the information was not matcrial, defendants Stephens and Fogarty were not required to disclose it to the Committee. Hence, defendants Stephens und Fogarty were not guilty of fraud or deception in fail- ing to furnish the information. In (5503) view of the land acquisition program, the security measures which they es- tablished were for the benefit of the Company and its stock- holders.'” In accepting the stock options granted to them on Feb- ruary 20, 1964, defendants Stephens, Fogarty, Kline, Molli- son and Holyk did not violate Section 10(b) or Rule 10b-5. THe Aprit 12, 1964 Press RELEASE On Sunday, April 12, 1964, at about 3:00 p.m., TGS issued a press release, the substance of which appeared in the Monday morning newspapers. The text of the release stated in part: 50a Appendix A —Opinion of the District Court ‘‘New York, April 12—The following statement was made today by Dr. Charles F. Fogarty, executive vice president of Texas Gulf Sulphur Company, in regard to the company’s drilling operations near Timmins, Ontario, Canada. Dr. Fegarty said: ‘**During the past few days, the exploration ac- tivities of Texas Gulf Sulphur in the area of Tim- mins, Ontario, have been widely reported in the press, coupled with rumors of a substantial copper dis- covery there. These reports exaggerate the scale of operations, and mention plans and statistics of size and grade of ore that are without factual basis and have evidently originated by speculation of people not connected with TGS. ‘¢ «The facts are as follows. TGS has been explor- ing in the Timmins area for six (5504) years as part ‘of its overall search in Canada and elsewhere for various minerals—lead, copper, zinc, etc. During the course of this work, in Timmins as well as in Eastern Canada, TGS has conducted exploration entirely on . its own, without the participation by others. Nu- merous prospects have been investigated by geo- physical means and a large number of selected ones have been core-drilled. These cores are sent to the United States for assay and detailed examination as a matter of routine and on advice of expert Canadian legal counsel. No inferences as to grade can be drawn from this procedure. ‘«*Most of the areas drilled in Eastern Canada have revealed either barren pyrite or graphite with- out value; a few have resulted in discoveries of small or marginal sulphide ore bodies. $e O08 M8 ot te RNC SSS SSS dla Appendix A —Opinion of the District Court ‘* ‘Recent drilling on one property near Timmins has led to preliminary indications that more drilling would be required for proper evaluation of this pros- pect. The drilling done to date has not been conclu- sive, but the statements made by many outside quar- ters are unreliable and include information and figures that are not available to TGS. “**The work done to date has not been sufficient to reach definite conclusions and any statement as to size and grade of ore would be premature and possibly misleading. When we have progressed to the point where reasonable and logical conclusions can be made, TGS will issue a definite statement to its stockholders and to the public in orde> to clarify the Timmins project.’ » (5506) The Commission argues that at the time the press release was issued, TGS knew that it had discovered a copper mine on the Kidd 55 Segment and that the press release was materially misleading in characterizing this discovery as a “‘prospect’’ and in Stating that ‘‘any state- taent as to size and grade of ore wouid be premature,” For these reasons the Commission contends that the press re- lease violated Section 10( b) and Rule 10b-5. 52a - Appendix A —Opinion of the District Court Food Serv., Inc., CCH Fep. Sec. L. Rep. $91,317 (N.D. Il. 1964). The phrase ‘‘in connection with the purchase or sale of : ny security’’ has been broadly construed ‘‘to carry out the intent of the Act, which is designed to protect in- vestors against fraud.’’ Stockwell v. Reynolds & Co., (5507) CCH Fep. Sec. L. Rep. 991,579 at 95,198 (S.D.N.Y. 1965) ; Cooper v. North Jersey Trust Co., 226 F. Supp. 972, 978 (S.D.N.Y. 1964). During the first week of April, rumors of a copper dis- covery by TGS on the Kidd 55 segment were circulating in Canada. These rumors intensified, and on April 9 Toronto newspapers reported that TGS had discovered ‘‘one of the largest copper deposits in North America,’’ ‘‘a major copper strike.’’ On April 10, defendant Stephens telephoned defendant Lamont seeking his advice as to what action TGS should take with respect to the rumors. Lamont advised that TGS should take no action unless the rumors reached the New York press or until TGS had sufficient information available to issue an appropriate press release. On Saturday morning, April 11, 1964, defendant Steph- ens, while at his home in Greenwich, Connecticut, read the articles appearing in the New York Times and the New York Herald Tribune. The Herald Tribune article an- nounced that TGS had ‘‘the biggest ore strike since gold was discovered more than 60 years ago in Canada. . . a bed of copper sulphide 600 feet wide with a possible over- all copper return of 2.87% through most of its width.’’; (5508) that TGS had four drill rigs in operation with four more to go into operation the following week; and that the richness of the copper was so great that it had been flown out of Canada to be assayed. Stephens telephoned defendant Fogarty at the latter’s home in Rye, New York and told him about the articles. Fogarty read the articles and called Stephens back. Fogar- 03a Appendix A —Opinion of the District Court ty testified that he and Stephens ‘‘were quite upset... because certainly they [the articles] were full of exaggera- tions and what I considered to be erroneous statements.’ Stephens advised Fogarty that TGS should issue a press release to clarify the rumors, referring to his April 10 con- versatiou with defendant Lamont. Stephens asked Fogarty to contact Carroll of Doremus & Co., the Company’s public relations firm, who also lived in Rye. Fogarty did so, and Carroll agreed that TGS should issue a press release. At about 1:00 p-m. on Saturday afternoon, April 11, Fo- garty telephoned defendant Mollison at his home in Green- wich, Connecticut, and asked for a review of the situation at the Kidd 55 segment. At about 5:00 p-m. he went to Mollison’s home to discuss the matter further. Mollison had been on (5509) the Kidd 55 segment on the mcrning of Aprii 10 and had been advised by defendant Holyk as to the drilling results to 7:00 p.m. on April 10. At that time drill holes K-55-1, K-55-3 and K-55-4 had been com- pleted; drilling of K-55-5 had started on Section 2200 S and had been drilled to 97 feet, encountering mineraliza- tion on the last 42 feet: and drilling of K-55-6 had been started on Section 2400 S and had been drilled to 569 feet, encountering mineralization over the last 127 feet. In reporting the situation on the Kidd 55 segment, Mol- lison told Fogarty that the only known mineral occurrences in the area had been at Kamkotia and that these consisted of a series of small disconnected sulphide masses. Mollison advised that it was too early to state what TGS had and ‘‘it was impossible at that time . . . to understand the structure, to make the projections from one hole to another.’’ Fogarty went home and drafted notes for a press release which he took to Carrull’s house so that they could be put in shape by Carroll for release on Sunday, the following day. He had telephoned defendant Hunting- o4a Appendix A —Opinion of the District Court ton, one of TGS’s lawyers, reading his notes to him. Hunt- ington made one or two suggestions and advised Fogarty that he thought the release would be all right legally. (5510) On Sunday morning, April 12, Fogarty telephoned Mollison to see if he had any additional information, and instructed Mollison to return with Holyk to Timmins as soon as possible to ‘‘move things along.’’ Fogarty and Carroll then completed the final draft of the press release at Carroll’s house. Fogarty telephoned Stephens and read the tinal draft to him, Stephens asking certain questions and making minor changes. Stephens instructed Fogarty to have the release issued as promptly as possible so that it would be on the wires on Sunday afternoon. From the foregoing, it is apparent that the purpose of the April 12 press release was an attempt to meet the rumors which were circulating with respect to the Kidd 55 segment. There is no evidence that TGS derived any direct benefit from the issuance of the press release or that any of the defendants who participated in its preparation used it to their personal advantage. The issuance of the release produced no unusual market action. 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 (5511) Rule 10b-5 since it was not issued ‘‘in connection with the purchase or sale of any security.’’ However, 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 demon- strate that it was false. misleading or deceptive. The sig- nificance of the drilling results known to TGS by 7:00 p.m. on April 10 was the subject of detailed and conflicting tes- = 55a Appendir A —Opinion of the District Court timony at the trial. Adelstein defined proven ore and prob- able ore. His definitions Were substantially ‘the same as the definitions used in the General Rules and Regulations under the Securities Act of 1933, Appendix I, Form 1-A, Notification Under Regulation A, Schedule I, Item 8A(ce), which provide: ‘The term ‘proven ore’ means a body of ore so extensively sampled that the risk of failure in con- tinuity of the ore in such body is reduced to a mini- mum. The term ‘probable ore’ means ore as to which the risk of failure in continuity is greater than for proven ore, but as to which there is sufficient Warrant for assuming continuity of the ore.”’ Based on these definitions and the drilling done to 7:00 p.m. on April 10, Adelstein was of the opinion that TGS could have calculated 8.33 million tons of proven ore. Penne- baker, (5512) the other Commission expert, was of the opinion that TGS could have calculated 6.2 million tons of Proven ore. Both of the Commission experts stressed that the drilling showed substantial mineralization in the cores and sabstantial copper mineralization on the eastern edge of the anomaly. Since they could make estimates as to the size and grace of ore on the basis of information to 7:00 p.m. on April 10, the Commission contends that the use of the word ‘‘prospect”’ in the April 12 press release was mis- leading. Adelsteir. defined a “‘prospect’’ as a property where there is no assurance that commercially mineable reserves exist. The opinions of Adelstein and Pennebaker were centra- dicted by Forrester, Park. Wiles, Walkey, Lacy and Me- Laughlin, independent experts called by TGS (see footnote (9)). PASTA MEAN ARREST aa PENT AO REY MONTE IE Or mS ia 56a Appendix A—Opinion of the District Court (5513) TGS’s experts were unanimously of the opinion that at 7:00 p.m. on April 10 the Kidd 55 segment was still a prospect and that no estimates as to proven or probable ore could be made. They all agreed that the April 12 press release accurately set forth the situation as it was known at the time. None thought that TGS could have estimated proven ore, and the (ommission’s expert, Pennebaker, agreed that this was a matter on which there could be dif- ferences of opinion. Defendants’ experts testified that on the basis of the drilling to that time there was no assurance of coniinuity in the mineralized zone and that, without fur- ther drilling, the results of one hole could not be correlated with the results of others. The Commission contends none the less that the press re- lease was misleading and deceptive because the defendants who prepared the release believed that TGS had a mine. The Commission points to the fact that drilling of K-55-8, the mill test hole, was commenced on April 11, and must have been ordered by the defendants at an earlier time. Both Adelstein and Pennebaker testified that a company does not drill a mill test hole on a ‘‘ prospect.”’ (5514) Park, Lacy and Forrester found nothing unusual in this procedure, and Wiles testified that it was usual to begin collecting metallurgical samples as the drilling pro- gresses. With a direct conflict in testimony between the Commission’s and defendants’ expert witnesses, it cannot be concluded that instructions to drill K-55-8 established that TGS knew that the Kidd 55 segment was no longer a ‘*prospect.”’ The Commission also points to the Northern Miner article which was drafted in Timmins on April 13. Even if it is assumed that Mollison, Holyk and Darke suggested the con- tents of that article to Ackerley, this wonid not establish that the April 12 press release was false or . - -eptive. Using 57a Appendix A —Opinion of the District Court the Commission’s figures, over 30% of the relevant drilling was done between 7:00 p.m. on April 10 and 7:00 a.m. on April 13. K-55-5 was drilled an additional 507 feet; K-55-6 was drilled an additional 375 feet; drilling of K-55-7 was commenced on April 12 on Section 2000 S and was drilled to a length of 146 foet by 7:00 a.m. on April 13. The de- fendants are to be judged on the facts known to them when the April 12 press release was issued. Mollison and Holyk were not at the site but were in or near New York (5515) while the release was being prepared. There is no evidence that the drilling results after 7:00 p.m. on April 10 were known to the framers of the April 12 press release, so there is NO more reason for charging TGS with this knowledge than with knowledge of the statement drafted by Mollison for the Ontario Minister of Mines on April 15, or with knowledge of the information that was available to TGS when it made its announcement on April 16. Moreover, the circumstances under which the April 12 release was prepared indicate that defendants Fogarty and Mollison were under considerable pressure. If they said too much, they would have been open to criticism and pos- sible liability if it turned out that TGS had not discovered & commercial mine. If they said too little éid later an- nounced a mine, they subjected themselves to the charge that their press release was misleading or deceptive—and, indeed, this is what has happened. If they had announced the drilling results in terms of number of drill holes, footage drilled and mineralization intersected, they would have en- couraged the rumor mill which they were seeking to allay. Perhaps they should have waited until they could have obtained more probative information before issuing a press release, particularly (5516) since developments were break- ing so rapidly. However, as above stated, TGS must not be judged by hindsight. In seeking the advice of Mollison, the SST MereeRD Dry, area ANION IR TE Tx Siege verre. 08a Appendix A —Opinion of the District Court -ad of TGS’s exploration group, in consulting with TGS’s -..Dlie relations firm, and in clearing the release with one ! TGS’s lawyers, Stephens and Fogarty exercised reason- iole business judgment under the circumstances. While, in :etrospect, the press reiease may appear gloomy or incom- »lete, this does not make it misleading or deceptive on the basis of the facts then known."® Accordingly, in issuing the April 12 press release TGS did not violate Section 10(b) or Rule 10b-5. ConcLUSION The foregoing constitutes the Court’s findings of fact and conclusions of law (Rule 52(a), Fed. R. Civ. P.). There appearing no just reason for delay, the Clerk is directed to enter judgment dismissing the complaint against defendants Texas Gulf Sulphur Company, Charles F. Fogarty, Richard D. Mollison, Walter Holyk, Kenneth H. Darke, Thomas S. Lamont, Francis G. Coates, Claude O. Stephens, John A. Murray, Earl L. Huntington and Harold B. Kline (Rule 58(1), Fed. R. Civ. P.). (5517) Defendants Richard H. Clayton and David M. Crawford are found to have violated Section 10(b) of the Act and Rule 10b-5. In accordance with the agreement be- tween the parties, the Commission tmay notice a hearing to determine the remedy to be accorded with respect to these two defendants. It is so ordered. Dated: New York, N. Y. August 16, 1966. Dunp.ey B. Bonsar. U.8.% J. Filed August 19, 1966 59a Appendix 4 —Opinion of the District Court (9518) Footnotes to Opinion in Securities and Exchange Commission v. Texas Gulf Sulphur Company, et al. 65 Ciy. 1182 (1) At least 49 private actions are now pending in this court against TGS, defendants named in the Commicsion’s action, and others, arising out of the transactions which are the subject matter of the Commission’s action. Some 16 of these are individual] actions, 31 are said to be class ac- tions, and one is a derivative action. At least 475 persons are included as plaintiffs. While many of the complaints do not specify the damages claimed, others, in the aggregate, claim compensatory damages in excess of $2,800,000 and punitive damages in excess of $77,000, (2) Certain minerals combine with sulphur to form sul- phides. Some sulphides, such as chalcopyrite (copper sul- phide) and sphalerite (zine sulphide), may be commercially mined if found in sufficient quantities ; others, such as pyrite and pyrrhotite (iron sulphides), have no commercial value. (3) The electromagnetic instruments used in the aerial geophysicial surveys indicate only that a conductor of elec- tricity exists. There are many good conductors besides sulphides. For example, graphite and even water are good conductors. On the other hand, zine sulphides are not con- ductors. (4) Prior to April 7a shortage of water needed for drill- ing prevented the operation of more than one drill rig. The second rig was put into operation on April 8, and the third and fourth rigs were put into operation on April 10 and 12 respectively. (9) Seven feet