by John Brooks
UP to this point, it was two wins against a whole string of losses for the S.E.C., and the right of a miner to drop his drill and run for a brokerage office appeared to have retained most of its sanctity, provided at least that his drill hole is the first of a series. But there remained to be settled the matter that, of all those contested in the case, was of the most consequence to stockholders, stock traders, and the national economy, as opposed to the members of corporate mining exploration groups. It was the matter of the April 16th activities of Coates and Lamont, and its importance lay in the fact that it turned on the question of precisely when, in the eyes of the law, a piece of information ceases to be inside and becomes public. The question had never before been subjected to anything like so exacting a test, so what came out of the Texas Gulf case would instantly become the legal authority on the subject until superseded by some even more refined case.
The basic position of the S.E.C. was that the stock purchases of Coates, and the circumspect tip given by Lamont to Hinton by telephone, were illegal use of inside information because they were accomplished before the announcement of the ore strike on the Dow Jones broad tape—an announcement that the S.E.C.’s lawyers kept referring to as the “official” one, although the Dow Jones service, much as it might like to, derives no such status from any authority other than custom. But the S.E.C. went further than that. Even if the two directors’ telephone calls had been made after the “official” announcement, it contended, they would have been improper and illegal unless enough time had elapsed for the news to be thoroughly absorbed by members of the investing public not privileged to attend the press conference or even to be watching the broad tape at the right moment. Defense counsel saw things rather differently. In its view, far from being culpable regardless of whether or not they had acted before or after the broad tape announcement, its clients were innocent in either case. In the first place, the lawyers contended, Coates and Lamont had every reason to believe the news was out, since Stephens had said during the directors’ meeting that it had been released by the Ontario Minister of Mines the previous evening, and therefore Coates and Lamont acted in good faith; in the second place, counsel went on, what with the buzzing in brokerage offices and the early-morning excitement at the Stock Exchange, to all intents and purposes the news really was out, via osmosis and The Northern Miner, considerably before it appeared on the ticker or before the mooted telephone calls were made. Lamont’s lawyers argued that their client hadn’t advised Hinton to buy Texas Gulf stock, anyhow; he’d merely advised him to look at the broad tape, an act as innocent to recommend as to perform, and what Hinton had done then had been entirely on his own hook. In sum, the lawyers for the two sides could agree on neither whether the rules had been violated nor what the rules actually were; indeed, it was one of the defense’s contentions that the S.E.C. was asking the court to write new rules and then apply them retroactively, while the plaintiff insisted that he was merely asking that an old rule, 10B-5, be applied broadly, in the spirit of the Marquis of Queensberry. Near the end of the trial Lamont’s lawyers, bearing down hard, created a courtroom sensation by introducing a surprise exhibit, a large, elaborate map of the United States dotted with colored flags, some blue, some red, some green, some gold, some silver—each flag, the lawyers announced, denoting a place where the Texas Gulf news had been disseminated before Lamont had acted or it had reached the broad tape. On questioning, it came out that all but eight of the flags represented offices of the brokerage firm of Merrill Lynch, Pierce, Fenner & Smith, on whose interoffice wire the news had been carried at 10:29; but while this revelation of the highly limited scope of the dissemination may have mitigated the legal force of the map, it apparently did not mitigate the esthetic impression on the judge. “Isn’t that beautiful?” he exclaimed, while the S.E.C. men fumed in chagrin, and when one of the proud defense lawyers noticed a couple of locations on the map that had been overlooked and pointed out that there should really be even more flags, Judge Bonsal, still bemused, shook his head and said he was afraid that wouldn’t work, since all known colors seemed to have been used already.
