The opinion of the court was delivered by: BONSAL
These are motions for summary judgment. Defendants Texas Gulf Sulphur Company (TGS), and Charles Fogarty, Richard Mollison, David Crawford, Kenneth Darke, Francis Coates, Claude Stephens, John Murray, Earl Huntington, Harold Kline, Walter Holyk, and Richard Clayton (the individual defendants, unless otherwise identified individually by name) move for summary judgment, seeking dismissal of plaintiffs' actions in Astor, Alexander, and 58 other actions,
on the ground that there is no genuine issue of material fact, and that they are entitled to judgment as a matter of law. Plaintiffs in Darraugh cross-move for summary judgment.
These 60 actions arise out of the events of November 1963 to April 1964, when TGS discovered valuable ore bodies in Timmins, Ontario.
Following announcement of the discovery, the Securities and Exchange Commission (S.E.C.) instituted an action against TGS and the individual defendants (65 Civ. 1182) (the S.E.C. action). The S.E.C. alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the 1934 Act), and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated pursuant thereto. The complaint brought by the S.E.C. alleged that certain of the defendants had purchased TGS stock or calls, or acquired stock options, between November 12, 1963 and April 16, 1964, inclusive, on the basis of material inside information concerning the results of TGS drilling in Timmins, Ontario while such information remained undisclosed to the investing public, the Stock Option Committee, and to TGS shareholders who sold during this period; and that TGS issued a deceptive press release on April 12, 1964. The case was tried by this court, sitting without a jury, and the court's opinion is reported at 258 F. Supp. 262 (S.D.N.Y. 1966). On appeal, the Court of Appeals affirmed in part and reversed and remanded in part, finding that the defendants who had purchased or recommended TGS stock or calls, or had accepted stock options during the period before the material information as to the Timmins drill results was disclosed had violated Rule 10b-5, and directed the District Court to reconsider the matter of the April 12 press release in the light of its opinion (401 F.2d 833 (2d Cir. 1968)).
The actions here involved (hereinafter referred to as the private actions) were brought by former shareholders of TGS seeking money damages, and all but one were filed after the S.E.C. action. There are 63 private actions presently pending in this court against TGS and against some or all of the individual defendants named in the S.E.C. action.
In their motion papers, defendants state that 40 of the private actions are brought by shareholders who allege that they sold TGS stock or calls between November 12, 1963 and April 12, 1964, or after April 12, 1964 without reliance on the April 12 press release, and who allege they would not have done so had they known of the material undisclosed inside information; that 10 are brought by shareholders who allege they sold between April 12 and April 16, 1964, inclusive, in reliance on the April 12 press release; and that 10 are brought by shareholders who allege that they sold both before and after April 12, 1964, and as to sales after April 12, allege reliance on the April 12 press release.
In their motions captioned Astor v. TGS and 51 other actions (hereinafter the Astor motion), defendants move for full or partial summary judgment with respect to the claims of plaintiffs who allege that they sold TGS stock or calls between November 12, 1963 and April 12, 1964, or after April 12, 1964 without reliance on the April 12 press release, and who allege they would not have sold had they known of the material undisclosed information.
In their motions captioned Alexander v. TGS and 19 other actions (hereinafter the Alexander motion), defendants move for full or partial summary judgment with respect to the claims of all plaintiffs who sold TGS stock or calls between April 12 and April 16, 1964, inclusive, and who allege reliance on the April 12 press release.
While the complaints vary, in general the plaintiffs charge violations of Rule 10b-5, in that individual defendants purchased or recommended TGS stock or calls, or accepted stock options, while in possession of material undisclosed inside information as to the Timmins drilling results; in that TGS failed to disclose such material information to the TGS shareholders; and in that TGS and the individual defendants "conspired" to conceal the material information while the individual defendants were purchasing or recommending TGS stock or calls, or accepting stock options.
TGS contends that it had no duty to disclose, and indeed had a duty not to disclose, because a proper corporate purpose was served by not disclosing in facilitating the acquisition of mineral rights in the area around the initial drill holes.
The individual defendants who purchased or recommended TGS stock or calls or accepted stock options, during the period of nondisclosure, contend that their failure to disclose violated no duty to the TGS shareholders, and that plaintiffs have no private right of action for damages under Rule 10b-5. Three of the individual defendants, Crawford, Coates, and Murray, add that they had no knowledge of the Timmins drill results prior to April 12, 1964.
Plaintiffs argue that genuine issues of material fact exist, including whether a proper corporate purpose was served in failing to disclose after March 27, 1964, when the land acquisition program was substantially completed and TGS determined to resume drilling; and that important questions of law, including whether they have a private right of action for damages under Rule 10b-5 with respect to securities transactions which took place on a national securities exchange, should not be resolved until a full trial is held - all of which preclude the granting of summary judgment.
For the reasons hereinafter stated, defendants' motions for summary judgment with respect to the claims of plaintiffs whose allegations are encompassed in the Astor motion, are granted in part and denied in part, as follows:
a) Defendant TGS' motion, seeking dismissal of plaintiffs' actions as to TGS, is granted as to those plaintiffs who allege they sold their TGS stock (or calls) on or before March 27, 1964; and is denied as to those plaintiffs who allege they sold their TGS stock after March 27, 1964.
b) Defendant Murray's motion is granted.
c) Defendants Crawford's and Coates' motions are denied.
d) The motions of the remaining individual defendants are denied, with the exception of the motions of defendants Mollison and Holyk, seeking dismissal of plaintiffs' actions alleging acceptance of stock options by them without disclosing material information, which are granted.
a. Motion of defendant TGS
In S.E.C. v. Texas Gulf Sulphur, supra, 401 F.2d at 850 n. 12, the Court of Appeals stated that "a valuable corporate purpose was served by delaying the publication of the K-55-1 discovery"; that "the timing of disclosure is a matter of business judgment of the corporate officers entrusted with the management of the corporation within the affirmative disclosure requirements promulgated by the exchanges and the SEC."
However, the Court did not find when "the valuable corporate purpose" had been accomplished, nor did it state whether TGS would have had an obligation under Rule 10b-5 to disclose the information about the Timmins drill results once the valuable corporate purpose had been served.
Plaintiffs contend that any such proper corporate purpose in nondisclosure ceased by March 27, 1964, when TGS had purchased or had an option to purchase the four 1/4 segments of K-55 and had ordered the drilling to resume on March 31, 1964; and that the issue of fact as to when the corporate purpose had ceased precludes granting the motion for summary judgment.
However, TGS urges that there continued to be a proper corporate purpose in nondisclosure after March 27, 1964, inasmuch as TGS was still negotiating for the purchase of the 10% override interests in the Hendrie and Woolings properties.
Whether TGS had a proper corporate purpose in not disclosing after March 27, 1964, and whether the lack of such corporate purpose would give rise to a duty to disclose, involve issues which cannot be determined on those motions for summary judgment.
However, in light of the Court of Appeals decision, the court finds that TGS had no duty to disclose on or before March 27, 1964, and the motion of defendant TGS is granted as to the claims of those plaintiffs who allege that they sold TGS stock on or before March 27, 1964.
b. Motion of defendant Murray
John Murray was employed as an office manager by TGS during the period involved. He is named a defendant in 36 of the 51 private actions included in the Astor motion. Plaintiffs in these actions allege that he knew material information concerning the Timmins drill results, conspired to conceal the information, and, on January 8, 1964, while in ...