Texas Gulf Sulfar Company is a drilling company
Texas Gulf Sulfar Company is a drilling company that drills for mineable minerals. Upon a result from core testing TGSC found high contents of exploitable minerals. TGSC then offered stock to employees without disclosing to the public or SEC of the viability of the futrue drill. The corporate employees used the results from the core drill to make their decision to purchase company stocks before the announcement was made public. Upon announcement of the future drill the SEC filed suit claiming violations against SEC 10b-5 for insider trading. TGSC won and SEC appealed and won in appellate court.
The employees and TGSC’s argument was that the mine was not commercially proven thus violating nothing. There was substantial reason to believe that the drilling would go commercial considering the stocks bought and the hushed information.
Did TGSC try and keep quiet, pertinent information regarding the minerals found in hopes to substantially gain?
Did they violate SEC 10b-5 by way of insider trading and if so how?
Rules and analysis:
The employess of TGSC were influenced, by their own admission, of the drilling results which in turn helped to make their decision to buy company stocks at a much lower rate than what they would be offered
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The samples from the core drill would have definitely and reasonable affected any investors future decision of wether to purchase stock or not. The sample were more than promising. If employees are allowed to purchase stock and the company is publicly traded then the public should have also been allowed to purchase stock as well at the same time.
There was substantial gain to be made by keeping the results quiet, TGSC kept the results quiet while their employees bought shares at below market value of what the shares would have been thus gaining a large profit when TGSC did finally go public with the information of the core drill results. Because of the expectation of the stock going up this would be viable inside information thus insider trading which violates SEC Rules.
Considering the fact that TGSC expected a positive second drilling and quietly acted within that scope, despite wether or not the second drilling was good or not, the actions of purchasing stock, based upong the first drilling was still prevalent as a decision to purchase and was a deciding factor. This is still considered insider trading, even if the second drill did not net anything. Just because a second drill does not produce, does not mean that a third drill won’t produce which would put everyhting back into economical perspective and not sleight of hand tactics.
TGSC was indeed aware of and expected a good second core drill, they gave their employees the option to buy stocks before the stocks went up. The stocks can only go up upon public notice of the outcome of the first drill. This netted all who did buy, a substantial gain economically. This is a direct example of illegal insider trading and the Appellate court agrees.