Lamont’s fastidiousness in waiting until 12:33, almost two hours after his call to Hinton, before he bought stock for himself and his family left the S.E.C. unimpressed—and it was here that the Commission took its most avant-garde stand and asked the judge for a decision that would forge most fearlessly into the legal jungles of the future. As the stand was set forth in the S.E.C. briefs, “It is the Commission’s position that even after corporate information has been published in the news media, insiders, are still under a duty to refrain from securities transactions until there had elapsed a reasonable amount of time in which the securities industry, the shareholders, and the investing public can evaluate the development and make informed investment decisions … Insiders must wait at least until the information is likely to have reached the average investor who follows the market and he has had some opportunity to consider it.” In the Texas Gulf case, the S.E.C. argued, one hour and thirty-nine minutes after the start of the broad-tape transmission was not long enough for that evaluation, as evidenced by the fact that the enormous rise in the price of Texas Gulf stock had hardly more than started by that time, and therefore Lamont’s 12:33 purchases had violated the Securities Exchange Act. What, then, did the S.E.C. think would be “a reasonable amount of time”? That would “vary from case to case,” the S.E.C.’s counsel Kennamer said in his summation, according to the nature of the inside information; for example, word of a dividend cut would probably percolate through the dullest investor’s brain in a very short time, while a piece of news as unusual and abstruse as Texas Gulf’s might take days, or even longer. It would, Kennamer said, be “a nearly impossible task to formulate a rigid set of rules that would apply in all situations of this sort.” Therefore, in the S.E.C.’s canon, the only way an insider could find out whether he had waited long enough before buying his company’s stock was by being haled into court and seeing what the judge would decide.
Lamont’s counsel, led by S. Hazard Gillespie, went after this stand with the same zeal, if not actually glee, that had marked its foray into cartography. First, Gillespie said, the S.E.C. had contended that Coates’ call to Haemisegger and Lamont’s to Hinton had been wrong because they had been made before the broadtape announcement; then it had said that Lamont’s later stock purchase had been wrong because it had been made after the announcement, but not long enough after. If these apparently opposite courses of action were both fraud, what was right conduct? The S.E.C. seemed to want to have the rules made up as it went along—or, rather, to have the courts make them up. As Gillespie put the matter more formally, the S.E.C. was “asking the court to write … a rule judicially and to apply it retroactively to adjudicate Mr. Lamont guilty of fraud because of conduct which he reasonably believed to be entirely proper.”
It wouldn’t stand up, Judge Bonsal agreed—and for that matter, neither would the S.E.C.’s contention that the time of the broad-tape transmission had been the time when the news had become public. He took the narrower view that, based on legal precedent, the controlling moment had been the one when the press release had been read and handed to the reporters, even though hardly any outsider—that is, hardly anybody at all—had known of it for some time afterward. Clearly troubled by the implications of this finding, Judge Bonsal added that “it may be, as the Commission contends, that a more effective rule should be established to preclude insiders from acting on information after it has been announced but before it has been absorbed by the public.” But he didn’t think it was up to him to write such a rule. Nor did he think it was up to him to determine whether or not Lamont had waited long enough before placing his 12:33 order. If it were left to judges to make such determinations, he said, “this could only lead to uncertainty. A decision in one case would not control another case with different facts. No insider would know whether he had waited long enough … If a waiting period is to be fixed, this could
be most appropriately done by the Commission.” No one would bell the cat, and the complaints against Coates and Lamont were dismissed.
THE S.E.C. appealed all the dismissals, and Clayton and Crawford, the only two defendants found to have violated the Securities Exchange Act, appealed the judgments against them. In its appeal brief the Commission painstakingly reviewed the evidence and suggested to the Circuit Court that Judge Bonsal had erred in his interpretation of it, while the defense brief for Clayton and Crawford concentrated on the possibly detrimental effects of the doctrine implied in the finding against them. Might not the doctrine mean, for example, that every security analyst who does his best to ferret out little-known facts about a particular company, and then recommends that company’s stock to his customers as he is paid to do, could be adjudged an insider improperly distributing tips precisely because of his diligence? Might it not tend to “stifle investment by corporate personnel and impede the flow of corporate information to investors”?
Perhaps so. At all events, in August, 1968, the U.S. Court of Appeals for the Second Circuit handed down a decision which flatly reversed Judge Bonsal’s findings on just about every score except the findings against Crawford and Clayton, which were affirmed. The Appeals Court found that the original November drill hole had provided material evidence of a valuable ore deposit, and that therefore Fogarty, Mollison, Darke, Holyk, and all other insiders who had bought Texas Gulf stock or calls on it during the winter were guilty of violations of the law; that the gloomy April 12th press release had been ambiguous and perhaps misleading; and that Coates had improperly and illegally jumped the gun in placing his orders right after the April 16th press conference. Only Lamont—the charges against whom had been dropped following his death shortly after the lower court decision—and a Texas Gulf office manager, John Murray, remained exonerated.
