SEC v. Texas Gulf Sulphur Company

401 F.2d 833 (2d Cir. 1968)

Facts:

  • 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.

Issue:

  • Was the information upon which D purchased TGS stock “material” so as to render it insider trading?

Holding:

  • 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.

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