of snow on the ground during this period impeded travel between the Kidd d9 segment and Timmins, 15 miles away, the trip taking as long as four hours. (6) Rule 10b-5 is general in terms. Other rules under Section 10(b) are more specific. See Rule 10b-6, which applies Section 10(b) to underwriters, issuers, brokers, deal- ers, ete. Compare also Rule 10b-2 with reference to solici- tation of purchases on an exchange to facilitate a distribu- tion of securities. (5519) (7) Inits briefs and at trial the Commission made no distinction between the three sections of Rule 10b-5, rely- 60a Appendix A—Opinion of the District Court ing on Last v. Fashion Park, Inc., 340 F. 2d 457, 462 (2d Cir. i%o5,, where the court noted that as long as a violation of the Rule is alleged, it makes little difference which section oi the Rule is invoked. There was no evidence, however, _ that the defendants employed ‘‘any device, scheme, or arti- fice to defraud’’ under section (1) or made any representa- tions under section (2). Therefore, only section (3) is applicable to the facts of this case. (S) Section 20c provides in part that: ‘*It shall be unlawful for any investment adviser, by use of the mails or any means or instrument :lity of interstate commerce, directly or indirectly— (1) to employ any device, scheme, or artifice to defraud any client or prospective client; (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; ...’’ (9) At the trial, the Commission called as expert wit- nesses Benjamin Adelstein and Edwin M. Pennebaker. Mr. Adelstein has been the Chief Mining Engineer for the Com- mission since 1941. He was previously employed by Ana- conda Copper Compary and by the United States Coast and Geodetie Survey and the United States Corps of Engineers. Mr. Pennebaker is a mining geologist from Scottsdale, Ari- zona with many years of experience, who was appointed Consulting Geologist to the Commission in November 1965. TGS called as expert witnesses: James D. Forrester, geologist, Dean of the University of Arizona School of Mines and Director of the Arizona Bureau of Mines, Tuc- son, Arizona; Charles F. Park, Jr., geologist, Professor of Geology at Stanford University, where he was Dean of the School of Earth Sciences from 1950-1965; Cloyd M. Wiles, mining engineer with National Lead Company from 1942 until his retirement in 1963; Graham Walkey, mining engi- neer and geologist with Kamkotia Mines, which is located approximately 12 miles from the Kidd 05 segment; Willard C. Lacy, geologist, professor at the University of Arizona and head of the University’s Department of Mining and Engineering; Donald McLaughlin, g« logist, Chairmaia vt the Board and fcrmerly president ‘1 Homestake Min..:: ae es 61la Appendix A —Opinion of the District Court Company ; John B. Boniwell, geophysicist with eight years’ expericnee on the Canadian Shield; Douglas H. Bellemore, security analyst, Professor of Finance at the Graduate School of Business (0920) Administration at New York University; and Alvin W. Pearson, security analyst, presi- dent of Lehman Corporation and chairman of its Portfolio Committee. (10) Adelstein testified that on the basis of work done to 7:00 p.m. on April 9 TGS could have calculated ore reserves of 7.7 million tons with a fTOSS assay value of $204,200,000. Pennebaker testified that TGS could have calculated ore re- serves of 5.5 million tons with a gross assay value of 197,200,000. Adelstein defined gross assay value to mean ‘‘the sum of the products of the number of units of each metal of commercial value times the prevailing price for each metal ...’’ Since grass assay value does not take account of the costs of mining, milling, smelting, sales, over- head, cost of capital, et., it can be misleading and its use in registration statements is prohibited by the Commission. For example, Wiles estimated that 95.2% of the gross assay value of the ore deposit on the Kidd 55 segment would be expended for the above purposes. Although his figures ap- pear to be conservative:and though ore with a much lower . this material information to their own advantag- + ~ ty its disclosure to the Public. ; : E § : AVBOIIE ALM EIN Pe teIIRE Re, a ia a) ot aT ee 64a Appendix A — Judgment of the District Court (Entered August 22, 1966) UNITED STATES DISTRICT COURT SouTHERN District or New York [Same Trr.e] The defendant Thomas P. O'Neill having been served with a summons and complaint, and said defendant having failed to answer or appear herein, and the plaintiff having moved for a default judgment in a separate proceeding, and allt the remaining parties having waived a jury and having agreed that trial should first be had on the issue of whether defendants or any of them had violated Section 10(b) and Rule 10b-5 reserving for a later hearing the issue of the remedy to be applied in the event such violations are found, and the said issue having been brought on regularly for trial before the Honorable Dudley B. Bonsal, United States District Judge, on May 9, 10, 11, 12, 13, 23, 24, 25, 26, 27, 31 and June 1, 2, 3, 6, 7, 8 and 21, 1966, and the Court having reserved decision at the conclusion of the evidence, and the Court thereafter having handed down its opinion decision, dated August 16, 1966 and filed on August 19, 1966 constituting the Court’s findings of fact and conclusions of law dismissing the complaint as to all defendants except Richard H. Clayton and David M. Crawford, and the Court having found that the defendants Richard H. Clayton and David M. Crawford had violated Section 10(h) of the Act and Rule 10b-5, and the Court in its opinion decision having stated that there was no just reason for delay of entry of this Judgment, it is 65a Appendix A — Judgment of the District Court ORDERED, ADJUDGED AND DecreeD: That the defendants, Texas Gulf Sulphur Company, a Texas corporation, Charles F. Fogarty, Richard D. Mollison, Walter Hoiyk, Kenneth H. Darke, Thomas S. Lamont, Francis