The decision was a famous victory for the S.E.C., and the first reaction of Wall Street was to cry out that it would make for utter confusion. Pending further appeals to the Supreme Court, it would, at least, result in an interesting experiment. For the first time in the history of the world, the effort would have to be made, in Wall Street, to conduct a stock market without the use of a stacked deck.
5
Xerox Xerox Xerox Xerox
WHEN THE ORIGINAL mimeograph machine—the first mechanical duplicator of written pages that was practical for office use—was put on the market by the A. B. Dick Company, of Chicago, in 1887, it did not take the country by storm. On the contrary, Mr. Dick—a former lumberman who had become bored with copying his price lists by hand, had tried to invent a duplicating machine himself, and had finally obtained rights to produce the mimeograph from its inventor, Thomas Alva Edison—found himself faced with a formidable marketing problem. “People didn’t want to make lots of copies of office documents,” says his grandson C. Matthews Dick, Jr., currently a vice-president of the A. B. Dick Company, which now manufactures a whole line of office copiers and duplicators, including mimeograph machines. “By and large, the first users of the thing were non-business organizations like churches, schools, and Boy Scout troops. To attract companies and professional men, Grandfather and his associates had to undertake an enormous missionary effort. Office duplicating by machine was a new and unsettling idea that upset long-established office patterns. In 1887, after all, the typewriter had been on the market only a little over a decade and wasn’t yet in widespread use, and neither was carbon paper. If a businessman or a lawyer wanted five copies of a document, he’d have a clerk make five copies—by hand. People would say to Grandfather, ‘Why should I want to have a lot of copies of this and that lying around? Nothing but clutter in the office, a temptation to prying eyes, and a waste of good paper.’”
On another level, the troubles that the elder Mr. Dick encountered were perhaps connected with the generally bad repute that the notion of making copies of graphic material had been held in for a number of centuries—a bad repute reflected in the various overtones of the English noun and verb “copy.” The Oxford English Dictionary makes it clear that during those centuries there was an aura of deceit associated with the word; indeed, from the late sixteenth century until Victorian times “copy” and “counterfeit” were nearly synonymous. (By the middle of the seventeenth century, the medieval use of the noun “copy” in the robust sense of “plenty” or “abundance” had faded out, leaving behind nothing but its adjective form, “copious.”) “The only good copies are those which exhibit the defects of bad originals,” La Rochefoucauld wrote in his “Maxims” in 1665. “Never buy a copy of a picture,” Ruskin pronounced dogmatically in 1857, warning not against chicanery but against debasement. And the copying of written documents was often suspect, too. “Though the attested Copy of a Record be good proof, yet the Copy of a Copy never so well attested … will not be admitted as proof in Judicature,” John Locke wrote in 1690. At about the same time, the printing trade contributed to the language the suggestive expression “foul copy,” and it was a favorite Victorian habit to call one object, or person, a pale copy of another.
Practical necessity arising out of increasing industrialization was doubtless chiefly responsible for a twentieth-century reversal of these attitudes. In any case, office reproduction began to grow very rapidly. (It may seem paradoxical that this growth coincided with the rise of the telephone, but perhaps it isn’t. All the evidence suggests that communication between people by whatever means, far from simply accomplishing its purpose, invariably breeds the need for more.) The typewriter and carbon paper came into common use after 1890, and mimeographing became a standard office procedure soon after 1900. “No office is complete without an Edison Mimeograph,” the Dick Company felt able to boast in 1903. By that time, there were already about a hundred and fifty thousand of the devices in use; by 1910 there were probably over two hundred thousand, and by 1940 almost half a million. The offset printing press—a mettlesome competitor capable of producing work much handsomer than mimeographed output—was successfully adapted for office use in the nineteen-thirties and forties, and is now standard equipment in most large offices. As with the mimeograph machine, though, a special master page must be prepared before reproduction can start—a relatively expensive and time-consuming process—so the offset press is economically useful only when a substantial number of copies are wanted. In office-equipment jargon, the offset press and the mimeograph are “duplicators” rather than “copiers,” the dividing line between duplicating and copying being generally drawn somewhere between ten and twenty copies. Where technology lagged longest was in the development of efficient and economical copiers. Various photographic devices that did not require the making of master pages—of which the most famous was (and still is) the Photostat—began appearing around 1910, but because of their high cost, slowness, and difficulty of operation, their usefulness was largely limited to the copying of architectural and engineering drawings and legal documents. Until after 1950, the only practical machine for making a copy of a business letter or a page of typescript was a typewriter with carbon paper in its platen.
