biz org class 21

basic v. levinson
implied right of action.

fraud on the market theory/ efficient capital market concept:
corporate statements are too technical, so if shareholders had to understand, then they would never be able to recover. but instead they have a remedy because analysts rely on statements and that's how they affect the market because they will make recommendations based on corporate statements.


west v. prudential securities
plaintiff's tried to argue fraud on the market theory but it didn't apply to these plaintiffs because the broker lied privately instead of publicly (a public lie could have been considered to have an effect on the market and on shareholder safety at large). if the NYT picked up the lie/misinformation and disseminated to the public, it might have been considered public information which impacts the market, thus changing the facts and the resultant holding. but professional investors would have been expected to investigate and then found out that no one was going to acquire jefferson saving and would have discounted, and the levels at which the stock was trading would have returned. but the information was never publicly disseminated, only privately given.

hugely matters how the misinformation was made/given. the fraud on the market applies to basic becuase they not only know about the mergers but they're also making an announcement about the merger that is purposely misleading. the identity of the party doesn't so much matter in this case. the misstatement was the wrongful conduct, and did it harm the plaintiffs? well, the Ps can't show direct harm (may not have been able to understand the paperwork) so instead to make it easier to decipher, look thorugh the lens of the market -- these misrepresentations made an effect on the market and because of this effect, the plaintiffs were harmed.

santa fe v. green
santa fe owns a subsidiary called kirby lumber. they want to get rid of the minority shareholders in kirby, and merges kirby into itself and freeze out the minority shareholders by giving them money.

short-form merger (NY and DE) there are statutes under which a parent corp can merge its sub into itself without any formal drafted agreements, without asking other shareholders to vote (remember, 2/3 have to usually agree to merge),  so long as the parent corp owns substantially all shares of the sub.

but the shareholders in kirby complained that their shares were inadequate. what's the problem and holding? these shareholders could have enjoined the merger, they could have gotten appraisal rights (rights given to minority shareholders who dissent from major corp transactions)

section 10.b5 is limited. is only violated when there's fraud or non-disclosure. only if the merger had occured and santa fe had failed to disclose all the information about the merger. 

the court talked about the policy of the sec act of 1934 and investment disclosure must be full disclosure. in the santa fe case, there was full disclosure and this was simply corporate mismanagement, which is not a federal issue.


some people argue that efficient capital market hypothesis should apply to private stock as well, and the strongest theory is that private information can still effect the market.

texas gulf sulphur
Defendants were officers, employees or were closely tied to employees of Texas Gulf. Texas Gulf, utilizing a geological survey, was conducting mining exploration in Canada. One area, called Kidd 55, was deemed promising by the survey, and a hole was drilled with the resulting core analyzed. The analysis showed that the minerals present in the area were extremely rich in minerals. Several other samples verified the findings. Defendants did not disclose the results of the analysis to outsiders, including other officers of Texas Gulf. Defendants did proceed to purchase shares and calls once they knew about the results. The trading activity and sample drilling did prompt rumors in the industry of a significant find by Texas Gulf, and on April 12, 1964. Defendants sent out a misleading press release to calm the speculation. The press release misrepresented the actual results of the samples, and made it seem like there wasn't a materially significant ore presence. If a company is misleading, then they are liable.

So Defendants decided to finally disclose to the public that it did discover a viable vein of ore on April 15, although the news did not reach the public until April 16. Defendants still traded between April 12 and April 16th. Defendants claimed that the information was not material to the value of the company and therefore did not feel obligated to publicly disclose the information. They also argued that any trading after they released the news at midnight of April 16 was legitimate because technically the news was disseminated to the public.


SEC goes after the officers for insider trading. the court's holding is to be liable all you have to do is go in on


so long as information is not disclosed to the public, then insiders have to abstain from trading. insiders have a choice - they can keep a discovery quiet so that the company can purchase the land and you don't have to disclose to the public. but so long as it's insider info, the company insiders must abstain from trading on the information.


from agassiz: materiality --  the very fact that insiders trade on some information is one that the court will use to determine if insider trading has occurred. but is that trial by ordeal??? if the insider didn't trade on information which may not have been material, then they lose an opportunity. but if the insider did make money, then the court considers it must be insider trading and the insider may be prosecuted.