## Facts

- Texas Gulf Sulphur Co. (TGS) conducted exploratory drilling near Timmins, Ontario (the “Kidd 55” site) and obtained drill-core results indicating an extremely rich ore body containing copper, zinc, and silver.
- To secure surrounding mineral rights, TGS kept the discovery confidential and continued acquiring options and leases on adjacent properties.
- Between November 1963 and April 1964, several TGS officers, directors, and employees purchased TGS stock and call options while aware of the undisclosed drilling results; some also tipped others who traded.
- Certain insiders accepted grants of TGS stock options without disclosing the drilling information to the company’s stock option decisionmakers.
- As rumors and press speculation increased, TGS issued an April 12, 1964 press release stating the rumors were exaggerated and that existing work was insufficient to reach definite conclusions about size and grade.
- On April 16, 1964, TGS publicly announced the discovery at a 10:00 a.m. press conference; broader market dissemination followed shortly after via major news services, and TGS’s stock price rose sharply.
- The SEC brought an enforcement action seeking injunctive and equitable relief for alleged violations of Exchange Act § 10(b) and Rule 10b-5 based on insider trading, tipping, and the April 12 press release.

## Issues

1. Whether the Kidd 55 drilling information was material nonpublic information when insiders traded or tipped others to trade in TGS securities.
2. Whether Rule 10b-5 requires corporate insiders to disclose material nonpublic information or abstain from trading and recommending while the information remains undisclosed, including during a short interval after selective disclosure but before broad dissemination.
3. Whether TGS’s April 12 press release was materially false or misleading under Rule 10b-5.
4. Whether equitable remedies such as injunctions and rescission/disgorgement-type relief were available in an SEC enforcement action for Rule 10b-5 violations.

## Decision

- The Second Circuit (en banc) held the Kidd 55 information was material well before April 16, 1964.
- The court held insiders who traded or tipped others while in possession of that material nonpublic information violated Rule 10b-5 unless they disclosed the information and waited until it was effectively disseminated to the investing public.
- The court held disclosure is not “effective” merely because a press event occurs; it must be disseminated in a manner reasonably calculated to reach the investing public, with sufficient time for market absorption, so trading in the interim can still violate Rule 10b-5.
- The court held TGS’s April 12 press release was materially misleading because it downplayed known facts and created a false impression about the significance of the drilling results.
- The court construed “in connection with the purchase or sale of any security” broadly and approved injunctive and equitable relief, including rescission/disgorgement-type remedies, to address the violations.

## Legal Principles

- Information is material if a reasonable investor would consider it important, including for contingent events where materiality depends on balancing (i) the probability the event will occur and (ii) the event’s expected magnitude for the issuer.
- Corporate insiders with material nonpublic information must either disclose it or abstain from trading or recommending transactions until the information has been effectively disseminated and the market has had a reasonable opportunity to absorb it.
- Rule 10b-5 prohibits not only affirmative misstatements but also half-truths and misleading omissions that create a materially false impression in light of the circumstances.
- Tipping of material nonpublic information for securities trading purposes can constitute deceptive conduct under Rule 10b-5.
- In SEC enforcement actions, courts may grant injunctions and equitable relief designed to prevent future violations and to strip gains obtained through Rule 10b-5 violations.

## Conclusion

The Second Circuit treated significant exploratory-drilling results as material before full confirmation, imposed a strict disclose-or-abstain duty that extends until effective public dissemination and market absorption, and held that both insider trading/tipping and a press release that misleadingly downplayed known facts can violate Rule 10b-5, with injunctive and disgorgement-type remedies available to the SEC.


Securities & Exch. Comm’n v. Tex. Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968)