I think so. In working up an article for a symposium on the 50th anniversary of the seminal insider trading decision in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.), cert. denied, 394 U.S. 976 (1968), I've found something rather interesting.
The TGS opinion declares that Rule 10b-5 “is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information.”[1] In support of that proposition, the court did not cite the text of the statute, which is hardly surprising because Securities Exchange Act § 10(b) nowhere mentions insider trading.[2] Likewise, the court failed to cite any legislative history, which also is not surprising, because there simply is no legislative history that supports the court’s purported policy.[3] Instead, to the extent Congress in 1934 addressed insider trading, it did so via the disclosure and short swing profit provisions of Exchange Act § 16.[4]
Instead, the sole basis for the Second Circuit’s holding was a pair of law review articles. The first was a transcription of remarks by, among other speakers, former SEC Chairman William Cary.[5] On the page identified by the court’s pinpoint citation, there is no express reference to equality of information. Instead, there are simply some general platitudes about the need for integrity and high standards of conduct. On the following page, Cary states “that insiders having access to material information available for a corporate purpose may not take advantage when it is not yet known to the public,”[6] but that statement is not a description of Congressional intent but simply part of a summary of the SEC ruling in In re Cady, Roberts & Co.[7] In fact, the words equal or equality nowhere appear in the opinion; nor does the phrase “Congressional intent.”
The second article upon which the court relied was written by distinguished practitioner Arthur Fleischer, albeit when he was just a mid-level associate at Fried, Frank.[8] In the pages identified by the Second Circuit’s pinpoint citation, there is but a single relevant statement; to wit, “As has been seen, an essential function of the Exchange Act was to create markets free from manipulation and from trading based on undisclosed corporate information.”[9] The supporting footnote refers the reader to footnotes 21-26 and the accompanying text. But that passage simply asserts, without relevant reference to the legislative history, that Sections 10(b) and 16 were broadly directed at preventing abusive trading practices. Nowhere in the passage does Fleischer identify any relevant evidence of a Congressional intent that investors have equal access to information. Indeed, neither equal nor equality are used anywhere in the entire article.
The house TGS built was constructed on sand. The Second Circuit offered no credible evidence of a Congressional intent to ensure that investors had equal access to information. Put bluntly, it was an act of judicial fiat grounded on misrepresentations of authorities of dubious value.
Here's the really odd thing: In multiple searches on Westlaw, I can't find any prior discussion of this point. Did nobody ever bother going and reading the two articles?
[1] TGS, 401 F.2d at 848.
[2] See United States v. McGee, 763 F.3d 304, 313 (3d Cir. 2014) (observing that “§ 10(b) does not mention insider trading at all”).
[3] See Richard J. Morgan, The Insider Trading Rules After Chiarella: Are They Consistent with Statutory Policy?, 33 Hastings L.J. 1407, 1409 (1982) (“Congress failed to provide any legislative history to guide the section's application to insider trading transactions.”).
[4] See Michael P. Dooley, Enforcement of Insider Trading Restrictions, 66 Va. L. Rev. 1, 56-57 (1980) (“The conventional wisdom is that Congress ... expressed its concern with insiders' informational advantage by enacting section 16.”).
[5] James Farmer et al., Insider Trading in Stocks, 21 Bus. Law. 1009, 1010 (1966).
[6] Id. at 1011.
[7] 40 S.E.C. 907 (1961).
[8] Arthur Fleischer, Securities Trading and Corporation Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va. L. Rev. 1271, 1278-80 (1965).
[9] Id. at 1279.
