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  In the course of the same hectic day in New York, the engineer Clayton and the company secretary Crawford found time to call their brokers and order themselves some Texas Gulf stock—two hundred shares in Clayton’s case, three hundred in Crawford’s. And Crawford soon decided that he hadn’t plunged deeply enough; shortly after eight o’clock the next morning, after an apparently preoccupied night at the Park Lane Hotel, he awakened his broker with a second call and doubled his order.

  ON Thursday morning, the first hard news of the Timmins strike spread through the North American investment world, rapidly but erratically. Between seven and eight o’clock, mailmen and newsstands in Toronto began distributing copies of The Northern-Miner containing the piece by the reporter who had visited Kidd55, in which he described the strike with a good deal of mining jargon but did not omit to call it, in language comprehensible enough for anyone, “a brilliant exploration success” and “a major new zinc-copper-silver mine.” At about the same time, the Miner was on its way out to subscribers south of the border in Detroit and Buffalo, and a few hundred newsstand copies appear to have arrived in New York between nine and ten o’clock. The paper’s physical appearance here, however, was preceded by telephone reports on its contents from Toronto, and by about 9:15 the news that Texas Gulf had hit it big for sure was the talk of New York brokerage offices. A customer’s man in the Sixtieth Street office of E. F. Hutton & Company complained later that his broker cronies had been so eager to natter on the telephone about Texas Gulf early that morning as to substantially prevent him from communicating with his customers; however, he did manage to squeeze in a call to two of them, a husband and wife for whom he was able to turn a rather quick profit in Texas Gulf—to be exact, a profit of $10,500 in less than an hour. (“It is clear that we are all in the wrong business,” Judge Bonsal was to comment when he heard this. Or as the late Wieland Wagner once remarked in another context, “I shall be quite explicit. Valhalla is Wall Street.”) At the Stock Exchange itself early that day, the traders in the Luncheon Club, which before the ten-o’clock opening serves as a breakfast club, were all munching on the Texas Gulf situation along with their toast and eggs.

  At the directors’ meeting at 200 Park, which began promptly at nine, the directors were shown the new statement that was shortly to be released to the press, and Stephens, Fogarty, Holyk, and Mollison, as representatives of the exploration group, commented in turn on the Timmins discovery. Stephens also stated that the Ontario Minister of Mines had announced it publicly in Toronto the previous evening (a misstatement, of course, although an unintentional one; actually, the minister was making his announcement to the Ontario Parliament press gallery in Toronto at almost the same moment Stephens was speaking). The directors’ meeting ended at about ten o’clock, whereupon a clutch of reporters—twenty-two of them, representing many of the major United States newspapers and magazines, general and financial—trooped into the board room for the press conference, the Texas Gulf directors all remaining in their places. Stephens distributed copies of the press release to the reporters and then, in fulfillment of a curious ritual that governs such affairs, read it aloud. While he was engaged in this redundant recital various reporters began to drift away (“they began sort of leaking out of the room” was the way Lamont put it later) to telephone the sensational news to their publications; still more of them slipped away during the events that subsequently rounded out the press conference—the showing of some innocuous colored slides of the countryside around Timmins, and an exhibition and explanation by Holyk of some drill cores—and by the time it ended, at around 10:15, only a handful of reporters were left. This certainly didn’t mean that the affair had been a flop. On the contrary, a press conference is perhaps the only kind of show whose success is in direct proportion to the number of people who leave before it is over.

  The actions of two of the Texas Gulf directors, Coates and Lamont, during the next half hour or so were to give rise to the most controversial part of the S.E.C.’s complaint, and, since the controversy has now been inscribed in the law, those actions are likely to be studied for at least a generation by inside stock traders seeking guidance as to what they must do to be saved, or at least to avoid being damned. The essence of the controversy was timing, and in particular, the timing of Coates’ and Lamont’s maneuvers in relation to that of the dissemination of the Texas Gulf news by the Dow Jones News Service, the familiar spot-news facility for investors. Few investment offices in the United States are without the service, and its prestige is such that in some investment circles the moment a piece of news becomes public is considered to be determined by the moment it crosses the broad tape. As to the morning of April 16th, 1964, a Dow Jones reporter was not only among those at the Texas Gulf press conference but was among those who left early to telephone the news to his office. According to his recollection, the reporter made his call between 10:10 and 10:15, and normally an item of such importance as the one he sent would begin to be printed out by Dow Jones machines in offices from coast to coast within two or three minutes after being telephoned in. In fact, though, the Texas Gulf story did not begin to appear until 10:54, an entirely inexplicable forty-odd minutes later. The mystery of the broad tape message, like the mystery of the Minister of Mines’ announcement, was left unraveled in the trial on grounds of irrelevance; an engaging aspect of the rules of evidence is their tendency to leave a few things to the imagination.

