TexasSulphurcase_new.pdf

9 – 2 0 4 – 1 1 4
R E V : O C T O B E R 1 7 , 2 0 0 6

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Professor Henry B. Reiling and Research Associate Maria M. Camargo compiled this case from the District Court opinion reported as Sec v.
Texas Gulf Sulphur 258 F. Supp. 262. 1966 and the Court of Appeals opinion reported as SEC v. Texas Gulf Sulphur, 401 F.2d 833 (1968).
Research Associate Kevin Wall contributed to the revision. HBS cases are developed solely as the basis for class discussion. Cases are not
intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard School.

H E N R Y B . R E I L I N G

M A R I A M . C A M A R G O

Texas Gulf Sulphur: The Timmins Ontario Mine

In 1957, Texas Gulf Sulphur (TGS) a mining company and the world’s largest supplier of sulphur,
initiated an exploration program in the mineral-rich area known as the Canadian Shield. Eventually
– six years later – TGS drilled several test holes. Visual and preliminary laboratory analysis caused
TGS to be optimistic about the presence of copper ore, and the company moved ahead with a plan to
acquire additional land in the drilling area known as Kidd 55. To control rumors and thereby
facilitate the land acquisition program, TGS president Stephens in November 1963 instructed TGS
executive vice president Fogarty and all members of the exploration group to keep the results
confidential – even to other officers, directors, and employees of TGS. In December 1963, a more
sophisticated analysis of the core from the first test holes was completed. The results were
characterized as “remarkable.”

By the end of March 1964, the land acquisition program had successfully advanced to a point
where the company decided to resume drilling in order to better estimate the size of the possible
discovery. The drilling to date had established that there was very high quality ore at several points
and an attractive depth, but the holes only implied minimums of length and depth, not width.
Illustratively, the body of ore might prove to be only a foot wide running between those points.
Parallel drilling at a distance, if successful, and successful to a comparable depth, would imply that
the space between the parallel lines also contained ore. Daily reports of drilling were sent to Stephens
and Fogarty. By April 7, based on the results of several of the drillings, there was real evidence that a
body of commercially minable ore “might” exist. By the evening of April 10, the results from two
additional holes made it apparent that “substantial copper mineralization had been encountered.”

Rumors that “a major ore strike is in the making” had begun circulating in Canada and on
Saturday, April 11, the New York Herald Tribune and the New York Times contained unauthorized
reports of TGS’s drilling which “seemed to infer a rich strike from the fact that the drill cores had
been flown to the United States for chemical assay.” At this point, Stephens (president), Fogarty
(EVP), and Huntington (TGS attorney), agreed that a press release was necessary. With the aid of a
public relations consultant, Fogarty drafted a press release designed to staunch the rumors. The
document was channeled through Stephens and Huntington.

On Sunday, April 12, TGS issued a press release – which appeared on Monday, April 13. Dr.
Fogarty stated:

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204-114 Texas Gulf Sulphur: The Timmons Ontario Mine

2

“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 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.”

On April 13, a Canadian journalist visited the drill site and published an article confirming a 10
million ton ore strike.1

On April 15, a statement relative to the discovery was given to the Ontario Minister of Mines for
release to the Canadian media. TGS expected it to be made public at 11:00 P.M. on April 15, but it
was in fact not read to the media until 9:40 A.M. on April 16.

On April 16, 1964, in the morning, TGS issued an official detailed statement announcing a strike of
at least 25 million tons of ore. This was read to representatives of the American financial media from
10:00 A.M. to 10:10 A.M. or 10:15 A.M. It appeared over Merrill Lynch’s private wire at 10:29 A.M.,
and somewhat later than expected, over the Dow Jones ticker tape at 10:54 A.M.

While the above was transpiring, incidents arose in the lives of several employees, officers and
directors of TGS that give an opportunity to assess where some of the lines of proper behavior are
located. See Appendix A for a time line integrating the foregoing facts and the following stock
acquisition activities.

