Securities and Exchange Com'n v. Texas Gulf Sulphur Co.

Citation446 F.2d 1301
Decision Date10 June 1971
Docket NumberDocket 35143.,No. 914,914
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. TEXAS GULF SULPHUR COMPANY, a Texas Corporation, et al., Defendants-Appellants.
CourtU.S. Court of Appeals — Second Circuit

COPYRIGHT MATERIAL OMITTED

Philip A. Loomis, Jr., Gen. Counsel, David Ferber, Solicitor, Frank E. Kennamer, Jr., Asst. Gen. Counsel, Robert E. Kushner, Asst. Gen. Counsel, Harvey L. Pitt, Stuart A. Morse, Attys., SEC, for appellee.

Orison S. Marden, White & Case, P. B. Konrad Knake, Thomas McGanney, W. Neil Thomas, III, New York City, for appellants Texas Gulf Sulphur, Fogarty, Mollison, Stephens and Kline.

David M. Crawford, pro se.

Earl L. Huntington, pro se.

Thomas A. Butler, Michael A. Grean, Keane, Butler & Grean, New York City, for appellants Holyk, Darke and Clayton.

Before FRIENDLY, Chief Judge, and WATERMAN and HAYS, Circuit Judges.

WATERMAN, Circuit Judge:

The within appeals bring before us for the second time the well-known combinations of situations that arose out of Texas Gulf Sulphur's (hereinafter TGS) discovery of rich ore deposits near Timmins, Ontario, and the accompanying stock transactions by the appellants. A detailed description is set forth in our prior opinion, 401 F.2d 833 (2 Cir. 1968) (in banc).1 In that decision we reversed the district court with reference to its findings, contained in its opinion, 258 F.Supp. 262 (SDNY 1966), as to several of the defendants who had been found below not to have violated Section 10(b) of the Securities Exchange Act of 1934 (hereinafter the Act), 15 U.S.C. § 78j (b), and Rule 10b-5, 17 CFR 240.10b-5, promulgated thereunder, and we remanded the case for a hearing on the appropriate remedies to be applied2 and for the resolution of one undecided question of liability. That hearing has been held, and varying sanctions have been applied. The judgment order entered below (1) enjoined defendants Clayton and Crawford from future violations of Rule 10b-5, (2) denied injunctions against TGS, and defendants Fogarty, Mollison, Stephens, Darke, Huntington, Holyk, and Kline although each was found to have violated 10b-5, (3) required Darke to pay to TGS the profits which he and his tippees made on TGS stock prior to April 17, 1964, (4) required Holyk, Huntington, and Clayton to pay to TGS the profits which each of them made on the TGS stock prior to April 17, 1964,3 and (5) required Kline's stock option to be canceled. In deciding the issues presented on this appeal, we have grouped the issues for easier discussion.

A. TGS — The April 12 press release.

On April 12, 1964, TGS issued its now famous press release dispelling rumors about the results of its exploratory drilling at Timmins. In our prior opinion we found that this release satisfied all the elements of a violation of Rule 10b-5, with the exception that a hearing was neeeded in order to determine whether the release was "misleading to the reasonable investor," 401 F.2d at 863, and whether this was caused by a lack of due diligence. On remand Judge Bonsal received both live and deposition testimony from a series of former TGS shareholders who claimed to have sold their stock because of the contents of the April 12 press release. Counsel for TGS objected to this testimony as non-expert opinion testimony of the ultimate fact for decision by the trier of fact, that is, whether the release was misleading. When these objections were overruled, TGS presented its own string of witnesses who testified that in their opinion the release was optimistic and not misleading. On the basis of this contradictory testimony Judge Bonsal found that the release was misleading to the reasonable investor and that it violated Rule 10b-5. Nevertheless, because there was no showing of any reasonable likelihood that TGS would violate Section 10 (b) and Rule 10b-5 in the future, Judge Bonsal denied the SEC's request for an injunction against the corporation.

Upon appeal TGS first contends that the admission of non-expert opinion testimony as to whether the press release was misleading was error. We first note that, contrary to the TGS contention, this testimony did not go to the ultimate issue. The ultimate issue was whether the release was "misleading to the reasonable investor." The testimony of the SEC's witnesses was only that they individually had sold their stock on the basis of the April 12 press release. Cf. Goldwater v. Ginzburg, 414 F.2d 324, 343 (2 Cir. 1969), cert. denied, 396 U.S. 1049, 90 S.Ct. 701, 24 L.Ed.2d 695 (1970). See also Rule 704, Proposed Rules of Evidence for United States Courts and Magistrates (March 1971). There is little doubt that the testimony offered by the SEC was relevant to whether the release was misleading to the "reasonable investor," but its relevance does not mean that the testimony itself was of the ultimate fact. Nor does the claim that the testimony was possibly opinion testimony render it inadmissible. All human perception includes elements of subjective conclusions, and the line between factual and opinion testimony is often undefinable. As stated by Judge Learned Hand in United States v. Cotter, 60 F.2d 689, 693-694 (2 Cir), cert. denied, 287 U.S. 666, 53 S.Ct. 291, 77 L.Ed. 575 (1932):

No rule is subject to greater abuse than the opinion testimony rule; it is frequently an obstacle to any intelligible account of what happens. Most witnesses will tell their story in colloquial speech which skips the foundations and runs in terms of the "ultimate facts." Ordinarily, they tell it much more plainly in this way, and the warrant for what they say can be perfectly probed by cross-examination.