  Coates, the Texan, was the first director to embark upon what he can hardly have thought of at the time as a historically significant course. Either before or immediately after the end of the press conference he went into an office adjoining the board room, where he borrowed a telephone and called his son-in-law, H. Fred Haemisegger, who is a stockbroker in Houston. Coates, as he related later, told Haemisegger of the Texas Gulf discovery and added that he had waited to call until “after the public announcement” because he was “too old to get into trouble with the S.E.C.” He then placed an order for two thousand shares of Texas Gulf stock for four family trusts of which he was a trustee, though not personally a beneficiary. The stock, which had opened on the Stock Exchange some twenty minutes earlier at a fraction above 30 in very active but by no means decisively bullish trading, was now rapidly on its way up, but by acting quickly Haemisegger managed to buy the block for Coates at between 31 and 31⅝, getting his orders in to his firm’s floor broker well before the unaccountably delayed news began to come out on the broad tape.

  Lamont, in the Wall Street tradition of plungers rather than the Texas one, made his move with decision but with an elegant, almost languorous lack of hurry. Instead of leaving the board room at the conclusion of the press conference, he stayed there for some twenty minutes, not doing much of anything. “I milled around … and listened to some of them chatter and talk with each other, and slapped people on the back,” he recounted later. Then, at 10:39 or 10:40, he went to a nearby office and telephoned a colleague and friend of his at the Morgan Guaranty Trust Company—Longstreet Hinton, the bank’s executive vice president and the head of its trust department. Earlier in the week Hinton had asked Lamont if he, as a Texas Gulf director, could shed any light on the rumors of an ore discovery that were appearing in the press, and Lamont had replied that he couldn’t. Now Lamont, as he recalled later, told Hinton “that there was news which had come out, or was shortly coming out, on the ticker, which would be of interest to him, regarding Texas Gulf Sulphur.” “Is it good?” Hinton asked, and Lamont replied that it was “pretty good” or “very good.” (Neither man is sure which he said, but it doesn’t matter, since in New York bankerese “pretty good” means “very good.”) In any case, Hinton did not follow the advice to look at the Dow Jones ticker, even though a machine was ticking twenty feet from his office; instead, he immediately called the bank’s trading department and asked for a market quotation on Texas Gulf. After getting it, he placed an order to buy 3,000 shares for the account of the Nassau Hospital, of which he was treasurer. A
ll this occupied no more than two minutes from the time Lamont had left the press conference. The order had been transmitted from the bank to the Stock Exchange and executed, and Nassau Hospital had its stock, before Hinton would have seen anything about Texas Gulf on the broad tape if he had been looking at it. But he was not looking at it; he was otherwise occupied. After placing the Nassau Hospital order, he went to the office of the Morgan Guaranty officer in charge of pension trusts and suggested that he buy some Texas Gulf for the trusts. In a matter of less than a half an hour, the bank had ordered 7,000 shares for its pension fund and profit-sharing account—two thousand of them before the announcement had begun to appear on the broad tape, and the rest either while it was appearing or within a few minutes afterward. A bit more than an hour after that—at 12:33 p.m.—Lamont bought 3,000 shares for himself and members of his family, this time having to pay 34½ for them, since Texas Gulf by that time was on its way up for fair. As it was to continue to be for days, months, and years. It closed that afternoon at 36⅜, it reached a high of 58⅜ later that month, and by the end of 1966, when commercial production of ore was at last under way at Kidd-55 and the enormous new mine was expected to account for one-tenth of Canada’s total annual production of copper and one-quarter of its total annual production of zinc, the stock was selling at over 100. Anyone who had bought Texas Gulf between November 12th, 1963 and the morning (or even the lunch hour) of April 16th, 1964 had therefore at least tripled his money.

  PERHAPS the most arresting aspect of the Texas Gulf trial—apart from the fact that a trial was taking place at all—was the vividness and variety of the defendants who came before Judge Bonsal, ranging as they did from a hot-eyed mining prospector like Clayton (a genuine Welchman with a degree in mining from the University of Cardiff) through vigorous and harried corporate nabobs like Fogarty and Stephens to a Texas wheeler-dealer like Coates and a polished Brahmin of finance like Lamont. (Darke, who had left Texas Gulf’s employ soon after April, 1964 to become a private investor—which may or may not indicate that he had become a man of independent means—declined to appear at the trial on the ground that his Canadian nationality put him beyond the reach of subpoena by a United States court, and the S.E.C. grieved loudly over this refusal; defense counsel, however, scornfully insisted that the S.E.C. was really delighted to have Darke absent, thus allowing plaintiff to paint him as Mephistopheles hiding in the wings.) The S.E.C, after its counsel, Frank E. Kennamer Jr., had announced his intention to “drag to light and pillory the misconduct of these defendants,” asked the court to issue a permanent injunction forbidding Fogarty, Mollison, Clayton, Holyk, Darke, Crawford, and several other corporate insiders who had bought stock or calls between November 8th, 1963 and April 15th, 1964, from ever again “engaging in any act … which operates or would operate as a fraud or deceit upon any person in connection with purchase or sale of securities”; further—and here it was breaking entirely new ground—it prayed that the Court order the defendants to make restitution to the persons they had allegedly defrauded by buying stock or calls from them on the basis of inside information. The S.E.C. also charged that the pessimistic April 12th press release was deliberately deceptive, and asked that because of it Texas Gulf be enjoined from “making any untrue statement of material fact or omitting to state a material fact.” Apart from any question of loss of corporate face, the nub of the matter here lay in the fact that such a judgment, if granted, might well open the way for legal action against the company by any stockholder who had sold his Texas Gulf stock to anybody in the interim between the first press release and the second one, and since the shares that had changed hands during that period had run into the millions, it was a nub indeed.

