SECURITIES AND EXCHANGE COM'N v. Texas Gulf Sulphur Co.

• Decision Date: 06 February 1970
• Docket Number: No. 65 Civ. 1182.,65 Civ. 1182.
• Citation: 312 F. Supp. 77
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. TEXAS GULF SULPHUR COMPANY, Charles F. Fogarty, Richard D. Mollison, Richard H. Clayton, Walter Holyk, Kenneth H. Darke, David M. Crawford, Claude O. Stephens, Thomas P. O'Neill, Earl L. Huntington and Harold B. Kline, Defendants.
• Court: U.S. District Court — Southern District of New York

312 F. Supp. 77

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. TEXAS GULF SULPHUR COMPANY, Charles F. Fogarty, Richard D. Mollison, Richard H. Clayton, Walter Holyk, Kenneth H. Darke, David M. Crawford, Claude O. Stephens, Thomas P. O'Neill, Earl L. Huntington and Harold B. Kline, Defendants.

No. 65 Civ. 1182.

United States District Court, S. D. New York.

February 6, 1970.

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Philip A. Loomis, Jr., David Ferber, Frank E. Kennamer, Jr., Robert E. Kushner, Harvey A. Rowen, Stuart A. Morse, Securities and Exchange Commission, Washington, D. C., New York City, for plaintiff.

White & Case, New York City, for defendants, Orison S. Marden, William D. Conwell, P. B. Konrad Knake, Thomas McGaney, Jeffrey A. Barist, New York City, of counsel.

OPINION

BONSAL, District Judge.

I. Introduction

This action was instituted by the Securities and Exchange Commission (SEC) pursuant to Section 21(e) and 27 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78u(e) and 78aa (the 1934 Act), against Texas Gulf Sulphur Company (TGS) and several of its officers, directors, and employees. The SEC alleged violations of Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated pursuant thereto. The complaint alleged that from November 12, 1963 through April 16, 1964 certain of the defendants had purchased TGS stock or calls or recommended it to others, or acquired stock options, on the basis of material inside information concerning the results of TGS's exploration activities near Timmins, Ontario, while such information remained undisclosed to the investing public, the Stock Option Committee, and to TGS shareholders who sold during the period, and that on April 12, 1964, TGS issued a false and deceptive press release with respect to these activities.

All parties agreed that the trial should first be had on the issue of whether the defendants or any of them had violated Section 10(b) or Rule 10b-5, reserving for later hearing the issue of the remedy to be applied in the event such violations were found.

The issue of liability was tried by this court and the court's opinion is reported at 258 F.Supp. 262 (S.D.N.Y. 1966). The Court of Appeals affirmed in part and reversed and remanded in part, 401 F.2d 833 (2d Cir. 1968), cert. denied, Coates v. Securities and Exchange Commission, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), holding that the defendants who purchased TGS stock or calls, or who recommended such purchases to others, or accepted stock options, before the material information as to the Timmins drill results was disclosed had violated Section 10(b) and Rule 10b-5. The Court of Appeals directed that this court reconsider the April 12 press release (the press release) in light of its opinion.

Beginning on October 6, 1969, this court held a hearing to:

(a) receive further evidence regarding the press release and its interpretation by the reasonable investor; and

(b) determine the remedy to be accorded the SEC with respect to the defendants found to have violated Section 10(b) and Rule 10b-5.

The events which led to this litigation are set forth in detail in the opinion of the Court of Appeals, 401 F.2d at 840-841, 843-847, and in the opinion of this court, 258 F.Supp. at 268-275, 293-294.

II. The April 12, 1964 Press Release

On Sunday, April 12, 1964, at about 3:00 P.M., TGS issued the following press release:

For Immediate Release

TEXAS GULF SULPHUR COMMENT ON TIMMINS, ONTARIO, EXPLORATION

NEW YORK, April 12—The following statement was made today by Dr. Charles F. Fogarty, executive vice president of Texas Gulf Sulphur Company, in regard to the company's drilling operations near Timmins, Ontario, Canada. Dr. Fogarty said:

"During the past few days, the exploration activities of Texas Gulf Sulphur in the area of Timmins, Ontario, have been widely reported in the press, coupled with rumors of a substantial copper discovery there. These reports exaggerate the scale of operations, and mention plans and statistics of size and grade of ore that are without factual basis and have evidently originated by speculation of people not connected with TGS.

