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Insider Trading Case of Texas Gulf Sulfur Company

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Risk revealing educational articles
2018/11/19 11:11
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Insider Trading Case of Texas Gulf Sulfur Company

   The insider trading case of the Texas Gulf Sulfur Company, which took place in the United States in the 1950s and 1960s, is a very classic case of combating insider trading in the history of human securities regulation. It is this case that once again establishes the basic characteristics of insider information - "significant" and "non-public", and the certainty of the specific content of the information itself is not a necessary condition for insider information. As long as the characteristics of the "significant" and "non-public" of the information itself are determined, it is inside information, and the insider must bear the corresponding legal responsibility for insider trading in order to buy and sell the relevant stock.
 
  1.Basic fact
 
  The Texas Bay Sulfur Company began its prospecting activities in eastern Canada in 1957. From March 1959 to October 29, 1963, the team led by Morrison, the company's vice president, discovered the conductivity of the rock near K50 near Timmins (place name) through aerial exploration and ground geophysical measurements. The ground measurement data is abnormal and it is considered necessary to carry out further detection. On November 8, 1963, the company excavated the first exploration well, which ended on November 12. Huo Leike, a member of the exploration team and the company's chief geologist, visually observed that the ore at the center of the mine had a copper content of about 1.15% and a zinc content of about 8.64%. Therefore, the samples were quickly sent to the company's laboratory in Utah for analysis. The analysis from the beginning of December showed that the mine contained 1.8% copper and 8.26% zinc, while containing 3.94 ounces of silver per ton. All five company experts, including members of the exploration team, electrical engineers and geophysicist Clayton, have never heard of such high-quality minerals. This result is very impressive.
 
  On March 31, 1964, the company began to test the second exploration well near the first exploration mine. On April 7, the third exploration well was started, and the excavation was completed on the evening of April 9. The test data of the ore samples excavated showed that the contents of copper and zinc in the second and third prospecting wells were basically the same as those in the first prospecting well. Since the second exploration of the mine, the rumors that major mineral deposits have been discovered have begun to spread in Canada. According to the regulations of the Texas Bay Sulfur Company, the test team will report to Vice President Stephens and Fogarty daily, starting from the second exploration of the mine. On the morning of April 11, Stephens found in the media that the New York Times and other media reported informal news about the chemical samples sent to the United States. He immediately contacted Fogarty, who had contacted and visited Morrison on the same day and got a report on the mineral deposit. The next day, Fogarty drafted a press statement and posted it on the April 13th newspaper to quell the market rumors.
 
  The main content of the press release is: In the past, the Texas Bay Sulfur Company's exploration operations in Timmins were widely reported by the media, rumors that a large number of copper mines were found there. These reports exaggerate the scale of the company's detection and the detection of copper reserves and grades. These messages were all sent out by unrelated speculators. The facts are: As part of the Canadian prospecting program, Timmins's prospecting activities have been going on for six years, and like in other parts of Canada, the company relies entirely on its own forces for prospecting activities, and a large number of exploration activities are carried out by geophysical means. The company conducted trial excavations in a large number of locations, and samples were sent to the United States for chemical analysis based on custom and advice from Canadian lawyers. It is not a problem to report to the United States alone. The mines that were dug in eastern Canada have little value, but only a small fraction of them found a small amount of sulfide. Recent excavations at Timmins indicate that further excavation needs to be continued to determine the true value of the mineral deposits in the area. So far, no definitive conclusion has been drawn, and the information obtained from other sources is not very reliable. Up to now, the scale of the mine and the grade of the ore have not been determined. When the company can draw a reasonable conclusion, the company will announce the official results to shareholders and the public.
 
  On April 8th, 10th and 12th, the Texas Gulf Sulfur Company also invested in the second, third and fourth sets of drilling equipment, and tried the fourth, fifth, sixth, seventh, eighth and ninth ports near the first well. In the exploration mines, these trial digging work was completed on April 15 and 16 and successively issued mineral reports. When the above excavation activities were over, the company decided to disclose the final prospecting results. On April 13, the company invited the "Northern Miners" reporter to visit the excavation area and met with Morrison, Holic and others. The reporter then wrote an article about the discovery of reserves of 10 million tons of ore by the Texas Bay Sulfur Company, published in the April 16 issue of the magazine. At the same time, at 10 am on April 16, an official statement was officially announced to the US financial media. According to the statement, according to the current prospecting situation, the reserves of the mine are at least 25 million tons. The message was displayed at the Merrill Lynch Information Bar at 10:29 am and displayed at 10:54 in the Dow Jones Bulletin.
 
  During the exploration period, the company's stocks fluctuated but showed a firm upward trend. On November 8th, the company's stock price was US$17.375. The first prospecting well was excavated on November 12, and the stock price was at US$18. On November 22nd, it fell to 16.375. On December 13, it received the chemical analysis of the first prospecting well. After the report, the company's share price rose to $20.875. When the company's employee options were issued on February 21, the company's share price was $24.125. When the excavation began on March 31, the company's share price was $26. When the excavation was completed on April 10, the company's share price rose to $30.125. On April 16th, when the company officially announced the discovery of mineral deposits, the stock price rose to 37 US dollars, and the price of the company's stock on May 15 was 58.25 US dollars.
 