  Apart from legal technicalities, counsel based its defense of the early insider stock purchases chiefly on the argument that the information yielded by the first drill hole in November had made the prospect of a workable mine not a sure thing but only a sporting proposition, and to buttress this argument, it paraded before the judge a platoon of mining experts who testified as to the notorious fickleness of first drill holes, some of the witnesses going so far as to say that the hole might very well have turned out to be not an asset but a liability to Texas Gulf. The people who had bought stock or calls during the winter insisted that the drill hole had had little or nothing to do with their decision—they had been motivated simply by the feeling that Texas Gulf was a good investment at that juncture on general principles; and Clayton attributed his abrupt appearance as a substantial investor to the fact that he had just married a well-to-do wife. The S.E.C. countered with its own parade of experts, maintaining that the nature of the first core had been such as to make the existence of a rich mine an overwhelming probability, and that therefore those privy to the facts about it had possessed a material fact. As the S.E.C. put it saltily in a post-trial brief, “the argument that the defendants were free to purchase the stock until the existence of a mine had been established beyond doubt is equivalent to saying that there is no unfairness in betting on a horse entered in a race, knowing that the animal has received an illegal stimulant, because in the homestretch the horse might drop dead.” Defense counsel declined to be drawn into argument on the equine analogy. As to the pessimistic April 12th release, the S.E.C. made much of the fact that Fogarty, its chief drafter, had based it on information that was almost forty-eight hours old when it was issued, despite the fact that communications between Kidd-55, Timmins, and New York were relatively good at the time, and expressed the view that “the most indulgent explanation for his strange conduct is that Dr. Fogarty simply did not care whether he gave the shareholders of Texas Gulf and the public a discouraging statement based on stale information.” Brushing aside the question of staleness, the defense asserted that the release “accurately stated the status of the drilling in the opinion of Stephens, Fogarty, Mollison, Holyk, and Clayton,” that “the problem presented was obviously one of judgment,” and that the company had been in a particularly difficult and sensitive position in that if it had, instead, issued an overly optimistic report that had later proved to have been based on false hopes, it could just as well have then been accused of fraud for that.

  Weighing the crucial question of whether the information obtained from the first drill hole had been “material,” Judge Bonsal concluded that the definition of materiality in such instances must be a conservative one. There was, he pointed out, a question of public policy involved: “It is important under our free-enterprise system that insiders, including directors, officers, and employees, be encouraged to own securities of their company. The incentive that comes with stock ownership benefits both the company and the stockholders.” Keeping his definition conservative, he decided that up until the evening of April 9th, when three converging drill holes positively established the three-dimensionality of the ore deposit, material information had not been in hand, and the decisions of the insiders to buy Texas Gulf stock before that date, even if based on the drilling results, were no more than perfectly sporting, and legal, “educated guesses.” (A newspaper columnist who disagreed with the judge’s finding was to remark that the guesses had been so educated as to qualify for summa cum laude.) In the case of Darke, the judge found that the spate of stock purchases by his tippees and sub-tippees on the last days of March seemed highly likely to have been instigated by word from Darke that drilling at Kidd-55 was about to be resumed; but even here, according to Judge Bonsal’s logic, material information did not yet exist and therefore could neither be acted upon nor passed along to others.

  Case was therefore dismissed against all educated guessers who had bought stock or calls, or made recommendations to tippees, before the evening of April 9th. With Clayton and Crawford, who had been so injudicious as to buy or order stock on April 15th, it was another matter. The judge found no evidence that they had intended to deceive or defraud anyone, but they had made their purchases with the full knowledge that a great mine had been found and that it would be announced
the next day—in short, with material private information in hand. Therefore they were found to have violated Rule 10B-5, and in due time would presumably be enjoined from doing such a thing again and made to offer restitution to the persons they bought their April 15th shares from—assuming, of course, that such persons can be found, the complexities of stock-exchange trading being such that it isn’t always an easy matter to figure out exactly whom one has been dealing with on any particular transaction. The law in our time is, and probably ought to remain, almost unrealistically humanistic; in its eyes, corporations are people, stock exchanges are street-corner marketplaces where buyer and seller haggle face to face, and computers scarcely exist.

  As for the April 12th press release, the judge found it in retrospect “gloomy” and “incomplete,” but he acknowledged that its purpose had been the worthy one of correcting the exaggerated rumors that had been appearing and decided that the S.E.C. had failed to prove that it was false, misleading, or deceptive. Thus he dismissed the complaint that Texas Gulf had deliberately tried to confuse its stockholders and the public.