"The facts are as follows. TGS has been exploring in the Timmins area for six years as part of its overall search in Canada and elsewhere for various minerals—lead, copper, zinc, etc. During the course of this work, in Timmins as well as in Eastern Canada, TGS has conducted exploration entirely on its own, without the participation by others. Numerous prospects have been investigated by geophysical means and a large number of selected ones have been core-drilled. These cores are sent to the United States for assay and detailed examination as a matter of routine and on advice of expert Canadian legal counsel. No inferences as to grade can be drawn from his procedure.

"Most of the areas drilled in Eastern Canada have revealed either barren pyrite or graphite without value; a few have resulted in discoveries of small or marginal sulphide ore bodies.

"Recent drilling on one property near Timmins has led to preliminary indications that more drilling would be required for proper evaluation of this prospect. The drilling done to date has not been conclusive, but the statements made by many outside quarters are unreliable and include information and figures that are not available to TGS.

"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. When we have progressed to the point where reasonable and logical conclusions can be made, TGS will issue a definite statement to its stockholders and to the public in order to clarify the Timmins project."

Texas Gulf Sulphur, the world's leading sulphur supplier, has conducted a continuing program of exploration for many years all over the world, searching not only for sulphur, but for oil and gas, metallic sulphides, potash, phosphate, trona and other minerals. This program has been successful, resulting in a broad diversification program from essentially a one-product company. In Moab, Utah, TGS has under way a $40 million potash operation which will be the largest in this country and is expected to start operating this year. The company recently announced a $45 million program to develop phosphate reserves at Lee Creek in North Carolina. The company is also drilling extensively for oil and gas in Western Canada and has other activities under way in trona. April 12, 1964

The press release was reported on the Dow Jones broad tape and in the Wall Street Journal, the New York Herald Tribune, and other morning newspapers throughout the country on April 13, 1964.

The SEC has contended that the press release was materially false and misleading in view of the facts as to the exploratory activities at Timmins at the time of its issuance, and hence violated Rule 10b-5(2) which provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,

* * * * * *

(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, * * *

* * * * * *

in connection with the purchase or sale of any security."

In interpreting the "in connection with" requirement of Rule 10b-5, the Court of Appeals held that:

"* * * Rule 10b-5 is violated whenever assertions are made, as here, in a manner reasonably calculated to influence the investing public * * * if such assertions are false or misleading or are so incomplete as to mislead irrespective of whether the issuance of the release was motivated by corporate officials for ulterior purposes." 401 F.2d at 862.

To determine whether the press release was false and misleading, the Court of Appeals directed this court to make "an appropriate primary inquiry into the meaning of the statement to the reasonable investor and its relationship to truth." Ibid.¹ The Court of Appeals stated that, "The speculators and chartists of Wall and Bay Streets are also `reasonable' investors entitled to the same legal protection afforded conservative traders." Id. at 849. From the record before it, the Court of Appeals could not,

"by applying the standard Congress intended, definitively conclude that it was deceptive or misleading to the reasonable investor, or that he would have been misled by it. * * * Accordingly, we remand this issue to the district court that took testimony and heard and saw the witnesses for a determination of the character of the release in the light of the facts existing at the time of the release, by applying the standard of whether the reasonable investor, in the exercise of due care, would have been misled by it.

"In the event that it is found that the statement was misleading to the reasonable investor it will then become necessary to determine whether its issuance resulted from a lack of due diligence." Id. at 863. (Emphasis added.)

Character of the Release

At the hearing, the court heard the testimony of seven witnesses and received the depositions of 28 witnesses taken prior to the hearing. Twenty shareholders testified that they sold their shares from April 12 through April 16, 1964 because of the press release. Twelve shareholders testified that they retained their shares or purchased shares after they became aware of the press release. The shareholders stated that they heard of the press release from the Dow Jones broad tape or accounts in the Wall Street Journal or their daily newspapers, published on April 13, 1964, or from their brokers who had obtained the information from these sources.

The shareholders who sold their shares testified that they were misled by certain words in the press release such...