The Green Bag posts the following question:
Let's start by being very clear about the phrasing of the question. It asks "who was the first person ever found by the" SEC to have violated the insider trading laws.
Found is being used here as the simple past tense of the verb find, of course, which in turn means "To determine a fact in dispute by verdict or decision < find guilty> <found that no duty existed>. Cf. HOLD (2)." Blacks Law Dictionary. Thus, we can eliminate cases in which the SEC charged someone with insider trading but the defendant was found to have violated the law (or not) by a court. Accordingly, we can eliminate the defendants in early cases such as Speed v. Transamerica Corp., 99 F. Supp. 808 (D.Del. 1951) (omissions in connection with what amounted to a tender offer); Kardon v. Nat'l Gypsum Co., 73 F. Supp. 798 (E.D. Pa. 1947) (sale of control negotiated face to face); In re Ward La France Truck Corp., 13 S.E.C. 373 (1943) (same). In addition, those cases uniformly involved face-to-face transactions and/or control transactions. As such, they do not really count as insider trading, which I take to refer in this context as the sort of modern insider trading violations on impersonal stock exchanges with which we are all familiar.
As such, we come inexorably to the SEC’s enforcement action In re Cady, Roberts & Co., 40 S.E.C. 907, 1961 WL 3743 (1961).
Curtiss-Wright Corporation’s board of directors decided to reduce the company’s quarterly dividend. One of the directors, J. Cheever Cowdin, was also a partner of Cady, Roberts & Co., a stock brokerage firm. Before the news was announced, Cowdin informed one of his partners, Robert M. Gintel, of the impending dividend cut. Gintel then sold several thousand shares of Curtiss-Wright stock held in customer accounts over which he had discretionary trading authority. When the dividend cut was announced, Curtiss-Wright’s stock price fell several dollars per share. Gintel’s customers thus avoided substantial losses.
Cady, Roberts involved what is now known as tipping: an insider who knows confidential information does not himself trade, but rather informs—tips—someone else, who does trade. It also involved trading on an impersonal stock exchange, instead of a face-to-face transaction. As the SEC acknowledged, this made it “a case of first impression.” Id. at *1. Although rule 10b-5 had sometimes been invoked prior to Cady, Roberts to deal with insider trading-like issues, as noted above, those cases typically had involved issues of tortious fraudulent concealment in face-to-face or control transactions. Notwithstanding, the SEC held that Gintel had violated Rule 10b-5. In so doing, it articulated what became known as the “disclose or abstain” rule: An insider in possession of material nonpublic information must disclose such information before trading or, if disclosure is impossible or improper, abstain from trading.
It was not immediately clear what precedential value Cady,Roberts would have. See, e.g., Recent Decision, 48 Va. L. Rev. 398, 403-04 (1962) (“in view of the limited resources of the Commission, the unfortunate existence of more positive and reprehensible forms of fraud, and the inherent problems concerning proof and evidence adhering to any controversy involving a breach of duty of disclosure, there is little prospect of excessive litigation evolving pursuant to [Cady, Roberts]”).
There were several reasons back in 1962 to doubt Cady, Roberts's precedential value. It was an administrative ruling by the SEC, not a judicial opinion. It involved a regulated industry closely supervised by the SEC. Neither the text of the statute nor its legislative history supported—let alone mandated—a broad insider trading prohibition. (Although the claim is somewhat controversial, I have argued elsewhere that Congress in 1934 did not intend for section 10(b) to prohibit insider trading as we know it today. Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52 Wash. & Lee L. Rev. 1189, 1228-34 (1995).)
Finally, there was a long line of state law precedent to the contrary. See id. at 1218-27 (analyzing cases).
In short order, however, Cady, Roberts became the law of the land, as it was embraced by the Second Circuit in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.), cert. denied, 394 U.S. 976 (1968).