G. Coates, Claude O. Stephens, Jonn A, Murray, Earl L. Huntington and Harold B. Kline have judgment against the plaintiff Securities and Exchange Commission dismissing the complaint, and it is further, ORDERED, ADJUDGED AND DECREED: That the defendants Richard H. Clayton and David M. Crawford have violated Section 10(b) of the Act and Rule 10b-5, and pursuant to agreement between the parties, the Securities and Exchange Commission may notice a hearing to determine the remedy to be accorded with respect to these two defendants. Dated: New York, N.Y. August 22, 1966 John J. Olear, Jr. Clerk 66a Appendix A — Opinion of the Court of Appeals UNITED STATES COURT OF APPEALS For THE Seconp Circuit — No. 296—September Term, 1966. a>. ~ (Argued March 20, 1967 Submitted to the in banc Court May 2, 1968 Decided August 13, 1968.) Docket No. 30882 n. SEcURITIES AND ExcHancE CoMMISSION, Plaintiff-Appellant, —V = Texas GutrF SutpHur Co., a Texas Corporation, CHARLES F. Focarty, Ricuarp D. Motiison, WALTER Ho.yk, KeEn- NETH H. Darke, Francis G. Coates, CLaupE O. STEPHENS, Joun A. Mvrray, Eart L. Huntincton, and Harotp B. Kung, Defendants-Appellees. TGS relies on the holding of the court below that “The issuance of the release produced no unusual ma.ket action” and “In the absence of a showing that the pu. pose 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 connec- 25 + Rule 19b-5(2) provides in pertinent part: It shall be unlawful for any person, directiy or indirectly, by the use of any means or instrumentality of interstate commerce, .. . (2) to make any untrue statement of a material fact or to omit to atate a material fact necessary in order to make the state- ments made, in the light of the circumstances under which they were made, not misleading, . . . in connection with the purchase or sale of any security. 105a Appendix A — Opinion of the Court of Appeals tion with the purchase or sale of any security, the Com- mission has failed to demonstrate that it was false, mis- leading or deceptive.” 258 F. Supp. at 294. Before further discussing this matter it seems desirable to state exactly what the SEC claimed in its complaint and what it seeks. 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 defen- dant Texas Gulf’s officers and employees, including de- fendants Fogarty, Mollison, Holyk, Darke and Clayton, to be materially false and misleading.” The specific relief the SEC seeks is, pursuant to Section 21(e) of Securities Exchange Act of 1934, 15 U. S. C. §78u(e), a permanent injunction restraining the issuance of any further materially false and misleading publicly distributed informative items.” B. The “In Connection With ...” Requirement. In adjudicating upon the relationship of this phrase to the case before us it would appear that the court below used a standard that does not reflect the congressional purpose that prompted the passage of the Securities Ex- change Act of 1934. 26 The prayer for relief reads: WHEREFORE the plaintiff prays for: * * * + * (5) The issuance of a final judgment permanently enjoining the defendant Texas Gulf from directly or indirectly, by use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connec- tion with the purchase or sale of securities, making any untrue statement of material fact or omitting to state a material fact necessary to make the statements made, in light of the circum- stances under which they were made, not misleading, namely, from issuing, publishing, distributing or otherwise disseminating materially false, misleading, inadequate or inaccurate press re- leases and other communications and reports concerning material facts about Texas Gulf’s activities and operations. Sediidetenreeeddichdined muah eneck oe ee 3 : 4 i ; i 106a Appendix A — Opinion of the Court of Appeals The dominant congressional purposes underlying the Se- eurities Exchange Aci of 1934 were to promote free and open public securities markets and to protect the invest- ing public from suffering inequities in trading, including, specifically, inequities that follow from trading that has been stimulated by the publication of false or misleading corporate information releases. Commenting on the dis- closure purposes of the House bill (fl. R. 9323), the bill a Committee of Conference eventually integrated with a similar Senate bill (S. 3420) to make the bill passed by both Houses of Congress that became the Securities Ex- change Act of 1934, the House Committee which reported out H. R. 9323 stated: The idea of a free and open public market is built upon the thecry that competing judgments of buyers and sellers as to the fair price of a security brings about a situation where the market price reflects as nearly as possible a just price. Just as artificial ma- nipulation tends to upset the true function of an open market, so the hiding and secreting of important in- formation obstructs the operation of the markets as indices of real value. There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy. The disclosure of information materially im- portant to investors may not instantaneously be re- flected in market value, but despite the intricacies of security values truth does find relatively quick accept- ance on the market. That is why in many cases it is so carefully guarded. Delayed, inaccurate, and mis- leading reports are the tools of the unconscionable market operator and the recreant corporate official who speculate on inside information. Despite the tug 107a Appendix A — Opinion of the Court of Appeals of conflicting interests and the influence of popular groups, responsible officials of the leading exchanges have unqualifiedly recognized in theory at least the vital importance of true and accurate corporate re- porting as an essential cog in the proper functioning of the public exchanges. Their efforts to bring about more adequate and prompt publicity have been handi- capped by the lack of legal power and by the failure of certain