258 F.Supp. 262 (S.D.N.Y. 1966), 65 Civ. 1182, S.E.C. v. Texas Gulf Sulphur Co.

Docket Nº:65 Civ. 1182.
Citation:258 F.Supp. 262
Party Name:SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. TEXAS GULF SULPHUR COMPANY, a Texas corporation, et al., Defendants.
Case Date:August 19, 1966
Court:United States District Courts, 2nd Circuit, Southern District of New York
 
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Page 262

258 F.Supp. 262 (S.D.N.Y. 1966)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.

TEXAS GULF SULPHUR COMPANY, a Texas corporation, et al., Defendants.

No. 65 Civ. 1182.

United States District Court, S.D. New York

Aug. 19, 1966

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Llewellyn P. Young, Regional Administrator, Securities and Exchange Commission, by Frank E. Kennamer, Jr., San Francisco, Cal., Michael Joseph, David Ferber, Donald M. Feuerstein, Washington, D.C., for plaintiff.

White & Case, New York City, Orison S. Marden, William D. Conwell, Edward C. Schmults, P. B. Konrad Knake, Thomas McGanney, Peter G. Eikenberry, New York City, of counsel, for defendant Texas Gulf Sulphur Co. and individual defendants, with exception of Lamont, Coates and O'Neill.

Davis Polk Wardwell Sunderland & Kiendl, New York City, S. Hazard Gillespie, Robert B. Fiske, Jr., Robert F. Dobbin, New York City, of counsel, for defendant Thomas S. Lamont.

Cravath, Swaine & Moore, New York City, Albert R. Connelly, Donald I. Strauber, New York City, of counsel, for defendant Francis G. Coates.

OPINION

BONSAL, District Judge.

Plaintiff, Securities and Exchange Commission (Commission), has instituted this action charging each of the defendants with violations of Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. 240; 10b-5) promulgated thereunder by the Commission. All parties waived a jury and agreed that trial should first be had on the issue of whether the defendants or any of them had violated Section 10(b) and Rule 10b-5, reserving for later hearing the issue of the remedy to be applied in the event such violations are found.

The Commission's action arises out of the exploratory activities of defendant Texas Gulf Sulphur Company (TGS) on the Kidd 55 segment near Timmins, Ontario, between November 12, 1963 and April 16, 1964. TGS is alleged to have violated Section 10(b) and Rule 10b-5 by issuing a false press release regarding these activities on April 12, 1964. Each of the individual defendants was a director, officer or employee of TGS. Individual defendants who purchased stock or calls on stock of TGS between November 12, 1963 and April 16, 1964, or recommended such purchases to others, are charged with violations of Section 10(b) and Rule 10b-5 on the ground that they used to their own advantage material information as to TGS's exploratory activities on the Kidd 55 segment, which material information had not been disclosed to or absorbed by the stockholders or the public. Five of the individual defendants who accepted stock options granted on February 20, 1964 are charged with violations of Section 10(b) and Rule 10b-5 on the ground that they were in possession of such material information which they used to their own advantage by failing to disclose it to the Directors' Committee which granted the stock options. 1

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Texas Gulf Sulphur Company (TGS)

In 1963-64 TGS (which was organized in 1909) was the world's largest supplier of sulphur. Its authorized capital stock was 15,000,000 shares, without par value. 11,520,000 shares had been issued (including 1,504,101 shares held in the Company's treasury). On December 31, 1963, there were issued and outstanding in the hands of the public in excess of 10,000,000 shares held by some 65,000 shareholders. The stock of TGS was listed on the New York Stock Exchange and was admitted to unlisted trading privileges on the Midwest Stock Exchange. TGS's total assets, less current liabilities, had a book value of over $169,000,000 as of December 31, 1963, and over $210,000,000 as of December 31, 1964. The stockholders' equity was stated to be in excess of $129,000,000 as of December 31, 1963, and in excess of $137,000,000 as of December 31, 1964. Its annual sales were in excess of $62,000,000 for 1963 and in excess of $70,000,000 for 1964. Its working capital was approximately $47,000,000 as of December 31, 1963, and approximately $87,000,000 as of December 31, 1964. Its earnings per share for the period 1960-1964 were:

