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Securities and Exchange Comm. v. Texas Gulf Sulphur Co.
Facts
Texas Gulf Sulphur Co. (TGS) (Defendant) was a corporation that engaged in, among other things, exploration for and mining of particular minerals. Pursuant to this activity, Defendant conducted aerial and ground surface surveys of an area near Timmins, Ontario, Canada. One tract in particular, known as Kidd 55, looked very promising as a source of desired minerals. The procedure to determine if commercially feasible quantities and qualities were present involved drilling a hole to a specified depth and examining and analyzing the contents of the core of the hole. TGS (Defendant) did not have ownership or mineral rights to Kidd 55. In order to determine if acquisition was called for, a test hole was drilled on November 8, 1963, and was designated Kidd 55-1. Present at the drilling site were various employees and consultants of TGS (Defendant). Included in that group was the TGS (Defendant) employees Clayton (Defendant) and Holyk (Defendant). An on-the-spot analysis of the core sample of Kidd 55-1 revealed a rich deposit of zinc, copper and silver. So that the find would not be discovered, a second hole was drilled in an adjacent area that showed no signs of minerals. Kidd 55-1 was covered over. On the basis of the content of the Kidd 55-1 TGS (Defendant) commenced acquisition of the entire Kidd tract and surrounding tracts. To facilitate the acquisitions, the president of TGS (Defendant), Stephens (Defendant), told all on-site personnel to keep total secrecy of the find. According to a laboratory analysis, the quality of the on-site analysis to be slightly conservative and the find was of amazing quality. Beginning March 31, 1964, TGS (Defendant) drilled three additional holes, Kidd 55-3, Kidd 55-4, and Kidd 55-5, to determine the depth and lateral extent of the deposits. The results of these three core samples indicated the real possibility of a substantial commercially viable deposit of zinc and copper. Stephens (Defendant) daily communicated continuing results of the three core samplings to TGS (Defendant). The last drilling in this series, Kidd 55-5, was completed April 10, 1964. Various rumors formulated regarding the size and quality of the find because of the activity surrounding the drilling of these core sample holes. On April 11, Stephens (Defendant) read stories in two New York newspapers based, apparently, on these rumors. To counteract the rumors, Stephens (Defendant) determined that a press release should be prepared stating the company’s position. Two TGS (Defendant) employees, Fogarty (Defendant) and Carroll (Defendant), prepared the release, which was issued on April 12, 1964. The release was credited to Fogarty (Defendant), describing him as executive vice president of TGS (Defendant). The release denied the validity of the rumors and described them as excessively optimistic. It described various unsuccessful ventures in Canada in general and stated that as to the core drilling near Timmins, Ontario, insufficient data or information was available to evaluate the company’s prospects there. The only indication that was available to date was that further drilling was necessary before any conclusions could be reached. The release ended by stating that when sufficient data was available to reach any conclusions a public statement would be issued. The release was stated to be the company’s position based on information in its possession through April 12. Drilling of core samples continued through April 15, with five additional holes having been drilled and the analysis was completed by April 16. Based on this additional information, a reporter for a widely read Canadian mining journal was invited to this site to report on the discovery. The report was prepared April 13 and submitted to Mollison (Defendant), Holyk (Defendant), and Darke (Defendant), the three TGS (Defendant) employees interviewed. They made no changes in the report, which stated that a 10-million-ton strike had been made, and the article was published April 16, 1964. A report prepared by the three was also submitted to Ontario government officials for their release on April 15. It was, in fact, not released until April 16, for unknown reasons. At 10:00 A.M., a 10- to 15-minute statement was read to representatives of the American financial press detailing the discovery and announcing its size as 25 million tons. The first release was over a brokerage house wire service at 10:29 A.M. Dow Jones reported the news at 10:54 AM. A review of the market price of TGS (Defendant) stock as quoted on the New York Stock Exchange was made for the period from November 8, 1963, when drilling of Kidd 55-1 started, to May 15, 1964. On November 8, the stock sold for approximately $17.50. When Kidd 55-1 had been completed, the stock was selling for $18. When the results of the chemical tests of the Kidd 55-1 care were completed in December, the shares were quoted at nearly $21. On February 21, 1964, the shares were selling at $24. By March 31, 1964, the price had risen to $26. On April 10, it was traded at $30. Due to the press release of April 12, the stock rose temporarily to $32, but by April 15 had dropped back to just over $29. On April 16, 1964, the date of the official announcement of the size of the strike, sales were around $37. By May 15, 1964, TGS (Defendant) stock was selling at just over $58 per share. What gave rise to the action by the Securities and Exchange Commission (Plaintiff) against the individual defendants and Texas Gulf Sulphur (Defendant) was that during the period from November 8, 1963, through April 16, 1964, the named defendants had purchased either shares in TGS (Defendant) or the company had permitted them to buy shares at 95 percent of the current market value. In addition, certain earlier named individuals who were not connected with TGS (Defendant) were also named as defendants due to their purchases of shares or calls to buy shares as a result of learning of the strike prior to complete broadcasting of the news to the public. One of the directors of TGS (Defendant), Coates (Defendant), made purchases through his son-in-law, a broker, of 2,000 shares at 10:20 A.M., April 16, for certain family trusts for which he was trustee but not beneficiary. As a result of the call from Coates (Defendant), the son-in-law also made substantial other purchases for his customers at the same time. Many of the people buying shares during this time, including several employees, had never bought any stock of any corporation and had never engaged in the somewhat speculative practice of buying calls. Before November 12, 1963, the named defendants collectively owned 1,135 shares of TGS (Defendant) stock and no calls. By March 31, 1964, they owned 8,235 shares and calls on 12,300 more shares. The aggregate investment of four employees alone was in excess of $100,000. On February 20, 1964, the stock options to give five employee-defendants were granted by the TGS (Defendant) board of directors. The facts of the discovery had been concealed from the members of the board. The recipients of the options did not notify the New York Stock Exchange as required. The SEC filed charges against all named defendants and the corporation alleging their actions violated § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Specifically, they charged that by concealing the information about the size of the find while simultaneously purchasing shares and calls and accepting options, the defendant-employees violated the provisions; that others acting on inside information purchased shares; and that TGS (Defendant) violated the provisions by the press release of April 12, 1964. Trial was held in United States District Court for the Southern District of New York. The judge, in a lengthy opinion, declared all defendants, except for two individuals, were not guilty of violations for any offenses charged. The two defendants found to have committed illegal acts had traded in TSG (Defendant) stock between April 9, 1964, and April 16, 1964. The trial judge concluded that before April 9, no material information had been concealed and, therefore, any trading before that date did not violate the act and that the press release was not misleading as there were no material facts to misstate at that time.
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