banking and business groups to appreciate that a business that gathers its capital from the in- vesting public has not the same right to secrecy as a small privately owned and managed business. It is only a few decades since men believed that the dis- closure of a balance sheet was a disclosure of a trade secret. Today few people would admit the right of any company to solicit public funds without the dis- closure of a balance sheet. (Emphasis supplied.) H. R. Rep. No. 1383, 73rd Cong., 2d Sess. 11 (1934). Section 10b of the Act (see footnote 8, supra) was taken by the Conference Committee from Section 10b of the pro- posed Senate bill, S. 3420, and taken from it verbatim insofar as here pertinent. The only alteration made by the Conference Committee was to substitute the present closing language of Section 10b, “.. . in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors” for the closing language of the original Section 10b of S. 3420, “. . . which the Commis- sion may declare to be detrimental to the interests of in- vestors.” 78 Cong. Rec. 10261 (1924). The Report of the Senate Committee which presented S. 3420 to the Senate summarized Section 10b as follows: a Nn a het ae i a tl Le i eh 108a Appendix A -— Opinion of the Court of Appeals Subsection (b) authorizes the Commission by rules and regulations to prohibit or regulate the use of any other manipulative or deceptive practices which it finds det- rimental to the interests of the investor. (Emphasis supplied.) S. Rep. No. 792, 73rd Cong., 2d Sess. 18 (1934). Indeed, from its very inception, Section 10(b), and the proposed sections in H. R. 1383 and S. 3420 from which it was derived, have always been acknowledged as eatch- alls. See Bromberg, Securities Law: SEC Rule 10b-5, p. 19 (1967). In the House Committee hearings on the pro- posed House bill, Thomas G. Corcoran, Counse! with the Reconstruction Finance Corporation and a spokesman for the Roosevelt Administration, described the broad pro- hibitions contained in §9(c), the section which corresponded to Section 10(b) of S. 3420 and eventually to Section 10(b) of the Act, as follows: “Subsection (c) says, ‘Thou shalt not devise any other cunning devices’... . Of course sub- section (c) is a catch-all clause to prevent manipulative devices. I do not think there is any objection to that kind of a clause. The Commission should have the authority to deal with new manipulative devices.” Stock Exchange Regulation, Hearings before the House Committee on In- terstate and Foreign Commerce, 73rd Cong., 2d Sess. 115 (1934). Although several other witnesses objected to the breadth of the proposed prohibition that Corcoran was supporting, the section as enacted «lid not in any way limit the broad scope of the “in connection with” phrase. See 3 Loss, Securities Regulation, 1424 h. 7 (2d ed. 1961). Thus, the legislative history of Section 10(b) does not support the proposition urged upon us by Texas Gulf Sul- phur that Congress intended the limited construction of the “in connection with” phrase applied by the trial court. 109a Appendix A — Opinion of the Court of Appeals Moreover, comparisons of Section 10(b) with the santifraud provisions of the Securities Act of 1932 (§12(2), 15 U.S. C. §771(2) “... [offers or] sells a security by means of ...”; §17(a), 15 U. S.C, §77q(a) “... in the [offer or] sale of any securities to obtain money or property by means of ...”; [language in brackets was added in 1954 amend. ments]), and with the 1936 antifraud amendment of Sec- tion 15 of the Securities Exchange Act of 1934 (§15(¢) (1), 15 U. S. C. §780(e)(1) “. . . effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security ...”) dewonstrite that wen Congress in- tended that there be a participation ir a securities trans- action as a prerequisite of a violation, it knew how to make that intention clear. See Bromberg, op. cit. supra Table 1 at 16-17. Therefore it seems clear ‘rom the legislative purpose Congress expressed in the Act, aad the legislative history of Section 10(b) that Congress when it used the phrase “in connection with a purchase or sale of any security” intended only that the device employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation’s securities. There is no indication that Congress intended that the corpora- tions or persons responsible for the issuance of a mislead- ing statement would not violate the section unless they engaged in related securities transactions or otherwise acted with wrongful motives; indeed, the obvicus purposes “of the Act to protect the investing public and to secure fair dealing in the securities markets would be seriously under- mined by applying such a gloss onto the legislative lan- guage. Absent a securities transaction by an insider it is almost impossible to prove that a wrongful purpose moti- Wey rey et ee SPIO ES SOR MERC Sap ren, TR ee er tnene ORE AYES pm reat 110a Appendix A — Opinion of the Court of Appeals vated the issuance of the misleading statement. The mere fact that an insider did not engage in securities transac- tions does not negate the possibility of wrongful purpose: perhaps the market did not react to the misleading state- ment as much as was anticipated or perhaps the wrong- ful purpose was something other than the desire to buy at a low price or sell at a high price. Of even greater relevance to the Congressional purpose of investor pro- tection is the fact that the investing publie may be injured as much by one’s misleading statement containing inac- curacies caused by negligence as by a misleading statement published intentionally to further a wrongful purpose. We do not believe that Congress intended that the proserip- tions of the Act would not be violated unless the makers of a misleading statement also participated in pertinent securities transactions in connection therewith, or unless it could be shown that the issuance of the statement was motivated by a plan to benefit