Securities and Exchange Commission Historical Society

Fair To All People: The SEC and the Regulation of Insider Trading

Pre-Securities Act Common Law Enforcement

"Special Facts or Special Circumstances"

In 1909, the Supreme Court in Strong v. Repide gave impetus to the trend allowing recovery by plaintiffs. Strong v. Repide was an insider trading case arising from the sale of stock in the Philippine Sugar Estates Development Company to one of the directors of the company. The defendant, while negotiating the purchase of the plaintiff's stock, was simultaneously negotiating the sale of the corporate land assets to the Philippine government.

The defendant took extraordinary efforts to conceal the information about the negotiations. As a result, the purchaser was able to obtain the stock from the stockholder for about one-tenth of its actual value. In a decision written by Justice Peckham, the Supreme Court refused to follow either the majority or minority rule, instead adopting a third approach holding that, under the particular facts of the case, "the law would indeed be impotent if the sale could not be set aside or the defendant case in damages for his fraud."(6)

This "special facts or special circumstances" rule meant that although directors generally had no duty to disclose material facts when trading with shareholders, as the majority rule held, a duty might arise where there were special circumstances, such as concealment of the defendant-purchaser's identity (the corporate officer had used an agent go-between to avoid detection of his actions by the seller here) and a failure to disclose significant facts that materially affected the price of the stock.

Over the next twenty years, state courts that continued to follow the majority rule paid deference to the special circumstances rule in insider trading cases. States used the three theories as they developed their own unique approaches to insider trading regulation. But neither the special circumstances nor the minority rules applied to stock transactions involving impersonal or non-face-to-face trades. During that time, the stock market evolved into a national market where the majority of trades were impersonal, with sellers and buyers having little or no contact with one another.

In Goodwin v. Agassiz (1933), the Massachusetts high court, relying on its common law of fraud, specifically rejected extending insider trading restrictions to those impersonal trades. The defendants, corporate directors and senior officers, having acquired knowledge about the likelihood of a discovery of substantial copper deposits in land the company was exploring, bought shares of the company in the open market. The plaintiff was a former stockholder who sold his shares without any contact with the defendants.

The court held there was no duty on the defendant officers to disclose the special information to the plaintiff before trading the securities.(7) Importantly, the court found that the information about the ore strike was speculative, and thus did not fit the special circumstances rule. The court ruled that, due to the impersonal nature of stock exchange transactions, a rule imposing a duty to notify in order to "put all parties to every contract on an equality as to knowledge, experience, skill and shrewdness" would impose an impractical duty on honest directors who might profit from "hard bargains made between competent parties without fraud."

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(6) Strong v Repide, 213 US 419 (1909).

(7) 186 N.E. 659 (Mass. 1933)

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