1960 1961 1962 1963 1964

------- ------- ------- -------
$1.27 $1.26 $1.21 $0.93 $1.15

From 1955 to 1963 TGS's annual sales declined from $93,000,000 in 1955 to $62,000,000 in 1963 and its annual earnings from $32,000,000 in 1955 to $9,300,000 in 1963. This decline was attributed by TGS to the oversupply of sulphur, resulting in depressed prices during the period. The market price of TGS stock on the New York Stock Exchange declined from a high of $45 a share in 1955 to a low of $11 a share in 1962. In 1963 the price rose from 13 3/4 in March to 19 3/8 in November and to 21 7/8 at the end of the year. In 1964 the price rose from a low of 21 1/8 in January to a high of 30 1/4 on April 15. On April 16, the day of TGS's public announcement of the Kidd mine, the price rose from a low of 30 1/8 to a high of 37, closing at 36 3/8. The price continued to rise during the balance of April 1964 to a high of 58 3/8 on April 30, on which day the stock closed at 54 3/4. Between 1956 and 1963, despite a growth in the demand for sulphur, the price per ton of sulphur declined from around $28 in 1956 to under $20 in 1963. However, by late 1963 the turn-around had been reached. Sulphur became in short supply, and on April 1, 1964 TGS announced a $2 per ton increase in the price. TGS's gross sales for 1963 were the highest in four years, up 5.56% From 1962. TGS's 1963 earnings were adversely affected by the mysterious loss of the S.S. MARINE SULPHUR QUEEN early in that year. In January 1964 TGS put into service a larger liquid sulphur cargo vessel to replace the lost vessel and announced the launching of the world's largest liquid sulphur tanker, which would make it possible to ship liquid sulphur to Europe, and on February 8, 1964 it announced plans to increase its Canadian production of sulphur by 500 tons per day. Apart from its primary sulphur business, TGS was engaged in a diversification program in other fields, such as phosphate, potash, trona, oil and gas. Its entry into the phosphate and potash fields was important because phosphate, potash and sulphur are the three basic components of fertilizers. On November 15, 1963, TGS announced the creation of a new division for its phosphate project and that its potash mine was near completion and was scheduled to go into production in the spring of 1964. On December 16, 1963, TGS announced that it had acquired the Canadian oil and gas properties of Delhi-Taylor Oil Company, and on April 3, 1964 announced plans to proceed with a 3,000,000 ton-per-year phosphate program in North Carolina at a cost of $45,000,000. TGS had been engaged in exploration for sulphide deposits on the Canadian Shield since 1957 and in 1963-64 undertook Page 269 exploratory work on the Kidd 55 segment in Kidd Township near Timmins, Ontario, which is more fully described hereafter. The Individual Defendants The individual defendants are directors, officers and employees of TGS as follows:

Defendant Position
-------------- -----------
Claude O. Stephens President and Director
Charles F. Fogarty Executive Vice President * and
Director
Thomas S. Lamont Director
Francis G. Coates Director
Harold B. Kline Vice President and General Counsel **
Richard D. Mollison Vice President
David M. Crawford Secretary ***
Richard H. Clayton Engineer
Walter Holyk Chief Geologist
Kenneth H. Darke Geologist
Earl L. Huntington Attorney
John A. Murray Office Manager
FN*Prior to February 20, 1964 Mr. Fogarty was Senior Vice President. FN** Prior to January 31, 1964 Mr. Kline was Vice President-Administration and Secretary. FN*** Mr Crawford was employed by TGS in January 1964 and became Secretary on February 20, 1964.

Defendant Thomas P. O'Neill was an accountant with TGS. He was served with a summons and complaint, but has failed to answer or appear. The Commission has moved for a default judgment against O'Neill in a separate proceeding. Therefore he is not referred to hereafter. Summary of TGS's Exploratory Activities on the Kidd 55 Segment Exploration on the Canadian Shield: In 1957 TGS initiated an exploration program for sulphides 2 on the Canadian Shield, a vast area comprising most of eastern Canada. Much of the area is barren and flat with few outcroppings of rock and is covered with a swampy material known as muskeg. The subsurface structure consists of Pre-Cambrian rocks, dating from an early geologic time, and is complex and distorted. Beginning in March, 1959, an exploration group-- headed by defendant Mollison, a mining engineer, and consisting of defendant Holyk, the chief geologist; defendant Clayton, an electrical engineer and geophysicist; and defendant Darke, a geologist-- conducted aerial geophysical surveys over more than 15,000 miles of the Canadian Shield area. Sulphides conduct electricity better than most other rock types and can be detected if they are in sufficient quantity and concentration and are not too deeply buried beneath the earth's surface. 3 In the course of this aerial exploration, TGS detected several thousand anomalies-- unusual variations in the conductivity Page 270 of rocks. In the opinion of the exploration group several hundred of these anomalies were worthy of further investigation, and rights to land around them were acquired. One of these anomalies, detected as early as 1959, was located near Timmins, Ontario, and was designated as the Kidd 55 segment. On June 6, 1963, TGS acquired an option to purchase the northeast quarter section (160 acres) of the Kidd 55 segment. Between...

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