See also United States v. Petrone, 185 F.2d 334, 336 (2 Cir. 1950), cert. denied, 340 U.S. 931, 71 S.Ct. 493, 95 L.Ed. 672 (1951). Of course, a foundation for opinion testimony must be laid, see Rule 701, Proposed Rules of Evidence for United States Courts and Magistrates (March 1971), and, without question, a foundation was laid here. In such cases, especially where there is no jury, the admission of this kind of testimony lies quite properly within the discretion of the trial court.

TGS also points to a number of facts which it claims makes the SEC's witnesses appear to be "unreasonable," instead of "reasonable," investors. However, these factors go only to the weight of the evidence and were thoroughly explored by TGS upon cross-examination. We conclude that Judge Bonsal's findings of fact on this issue, after his careful and pains-taking weighing of the conflicting testimony in the light of our prior opinion, are not clearly erroneous findings, and we hold, with him, that the press release of April 12 was indeed misleading to the reasonable investor.

TGS next contends that it exercised due diligence in issuing the April 12 press release. However, the district court found, on the basis of the standard laid down in our former opinion, that "the framers of the press release failed to exercise due diligence." 312 F.Supp. at 86. TGS urges that this finding was not an independent finding of fact but a mere adoption of the views in our previous opinion. On this isue TGS introduced no additional evidence on remand, and, without such additional testimony, the fact that the district judge's finding concurred with what TGS claims to have been the view of the in banc court in no way impeaches the independence of the district judge. We find nothing improper in the challenged finding of lack of due diligence.

TGS finally contends that the finding of a violation of Rule 10b-5 for mere negligence in the issuance of the April 12 press release infringes its First Amendment rights.4 However, the First Amendment deals with the free exchange of ideas and not with commercial "factual" speech. Valentine v. Chrestensen, 316 U.S. 52, 62 S.Ct. 920, 86 L.Ed.2d 1262 (1942); Securities & Exch. Comm'n v. Wall Street Transcript Corp., 422 F.2d 1371, 1379-1381 (2 Cir.), cert. denied, 398 U.S. 958, 90 S.Ct. 2170, 26 L.Ed.2d 542 (1970); New York State Broadcasters Ass'n v. United States, 414 F.2d 990, 996-997 (2 Cir. 1969), cert. denied, 396 U.S. 1061, 90 S.Ct. 752, 24 L.Ed.2d 755 (1970); Banzhaf v. FCC, 132 U.S.App.D.C. 14, 405 F.2d 1082, 1101-1102 (D.C. Cir. 1968), cert. denied sub nom. Tobacco Institute v. FCC, 396 U.S. 842, 90 S.Ct. 50, 24 L.Ed.2d 93 (1969); cf. Curtis Publishing Co. v. Butts, 388 U.S. 130, 150 & n. 14, 87 S.Ct. 1975, 18 L.Ed.2d 1094 (1967); Garrison v. State of Louisiana, 379 U.S. 64, 75, 85 S.Ct. 209, 13 L.Ed.2d 125 (1964). The April 12 release was a corporate report on the progress of TGS's drilling operations near Timmins, Ontario, and, insofar as the First Amendment's protection of speech is concerned, the report is in the same category as corporate registration statements and prospectuses.

The finding that TGS violated 10b-5 is well-founded and, in our view, unassailable, and though TGS argues that the complaint should be dismissed as to it inasmuch as the injunction the SEC sought was not granted, we affirm the denial of an injunction without dismissing the complaint as a proper discretionary decision by the trial judge under the circumstances. See Sullivan v. Committee on Admissions & Grievances, 130 U.S.App.D.C. 14, 395 F.2d 954 (1969).

B. Injunctions — Clayton and Crawford.

Clayton and Crawford were the only defendants enjoined from committing future violations of Rule 10b-5.5 They contend that this action was discriminatory, particularly because there was no evidence to indicate that their former violations might be repeated. Although we suspect that all the defendants will be circumspect in their future stock transactions, we find that, if any injunctions are to be issued, there is sufficient distinction in Clayton's and Crawford's cases for the district court to single them out. Both of these defendants, having inside information as to the results of the Timmins drilling, bought stock within 24 hours...

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