The nineteen-fifties were the raw, pioneering years of mechanized office copying. Within a short time, there suddenly appeared on the market a whole batch of devices capable of reproducing most office papers without the use of a master page, at a cost of only a few cents per copy, and within a time span of a minute or less per copy. Their technology varied—Minnesota Mining & Manufacturing’s Thermo-Fax, introduced in 1950, used heat-sensitive copying paper; American Photocopy’s Dial-A-Matic Autostat (1952) was based on a refinement of ordinary photography; Eastman Kodak’s Verifax (1953) used a method called dye transfer; and so on—but almost all of them, unlike Mr. Dick’s mimeograph, immediately found a ready market, partly because they filled a genuine need and partly, it now seems clear, because they and their function exercised a powerful psychological fascination on their users. In a society that sociologists are forever characterizing as “mass,” the notion of making one-of-a-ki
nd things into many-of-a-kind things showed signs of becoming a real compulsion. However, all these pioneer copying machines had serious and frustrating inherent defects; for example, Autostat and Verifax were hard to operate and turned out damp copies that had to be dried, while Thermo-Fax copies tended to darken when exposed to too much heat, and all three could make copies only on special treated paper supplied by the manufacturer. What was needed for the compulsion to flower into a mania was a technological breakthrough, and the breakthrough came at the turn of the decade with the advent of a machine that worked on a new principle, known as xerography, and was able to make dry, good-quality, permanent copies on ordinary paper with a minimum of trouble. The effect was immediate. Largely as a result of xerography, the estimated number of copies (as opposed to duplicates) made annually in the United States sprang from some twenty million in the mid-fifties to nine and a half billion in 1964, and to fourteen billion in 1966—not to mention billions more in Europe, Asia, and Latin America. More than that, the attitude of educators toward printed textbooks and of business people toward written communication underwent a discernible change; avant-garde philosophers took to hailing xerography as a revolution comparable in importance to the invention of the wheel; and coin-operated copying machines began turning up in candy stores and beauty parlors. The mania—not as immediately disrupting as the tulip mania in seventeenth-century Holland but probably destined to be considerably farther-reaching—was in full swing.
The company responsible for the great breakthrough and the one on whose machines the majority of these billions of copies were made was, of course, the Xerox Corporation, of Rochester, New York. As a result, it became the most spectacular big-business success of the nineteen-sixties. In 1959, the year the company—then called Haloid Xerox, Inc.—introduced its first automatic xerographic office copier, its sales were thirty-three million dollars. In 1961, they were sixty-six million, in 1963 a hundred and seventy-six million, and in 1966 over half a billion. As Joseph C. Wilson, the chief executive of the firm, pointed out, this growth rate was such that if maintained for a couple of decades (which, perhaps fortunately for everyone, couldn’t possibly happen), Xerox sales would be larger than the gross national product of the United States. Unplaced in Fortune’s ranking of the five hundred largest American industrial companies in 1961, Xerox by 1964 had attained two-hundred-and-twenty-seventh place, and by 1967 it had climbed to hundred-and-twenty-sixth. Fortune’s ranking is based on annual sales; according to certain other criteria, Xerox placed much higher than hundred-and-seventy-first. For example, early in 1966 it ranked about sixty-third in the country in net profits, probably ninth in ratio of profit to sales, and about fifteenth in terms of the market value of its stock—and in this last respect the young upstart was ahead of such long-established industrial giants as U.S. Steel, Chrysler, Procter & Gamble, and R.C.A. Indeed, the enthusiasm the investing public showed for Xerox made its shares the stock market Golconda of the sixties. Anyone who bought its stock toward the end of 1959 and held on to it until early 1967 would have found his holding worth about sixty-six times its original price, and anyone who was really fore-sighted and bought Haloid in 1955 would have seen his original investment grow—one might almost say miraculously—a hundred and eighty times. Not surprisingly, a covey of “Xerox millionaires” sprang up—several hundred of them all told, most of whom either lived in the Rochester area or had come from there.