• Darke. Darke, a geologist and junior member of the exploration group, visited two friends
during the year-end holidays of 1963 and in response to questions, told them that TGS was a
“good buy.” The two friends told several of their friends that TGS was “a good buy.” At the
time of the conversation Darke, his two friends, and the friends’ friends owed 1,135 shares
and no calls, i.e., options to buy stock. By March 30, 1964, their holdings had increased to
8,235 shares and calls on 12,300 shares.

• Stephens, Fogarty, and Others. In late February 1964, top officers of TGS accepted stock
options. Stephens’ edict on confidentiality was still in effect and, therefore, neither the Board
of Directors nor its Stock Option Committee was aware of the Kidd 55 test results.

• Huntington. A corporate attorney, Huntington purchased 50 shares of TGS stock on February
16, 1964, after drilling of the first hole was completed. On March 16, he helped prepare a
letter for Dr. Holyk’s (the chief geologist) signature in which TGS made a substantial offer for
lands near the first hole of Kidd 55. That same day he, who had never before purchased calls
on any stock, purchased a call on 100 shares of TGS stock.

• Crawford. The TGS public relations manager, who helped prepare the April 12 press release,
phoned his broker just before midnight on the 15th and placed a buy order for 300 shares of
TGS.

1 Ten million tons of copper ore would be a “major” strike assuming reasonable extraction costs and market prices.

This document is authorized for use only by Eric Rodriguez ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or
800-988-0886 for additional copies.

Texas Gulf Sulphur: The Timmons Ontario Mine 204-114

3

• Coates. On April 16th, Coates, a TGS director, left the briefing room immediately after the 25
million ton announcement and, at 10:20 a.m., placed an order for 2,000 TGS shares for family
trust accounts for which he was a trustee.

• Thomas S. Lamont. Director of TGS and director of Morgan Guaranty Trust Company,
Lamont learned of the rumors on April 10 from Stephens. On April 13 and 14 he had a
conversation about the rumors with Hinton, Executive Vice President of Morgan Guaranty
Trust Company, and told him that he knew nothing more than appeared in the press. On
April 16, Lamont attended the press release. Around 10:40 A.M., after the announcement, he
called Hinton and told him that good news about TGS would be shortly coming on “the tape,”
and that Hinton should watch for it and then take appropriate action.

This document is authorized for use only by Eric Rodriguez ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or
800-988-0886 for additional copies.

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This document is authorized for use only by Eric Rodriguez ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or
800-988-0886 for additional copies.

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/GrayImageResolution 300
/GrayImageDepth -1
/GrayImageDownsampleThreshold 1.50000
/EncodeGrayImages true
/GrayImageFilter /DCTEncode
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/GrayImageAutoFilterStrategy /JPEG
/GrayACSImageDict << /QFactor 0.15 /HSamples [1 1 1 1] /VSamples [1 1 1 1] >>
/GrayImageDict << /QFactor 0.15 /HSamples [1 1 1 1] /VSamples [1 1 1 1] >>
/JPEG2000GrayACSImageDict << /TileWidth 256 /TileHeight 256 /Quality 15 >>
/JPEG2000GrayImageDict << /TileWidth 256 /TileHeight 256 /Quality 15 >>
/AntiAliasMonoImages false
/DownsampleMonoImages false
/MonoImageDownsampleType /Bicubic
/MonoImageResolution 300
/MonoImageDepth -1
/MonoImageDownsampleThreshold 1.50000
/EncodeMonoImages true
/MonoImageFilter /CCITTFaxEncode
/MonoImageDict << /K -1 >>
/AllowPSXObjects true
/PDFX1aCheck false
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/PDFXCompliantPDFOnly false
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/PDFXTrimBoxToMediaBoxOffset [
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/PDFXSetBleedBoxToMediaBox true
/PDFXBleedBoxToTrimBoxOffset [
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/PDFXOutputIntentProfile (None)
/PDFXOutputCondition ()
/PDFXRegistryName (http://www.color.org)
/PDFXTrapped /False

/Description << /JPN
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/FRA
/PTB
/DAN
/NLD
/ESP
/SUO
/ITA
/NOR
/SVE
/ENU ()
…