Texas Gulf Sulphur Co. (TGS), a mining company, drilled an exploratory hole— Kidd 55— near Timmins, Ontario. Assay reports showed that the core from this drilling proved to be remarkably high in copper, zinc, and silver. TGS kept the discovery secret, camouflaged the drill site, and diverted drilling efforts to another site to allow TGS to acquire land around Kidd 55. TGS stock traded at $ 18 per share.
Eventually, rumors of a rich mineral strike began circulating. On Saturday, the New York Times published an unauthorized report of TGS drilling efforts in Canada and its rich mineral strike. On Sunday, officers of TGS drafted a press release that was issued that afternoon. The press release appeared in morning newspapers of general circulation on Monday. It read, in pertinent part, “The work done to date has not been sufficient to reach definite conclusions and any statement as to size and grade of ore would be premature and possibly misleading.”
The rumors persisted. Three days later, at 10: 00 a. m., TGS held a press conference for the financial media. At the time of the press conference, TGS stock was trading at $ 37 per share. At this press conference, which lasted about 10 minutes, TGS disclosed the richness of the Timmins mineral strike and that the strike should run to at least 25 million tons in ore. The following two company executives who had knowledge of the mineral strike at Timmins traded in the stock of TGS:
1. Crawford. Crawford telephoned orders to his Chicago broker about midnight on the day before the announcement and again at 8: 30 in the morning of the day of the announcement, with instructions to buy at the opening of the stock exchange that morning. Crawford purchased the stock he ordered.
2. Coates. Coates telephoned orders to his stock broker son in law to purchase the company’s stock shortly before 10: 20 a. m. on the day of the announcement, which was just after the announcement had been made. Coates purchased the stock he had ordered.
After the public announcement, TGS stock was selling at $ 58. The SEC brought an action against Crawford and Coates for insider trading, in violation of Section 10(b) of the Securities Exchange Act of 1934. Is Crawford guilty of illegal insider trading? Is Coates guilty of illegal insider trading? Securities and Exchange Commission v. Texas Gulf Sulphur Company, 401 F. 2d 833, 1968 U. S. App. Lexis 5797 (United States Court of Appeals for the Second Circuit)