the corporation or them- selves at the expense of a duped investing public. Nor is there anything about Rule 10b-5 which demon- strates that the SEC sought by the Rule not fully to im- plement the Congressional purpose and objectives under- lying Section 10(b). See Securities Exchange Act of 1954, Release No. 3230 (May 21, 1942); 10 SEC Ann. Rep. 56-7 (1944); 8 SEC Ann. Rep. 10 (1942). To be sure, SEC official publicity accompanying the promulgation of the Rule emphasized the insider trading aspects of the Rule, particularly the prohibition against purchases by insiders, but this was emphasized because “the previously existing rules against fraud in the purchase of securities applied only to brokers and dealers,” 8S SEC Ann. Rep. 10, and the Commission wished to make it emphatically clear that the Rule was expected, inter alia, to close this loophole. llla ALLOWS 4 Opinion of the Court of Appeals The foregeing disenssion demonstrates that Congress in- tended to orcter: the ‘mvesting public in connection with PSINSRSS OT Seles on Exchanges from being misled by Mislv€cing statements ;Tomulgated for or on behalf of COPPOTSLONS irrespective of whether the insiders contempo- raneonsiy (TSae cn the securities of that corporation and irrespevtive of whether the corporation or its management @ 0 Uterior porpose or purposes in making an official lj 482. Indeed, the C ommission has been charged by Congress with ch, espemernisity of policing all mis- eading eorporsis stgtemen s from those contained in an Mittal prosrevens ct: hoe pelea in a notice to stock- CTS Telative to the need or de esirability of terminating ie EXISteNey OFS corporation or of merging it with another. To render he c- =eTessional purpose ineffective by insert- ‘s Ing inte the starz, TY words the need of proving, not only that the onblie ™S¥ have heen misled by the release, but Slso thar thos: TSSPOTSIhle were actuated by a wrongful Purpose wher they issued the release, is to handicap unrea- Sonadly the Crommission in its work. We should have in he Wiss words of © 2dge Learned Hand in Cawley vy. ~ = 2.26 443. 445 (2 Cir. 1959), relative to an Interpretation of the words contai mo within a congressional ==.°S$ they explicitly forbid it, the pur- Pose of 8 stgtatory provision js the best test of the meaning Of the words choses We are tO put ourselves go far as we Can in tae pesition of the legislature that uttered them, and devide whether -+ -- “t would declare that the Situation that has griser ¢s y cthin what it wishes to cover. Indeed, at times the purnase ‘may be so manifest as to override even the explivit words pea Markham v. Cabell, 326 U.S. As Was peinied oct ty the trial court, 258 F. Supp. at 293, the inter: of ihe Securities Exchange Act of 1934 is Pt Ree ra eee - PFE POG. GE PM BIA TET? Aare TETRA LL REP Fe thins t pales TI Ok ET Cree: nics aha dela a eat es ee Ne NM, Se LEME RRA ti ae BOY SE RR a! oe Se oe, Cer — 112a Appendix A— Opinion of the Court of Appeals the protection of investors against fraud. Therefore, it would seem elementary that the Commission has a duty to police management so as to prevent corporate practices which are reasonably likely fraudulently to injure investors. And, of course, as we have already emphasized, a corpora- tion’s misleading material statement may injure an investor irrespective of whether the corporation itself, or those indi- viduals managing it, are contemporaneously buying or sell- ing the stock of the corporation. Therefore, when materially misleading corporate statements or deceptive insider activi- ties have been uncovered, the courts, as they should, have broadly construed the statutory phrase “in connection with the purchase or sale of any security.” Freed v. Szabo Food Serv., Inc., CCH Fed. SEC L. Rep. 791,317 (N. D. Ill. 1964) ; Stockwell v. Reynolds d& Co., 252 F. Supp. 215 (SDNY 1965) ; Cooper v. North Jersey Trust Co., 226 F. Supp. 972, 978 (SDNY 1964); Miller v. Bargain City, U. S. A., Inc., 229 F.. Supp. 33, 37 (E. D. Pa. 1964) ; see Ruder, Corperate Disclosures Required by the Federal Securities Laws: The Codification Implications of Texas Gulf Sulphur, 61 Nw. U. L. Rev. 872, 895 (1967). The court below found: “There is no evidence that TGS derived any direct benefit from the issuance of the press release or that any of the defen- dants who participated in its preparation used it to their personal advantage.” 258 F. Supp. at 294. The requirement that a statement may not be found misleading unless its issuance is actuated hy a “wrongful purpose” might well have the effect of permitting the issuers of misleading state- ments to seek an advantage but to escape liability if the advantage fails to materialize to the degree contemplated, or cannot be demonstrated. 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 113a Apperdix A — Opinion ef the Court of Appeals statements irrespective of the purpose underlying their issuance.’ It does not appear to be unfair to impose upon corporate management a duty to ascertain the truth of any statements the corporation releases to its shareholders or to the investing public at large. Accordingly, we hold that Rule 10b-5 is violated whenever assertions are made, as here, in a manner reasonably calculated to influence the investing public, e.g., by means of the financial media, Fleischer, supra, 51 Va. L. Rey. at 1294-95, if such assertions are false or misleading or are so incomplete as to mislead ir- respective of whether the issuance of the release was moti- vated by corporate officials for ulterior purposes. It seems clear, however, that if corporate management demonstrates that it was diligent in ascertaining that the information it published was the whole truth and that such diligently ob- tained information was disseminated in good faith, Rule 10b-5 would not have been violated. C. Did the Issuance of the April 12 Release Violate Rule 10b-5? Turning first to the question of whether the