In June 1963, Texas Gulf Sulphur acquired the option to buy land in Timmons, Ontario. A preliminary drilling in November 1963 suggested that the land held great amounts of copper and zinc. This information was supposed to be kept secret; not even officers and executives at TGS were supposed to know about the results of the drilling. TGS acquired the land and resumed drilling in March 1964. During the time from November 1963 to March 1964, certain directors, officers, and employees of TGS received “tips” and purchased TGS stock or options to buy shares at a fixed price. When drilling began in November 1963, these people had owned 1,135 shares of TGS stock and possessed no calls; thereafter, they owned a total of 8,235 shares and possessed 12,300 calls.
In April 1964, when rumors of a major mineral find appeared in newspapers, TGS responded by claiming that the rumors of a major find did not have factual basis. However, a few days later, TGS confirmed that the strike was expected to yield many million tons of ore. In between the days that TGS claimed the rumors were false and later confirmed the rumors, two defendants, Clayton and Crawford, ordered a combined total of 500 shares of TGS stock. The SEC brought suit against TGS and 13 of its directors, officers, and employees for violation of Section 10

(b) of the Exchange Act and SEC Rule 10(b)-5, seeking an injunction to prevent TGS from publishing misleading press releases and requesting rescission of TGS’s purchases and stock options. The district court dismissed the charges against all defendants but Clayton and Crawford and the SEC appealed.
JUDGE WATERMAN Rule 10b-5 was promulgated pursuant to the grant of authority given the SEC by Congress in Section 10

(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)). By that Act Congress purposed to prevent inequitable and unfair practices and to insure fairness in securities transactions generally, whether conducted face-to-face, over the counter, or on exchanges. The Act and the Rule apply to the transactions here, all of which were consummated on exchanges. Whether predicated on traditional fiduciary concepts, the Rule is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information. The essence of the Rule is that anyone who, trading for his own account in the securities of a corporation has “access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone” may not take “advantage of such information knowing it is unavailable to those with whom he is dealing,”
i.e., the investing public. Insiders, as directors or management officers are, of course, by this Rule, precluded from so unfairly dealing, but the Rule is also applicable to one possessing the information who may not be strictly termed an “insider” within the meaning of Sec.16

(b) of the Act. Thus, anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed.
… As we stated in List v. Fashion Park, Inc., 340 F.2d 457, 462, “The basic test of materiality … is whether a reasonable man would attach importance … in determining his choice of action in the transaction in question.” This, of course, encompasses any fact “… which in reasonable and objective contemplation might affect the value of the corporation’s stock or securities….” Such a fact is a material fact and must be effectively disclosed to the investing public prior to the commencement of insider trading in the corporation’s securities. Thus, material facts include not only information disclosing the earnings and distributions of a company but also those facts which affect the probable future of the company and those which may affect the desire of investors to buy, sell, or hold the company’s securities.
In each case, then, whether facts are material within Rule 10b-5 when the facts relate to a particular event and are undisclosed by those persons who are knowledgeable thereof will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.
The core of Rule 10b-5 is the implementation of the Congressional purpose that all investors should have equal access to the rewards of participation in securities transactions. It was the intent of Congress that all members of the investing public should be subject to identical market risks—which market risks include, of course, the risk that one’s evaluative capacity or one’s capital available to put at risk may exceed another’s capacity or capital. The insiders here were not trading on an equal footing with the outside investors. They alone were in a position to evaluate the probability and magnitude of what seemed from the outset to be a major ore strike; they alone could invest safely, secure in the expectation that the price of TGS stock would rise substantially in the event such a major strike should materialize, but would decline little, if at all, in the event of failure, for the public, ignorant at the outset of the favorable probabilities would likewise be unaware of the unproductive exploration, and the additional exploration costs would not significantly affect TGS market prices. Such inequities based upon unequal access to knowledge should not be shrugged off as inevitable in our way of life, or, in view of the congressional concern in the area, remain uncorrected.
We hold, therefore, that all transactions in TGS stock or calls by individuals apprised of the drilling results were made in violation of Rule 10b-5.
CRITICAL THINKING:
Identify the reasons given by the judge for the decision. How do these reasons demonstrate the link between business law and business ethics?
ETHICAL DECISION MAKING:
What values are being emphasized by the prohibition on insider trading?