Investor relations case for Public Relations Case Studies course

1. Texas Gulf Sulphur Investor Relations COM 412 Julia Shanahan, David Peccia, Stephanie Majercik

2. Background What is Texas Gulf Sulphur (TGS)? Drilling company founded in 1909 Now known as Texas Gulf What is the Securities & Exchange Act Rule 10b-5? Section 10 and Rule 10b-5 states that persons may not “make any untrue statement of material fact or…omit to state a material fact” that would have the effect of misleading in connection with the purchase or sale of any security.A precondition would be that a person did, in fact, possess information whose disclosure or nondisclosure could have an effect on the value of a security. Thus, “insider” information, the disclosure of such information, and the purchase or sale of securities are mutually involved. Private gain is implicit.

3. Background In late 1950s TGS started “exploratory activities” in Timmins, Canada Those involved in these activities were: Richard D. Mollison Walter Holyk Richard H. Clayton Kenneth H. Darke

4. The Cover-Up While waiting for results of land tests to see what minerals were present, TGS President Claude O. Stephens directed the group to keep the unconfirmed results a secret, even to other officers, directors, & employees

5. Timeline of Events November 1963 – 7 TGS employees were keepers of information Dr. Charles Fogarty (executive VP of TGS), Clayton, Mollison, & Mrs. Holyk purchased 2,050 shares of TGS stock December 1963 – Chemical tests of land came back confirming the TGS estimate of copper & zinc, including some silver

6. Timeline of Events January-February 1964- Inside informers and their tipsters own 8,235 shares of stock February 1964-TGS issues stock options to 26 officers & other employees, including 5 insiders. Option committee & board of directors had not been made aware of the find. March 31, 1964-TGS resumes drilling

7. The Problem Rumors were circulating around Canada of a major ore strike Feb. 27 Northern Miner reported rumors of Texas Gulf’s ore indications March 31 TGS invites Northern Miner to visit the drilling site on April 20 April 9 Toronto Daily Star & Globe and Mail headlines read “Wild Speculation Spree on TGS: Gigantic Copper Strike Rumored”

8. The Problem New York Times and New York Herald Tribune picked up the Canadian stories on April 11 Robert Carroll, a public relations consultant, helped Dr. Fogarty draft a news release that weekend, which was released on April 12 for Monday’s newspaper New York Herald Tribune headline on April 13 read “Copper Rumor Deflated” This press release was at the heart of the problem-manner in which it was released raised questions of whether or not it was deceptive

9. The April 12th Press Release SEC argued that the press release on April 12 misstated the quality and quantity of the recently discovered mine. One misleading paragraph: “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 sulfide ore bodies.” After the release, TGS shares traded down

10. The Problem Reports from Timmins on the land were looking extremely promising, TGS planned an announcement for April 16 On day of the announcement, there were many issues in the distribution and synchronization of communications

11. The Trial SEC complained that TGS executives used the information to trade in the company’s stock before it was disclosed publicly Judge ruled in favor of all defendants, except David Crawford & Richard Clayton, who purchased TGS stock between the April 12th press release and the April 16th announcement Judge dismissed cases against other defendants claiming that stock purchased before April 9th was based on information that was “not material”

12. The Trial Judge ruled that because the executives had sought advice from a PR professional, they exercised reasonable business judgment. On the press release, the judge stated that “While in retrospect, the press release may appear gloomy or incomplete, that does not make it misleading or deceptive on the basis of the facts then known.”

13. Appeals SEC appealed the dismissals of the lower court Appellate court reversed the lower courts rulings, except for convictions on Crawford and Clayton Lower court judge ordered to make the appropriate remedies which included: TGS & executives failed to exercise due diligence in April 12th news release Certain defendants ordered to turn profits made on insider trading to TGS

14. Appeals Injunctions issued against Crawford and Clayton, could no longer make purchases or sales based on “undisclosed” information Denied SEC request that TGS as a company be enjoined from issuing false, misleading, or inadequate information as there was “no reasonable likelihood for further violations” No injuntions against Darke, Holyk, Huntington (TGS attorney), Fogarty, or Mollison for that reason Assessed paybacks over $100,000 from Darke, Holyk, Clayton, Huntington, & tippees

15. After Effects & PR Relevance Publicly owned companies reexamined their disclosure practices for financial information to make sure they were in compliance Corp. Financial relations pros took a more outspoken role in corporate decisions, meaning seats in management councils, etc PR professionals providing counsel & implementing communications involved in financial affairs can qualify as “insiders”

16. The Precedents The TGS case set various precedents for publicly owned companies: Full & complete disclosure of every material fact in a timely manner Complete ban on insider trading Corporate and personal responsibility of PR counsel

17. Question 1 Drawing on the information in the case, and having the benefit of knowing how it all came out, what should the public relations executive have counseled TGS officers to do differently, or to communicate publicly, at some point before TGS executives were found to be trading in the stock?

18. Question 2 Consider this situation: A weekly financial magazine column “Tips and Rumors” regularly got into some people’s hands a day before each issue of the magazine came out, and some of the stocks mentioned were suddenly traded heavily and run up in price. Suppose also, it turned out that a clerical person in the magazine’s PR department privately had been giving an advance rough draft of the column as a favor to a friend at a brokerage firm. Neither that clerk nor the friend at a brokerage firm traded or made any profit. As you understand Rule 10b, who is legally liable?

19. Question 3 Objectively, was the initial TGS news release about the ore strike at Timmins misleading on the basis of what was known at the time the news was released? Or did it only go as far as a cautious, prudent management was willing to go for fear of overstating and getting in trouble for that? Or, what else does your objective evaluation say might have been the determining consideration?

20. Question 4 A reputation for being honest in economic matters, civil in social relations, and honorable in character has long been said to be a precious and fragile possession. And the reputation of communications people is generally perceived by critics and supporters alike as being a reflection of those they serve and associate with. If we accept both premises, how can we stay clean and honorable, earn a good living, and advance in a career when we are cast in an atmosphere that many moralists, historians, intellectuals, journalists, and some government officials describe as a “moral morass”?