CASE
Vulcan, Inc.
THE COMPANY
Vulcan, Inc. is a multinational Fortune 200 company engaging principally in
the exploration for and extraction of minerals. It is listed on the New York
Stock Exchange and has more than 615 million shares outstanding.
THE MEETING (MARCH 7)
On March 5, Stewart Myer, the company’s CEO, personally telephoned
Martha Bordeaux, the VP for *nance; Lamont Johnson, the chief geologist;
and Natasha Bylinski, the VP for acquisitions, to arrange a March 7 meeting
at the Atlanta airport. He emphasized to each of them the need for the
utmost secrecy, directing them to arrange their travel to Atlanta as a
THE REPORT
Johnson read his report:
Over the past few years we have conducted extensive aerial
geophysical surveys of the areas west of the Great Plains. These
revealed numerous anomalies or extreme variations in the conductivity
of rocks. One appeared particularly encouraging, so late last year we
began a ground geophysical survey of the southwest portion of the Z
segment in Montana. This survey con*rmed the presence of anomalies.
Accordingly, on January 14 we drilled some core samples and sent
them to our lab. The results were so extraordinarily promising that on
February 10 we obtained more core samples and had them chemically
assayed. On February 25, we received the assay, which revealed an
THE REACTION
Bordeaux exclaimed, “Our stock price will go through the roof!” Bylinski
retorted, “So will land prices!”
THE STRATEGY
Myer interrupted, “Look, we’re not here to celebrate. There are a lot of better
places to do that. We can’t keep a lid on this for very long so we have to
strike soon. We need to line up the right agents to acquire the land. We must
fragment the acquisitions to keep the sellers in the dark. Most critical is
maintaining absolute secrecy. No one else in the company must know this. I
will decide who needs to know and I will tell them. It is your duty to the
THE PLAN
Bylinski outlined the plan to acquire the land. “We only own about 20 percent
of the land we want and we have options on another 15 percent. However,
we currently own none of the principal portion. So we have a lot of work to
do. We will employ several agents to negotiate the purchases. We will
instruct them not to disclose that they are acting for us. In fact, we will order
STOCK OPTIONS
On March 15 Vulcan issued stock options at $23.50 per share to thirty of its
executives including Myer, Bordeaux, Johnson, and Bylinski. At this time
neither the stock option committee nor the board of directors had been
informed of the strike or the pending land acquisition program.
THE RUMORS
While the land acquisition plan was nearing completion, rumors about a
major strike by Vulcan began circulating throughout the business community.
On the morning of March 20, Bordeaux read an account in a national
newspaper reporting that ore samples had been sent out of Montana and
inferring from that fact that Vulcan had made a rich strike. Bordeaux called
Myer and told him about the article.
THE PRESS RELEASE
Myer prepared the following press release, which appeared in morning
newspapers of general circulation on March 21:
During the past few days the press has reported drilling activities by
Vulcan and rumors of a substantial copper discovery. These reports
greatly exaggerate. Vulcan has engaged in normal geophysical
LAND ACQUIRED
On April 6 Vulcan completed its land acquisition program. It had employed
seven different agents. In total, it had acquired thirty-seven parcels from
twenty-two different sellers at prices ranging from $300 to $600 per acre.
The land cost a total of approximately $6 million.
OFFICIAL ANNOUNCEMENT
At 10:00 A.M. on April 11, Myer released on behalf of Vulcan an oGcial
announcement of a strike in Montana containing at least 30 million tons of
high-grade copper and zinc ore. The release appeared on the wire services at
10:30 A.M. The price of Vulcan stock shot up eleven points to $38 by the
close of business that day and continued to rise, reaching a price of $56 on
May 16. (Figures 2-8 and 2-9 show the price and volume of Vulcan stock.)
LOOSE LIPS
Prior to the April 11 oGcial announcement, a number of people purchased
Vulcan stock with knowledge of the mineral discovery. Some people also
purchased land adjacent to Vulcan’s holdings in Montana. These purchasers
included the following:
The Vulcan Executives Myer, Bordeaux, Johnson, and Bylinski each
purchased shares or calls on several occasions during this time period. See
Figure 2-10 for a listing of their purchases.
The Eager Eavesdropper After leaving the March 7 meeting, Bordeaux and
Bylinski went to the airport lounge to wait for their Kights. They excitedly—
and loudly—discussed what they had learned at the meeting. Several people
The Crestfallen Security Guard On March 9 Johnson went into the home
oGce very early to finish up the exploratory work on the new *nd. At the
elevator he encountered Celia Tidey, one of the company’s security guards.
Johnson knew her fairly well since they both had worked for Vulcan for more
than *fteen years. Noting her despondent visage, Johnson asked her what
was wrong. She related to him her tale of woe: her husband had become
disabled and lost his job while her son needed an expensive medical
The Avaricious Agent William Baggio, one of the agents hired to acquire
the land, inferred that whatever was up had to be good for Vulcan.
Accordingly, on March 21 he purchased two thousand, *ve hundred shares of
Vulcan and *ve thousand acres of land adjacent to the Vulcan property.
The Trusted Tippee On March 8, Myer called Theodore Gri4ey, his oldest
and dearest friend. After getting Gri4ey to swear absolute con*dentiality,
Myer told him all the details of the strike. After hanging up the telephone,
Gri4ey immediately purchased *fteen thousand shares of Vulcan stock.
THE LAND GRAB
After the oGcial announcement on April 11, several of Vulcan’s competitors
began exploring the area and purchased large tracks of land, bidding up the
price of land to $2,250 per acre. Both Bodie and Baggio sold their newly
acquired land to Vulcan competitors at this higher price.
ISSUES
What circumstances constitute insider trading? Is it ethical to use
non-disclosed agents to buy land for a price lower than its known (but
undisclosed) value?
ACTION DISCUSSION
Stock Options Was it ethical to issue stock options to the
executives who knew about the impending
land acquisition and mineral strike?
Misleading Press Release Although the press release issued in
response to rumors was technically
accurate, its downplaying of the situation is
misleading. Is this a legal or ethical
practice?
Land Acquisition Is it legal and ethical to use multiple
non-disclosed agents to mask the volume
and value of land purchases in order to
Stock Purchase by
Executives Who Know
About Mineral Find
Is this insider trading?
Stock Purchase by
Eavesdropper Who Does
Is this insider trading?
Stock Purchase by Agent
Who Knows About Land
Purchases
Is this insider trading?
Stock Purchase by Friends
and Family of Executives
Who Know About Mineral
Is this insider trading?
DECISION
Have the students justify their decision.
ADDITIONAL DISCUSSION
• Is there ever a time when it is ethical and legal to buy stocks based on
insider information?