  From the end of the first mine excavation on November 12, 1963 to March 31, 1964, the second mine was excavated. More than 10 people including Morrison, Fogarty, Holic, Clayton and other people bought the Gulf of Texas. Sulfur company shares 7100 shares, buy options 12300. On February 20, 1964, the company issued stock options to 26 executives and senior staff including Morrison, Stephens, Fogarty, Hollyk and Crane. Only Kran did not know the results of the first exploration mine, but he also knew that the copper and zinc content in the well excavated in Timmins was very good. At that time, due to the need for confidentiality of the detection operations, the Texas Gulf Sulfur Company Stock Options Committee and the company's board of directors were not aware of the results of the first exploration mine.
 
  In addition, on April 13th, the Texas Gulf Sulfur Company released its first press release until April 16th officially announced the prospecting results. Clayton bought 200 shares of the company through its broker. In addition, Crawford also bought 300 shares on the 15th and 16th respectively. Coates immediately bought 2,000 shares in the name of the family trust through his agent and his son-in-law haemisegger on the 16th after leaving the press conference. Coates is the trustee but not the beneficiary of the trust. . Haemisegger also bought 1,500 shares at the same time as his other clients.
 
  The insider trading case of the Texas Gulf Sulfur Company, which took place in the United States in the 1950s and 1960s, is a very classic case of combating insider trading in the history of human securities regulation. It is this case that once again establishes the basic characteristics of insider information - "significant" and "non-public", and the certainty of the specific content of the information itself is not a necessary condition for insider information. As long as the characteristics of the "significant" and "non-public" of the information itself are determined, it is inside information, and the insider must bear the corresponding legal responsibility for insider trading in order to buy and sell the relevant stock.
 
  2.Investigation and trial
 
  The US Securities and Exchange Commission (U.S. Securities and Exchange Commission) has been involved in the process of investigating the case. In order to investigate the legal liability of insider traders, the US Securities Regulatory Commission will sued the Texas Gulf Sulfur Company and related personnel to the court and demanded that the court should impose the legal responsibility of the defendant. However, the court of first instance held that the existence of mineral deposits could not be determined by only one hole. Although the discovery on November 12, 1963 was promising, it could not prove the existence of the deposit until the third on April 9, 1964. The successful excavation of the borehole determines the presence of the deposit. Therefore, the discovery of the first two holes cannot be called “important facts”. The relevant individual defendants do not need to bear legal responsibility for the shares bought before April 9, 1964, but from April 9 to 4, 1964. The insider who bought the stock at 10 am on the 16th of the month should take legal responsibility by using the "important facts" that the general investor did not know. Similarly, the press release issued by the Texas Gulf Sulfur Company on April 13 is not misleading. In the end, the court ruled that the Texas Gulf Sulfur Company and some individual defendants did not bear legal responsibility.
 
  The US Securities and Exchange Commission refused to accept the judgment of the court of first instance and appealed to the regional circuit court. After the trial, the Circuit Court held that the interest caused by the first hole and the fact that the defendants immediately bought the stock were sufficient to prove that the discovery of the first hole could affect the decision of the investor, so it should be regarded as “important”. fact". It is also illegal for the defendant to tell these facts to his relatives and friends. The company's internal personnel must be convinced that the facts are actually known to the public before acting on important facts. The press release issued by the Texas Gulf Sulfur Company on April 13 was vague, not based on the specific circumstances the company knew at the time, so it was also illegal. Although the defendant refused to accept the above-mentioned judgment of the District Circuit Court, he appealed to the US Supreme Court. However, the Supreme Court rejected the defendant’s appeal and upheld the decision of the Circuit Court.
 
  3.Case review
 
  Although the insider trading case of the Texas Gulf Sulfur Company occurred half a century ago, it is still very useful for the securities markets of today. The classic of this case is that it establishes the principle that the criterion for judging inside information is not based on the complete determination of the content of the information, but on the certainty of the "significance" and "non-publicity" of the information itself. As a standard, non-public information that may have a significant impact on the company's stock price is inside information, regardless of whether the specific facts associated with the information itself are conclusive. In this case, the judgment of the Regional Circuit Court and the Supreme Court showed that although the results of the first mine cannot fully determine the existence of the deposit, the information can completely affect the price of the company's stock, so it should of course be regarded as insider information.
 
  At present, the scale of China's securities market has leapt to the forefront of the world, and the support and promotion of the securities market to the national economy has become increasingly apparent. With the basic realization of full circulation, China's listed companies have become more and more powerful through mergers and acquisitions, and the issuance of additional shares to purchase assets. In the process of capital operation, a plan may be continually revised, and finally it may be completely unrecognizable. It may completely negate a plan. Another option may be due to immaturity, temporarily abandoning the implementation of the capital operation plan, and so on. All of these capital operation plans are full of uncertainty before the proposed motion is finalized, but we cannot assume that these uncertain plans are not inside information, and internal personnel or other means are known. The person who buys the stock accordingly does not need to bear legal responsibility. In fact, in these uncertainties, internal staff often buy stocks one by one because they know the plan ahead of time, causing stock prices to fluctuate greatly. This is enough to show that the impact of the plan on the stock price is completely certain, so it is officially Before the disclosure, it should belong to insider information, and the person who buys the stock accordingly should bear the corresponding legal responsibility.

 

  (This case is taken from the official website of China Securities Regulatory Commission)