401 F.2d 833 (2d Cir. 1968)
- The Texas Gulf Sulphur Co (TGS) was on a mining exploration throughout Canada based on a geological survey. TGS began mining in a particular area that the survey stated was promising for mineral deposits. After finding quite a bit of minerals and then verifying their existence, TGS was quite confident they had found a rich mineral deposit.
- This information was not released to the public.
- Ds (officers, employees, and others closely connected to TGS) began buying shares in the company.
- The purchase of shares by these insiders led to speculation and rumoring throughout the industry that TGS had found a promising area.
- TGS issued a false statements to quell the rumors, which actually incorrectly stated the results of the findings.
- Three days later Ds announced the real findings, although the news did not reach the public until four days later.
- Between the initial misleading statement and the eventual correct announcement Ds continued to trade TGS stock.
- The SEC brought this action for insider trading.
- Ds argued the information was not “material” and didn’t rise to the level required for public disclosure.
- Was the information upon which D purchased TGS stock “material” so as to render it insider trading?
- Yes, Ds are guilty of insider trading.
- A reasonable person would believe the information was relevant to the share price.
- In this case, the uncertainty regarding the information was not substantial enough to justify withholding the information.
- The information was material to all shareholders and Ds explicitly traded on that basis, thus their actions constitute insider trading.
- When reviewing whether their actions constituted insider trading, the court looked to the Ds conduct as evidence that information was material:
- Ds actually purchased the shares
- Ds intentionally withheld the information from others, even going out of their way to do so
- Ds purchased the shares in the timeframe where the information was non-public
- In this case, Ds should have waited until the information was sufficiently public so that the public could have a “reasonable opportunity to act” on the information.