release was misleading, i.e., whether it conveyed to the public a false impression of the drilling situation at the time of its issu- ance, we note initially that the trial court did not actually decide this question. Its conclusion that “the Commission has failed to demonstrate that it was false, misleading or deceptive,” 258 F. Supp. at 294, seems to have derived from its views that “The defendants are to be judged on the facts known to them when the April 12 release was issued,” 258 F. Supp. at 295 (emphasis supplied), that the drafts- men “exercised reasonable business judgment under the 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. ee oh ak ante aa at pete ee ee FORE Tae a ee Re eee PEE EE A PY " PYLE WE ITM ATR ONIN RM ONY Em Syne, 1l4a Appendix A — Opinion of the Court of Appeals circumstances,” 258 F. Supp. at 296, and that the release was not “misleacing or deceptive on the basis of the facts then known,” 258 F. Supp. at 296 (emphasis supplied) rather than from an appropriate primary inquiry into the meaning of the statement to the reasonable investor and its relationship to truth. While we certainly agree with the trial court that “in retrospect, the press release may appear gloomy or incomplete,” ** 258 F. Supp. at 296, we 28 Examined in retrospect, the situation in Timmins at the time the release was prepared seems to offer good reason for optimism. The draftsmen of the release had full knowledge of the discoveries up to 7:00 P.M. on Friday, April 10. At that time approximately 2/3 of the ore ultimately found to exist by the time of the prepnration 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. 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. Ac- cepting the conservative view of TGS’s expert Wiles that 95.2% would be absorbed by costs, the ultimate profit could then have been esti- mated at more than $14,000,000. 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. at 282 n. 10. Roche, a mining stock specialist, added that mines with significantly lower percentages of copper and with no zine or silver, as here, were profitably operated. On the basis of approxi- mately one-third more data, and, for all the record shows, without any additional figures as to estimated costs, TGS announced on April 16 a major strike with over 25 million tons of ore. The trial court found that as of 7:00 P.M. on Thursday, April 9, “There was real evidence that a body of commercially mineable ore might exist.” 252 F. Supp. at 282. 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 minerali- zation had been completed, 84.4% by 7:00 P.M. on the 12th, and 90.2% by 7 A.M. on April 13. The release did not appear in most newspapers of general circulation until later in the morning of Monday, the 13th. The release, see pp. 3600-3601 supru, began by referring to rumored reports that the company had made a substantial copper discovery and then continued: “These reports exaggerate the scale of operations, and mention plans and statistics of size and grade of ore that are without factual basis and have evidently originated by speculation of people not connected with TGS.” It then stated, purporting to give the true facts in contradiction to the rumors: “The facts are as follows.” However, the “facts” disclosed relative to the Kidd-55 segment were: “Recent drilling on one property near Timmins has led to preliminary aaiieiadlas LLNS AE SRE 1lda -Eppondix A — Opinion of the Court of Appeals cannot, from the present record, by applying the standard Congress intended, definitively conclude that it was decep- tive or misleading to the reasonable investor, or that he would have been misled by it. Certain newspaper accounts of the release viewed the release as confirming the exist- ence of preliminary favorable developments, and this opti- mistic 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. 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 293¢ 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. Accordingly, we remand this issue to the district court that took testimony and heard and saw the witnesses for a de- termination of the character of the release in the light of the facts existing at the time of the release, by applying the standard of whether the reasonable investor, in the exercise of due care, would have been misled by it. In the event that it is found that the statement was mis- leading to the reasonable investor it will then become neces- sary to determine whether its issuance resulted from a lack of due diligence. The only remedy the Commissien seeks against the corporation is an injunction, see footnote 26, indications that more drilling would be required for proper evaluation of this prospect. The drilling done to date has not been conclusive, but the statements made by many outside quarters are unreliable.” It was then said that, as of April 12, the release date, “... any statement as to size and grade of ore would be premature and possibly misleading.” A definite statement “to clarify” was promised in the future. [BP RET aR PLES Ty Nee rae PONE waBe ollie CET 1l6a Appeudix A — Opinior of the Court of Appeals 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 corpora- tion to any liability for damages. We have recently stated in a case involving a private suit under Rule 10b-5 in which damages and an injunction were sought, “‘It is not neces- sary in a suit for equitable or prophylactic relief to estab- lish all the elements required in a suit for monetary dam- ages.’ Mutual Shares Corp. v. Genesco, Inc., 384 F. 2d 540, 547, quoting from SEC v. Capital Gains Research Bureau, In., 375 U. S. 180, 193 (1963). We hold only that, in an action for injunctive relief, the district court has the discretionary power under Rule 10b-5 and Section 10(b) to issue an injunction, if the misleading statement resulted from a lack of due [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0081%3A1. Public record. Not legal advice.