Business Ethics

No more than 750 words. VULCAN, INC. “This little piggy went to market...” 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 115 million shares outstanding. The Meeting (March 7) On March 5, Toshiyuki Argentum, the company's CEO, personally telephoned Catherine Bismuth, the VP for finance, Lamont Cupric, the chief geologist, and Natasha Ferrous, 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 connection to other and different destinations. When they all arrived at the meeting room, Argentum reemphasized the need for complete secrecy. He then asked Cupric to present his report. The Report Cupric 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 confirmed 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 average mineral content of 1.17% copper and 8.6% zinc over 600 feet of the sample's 650 foot length. Cupric then commented, “In my forty years in the business I have never seen such remarkable test results. On a scale of one to ten, this is an eleven.” The Reaction Bismuth exclaimed, “Our stock price will go through the roof!” Ferrous retorted, “So will land prices!” The Strategy Argentum 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 company to keep totally quiet. Now, let's discuss the acquisition plan.” When asked how he had managed to obtain core samples without tipping off the owners of the land, Cupric explained, “We pretended to be a motion picture company looking for locations to remake the movie High Noon. We drilled the samples in isolated areas and quickly filled the holes. To further cover our tracks we drilled some barren core samples from land we owned and hid the cores on our land.” The Plan Ferrous outlined the plan to acquire the land. “We only own about twenty percent of the land we want and we have options on another fifteen 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 them not to disclose they are acting for anyone. We need to acquire approximately 20 square miles of additional land.” Bismuth asked, “What if the locals start getting curious?” Argentum replied, “I'll deal with that later if it arises.” Stock Options On March 15 Vulcan issued stock options at $23.50 per share to thirty of its executives including Argentum, Bismuth, Cupric, and Ferrous. 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, Bismuth 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. Bismuth called Argentum and told him about the article. The Press Release Argentum 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 explorations throughout the West. We routinely send core samples to verify our visual examinations. Most of the areas drilled have been barren or marginal. When we have additional information we will issue a statement to shareholders and the public. 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 six million dollars. Official Announcement At 10:00 a.m. on April 11, Argentum released on behalf of Vulcan an official 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 11 points to $38 by the close of business that day and continued to rise, reaching a price of $56 on May 16. (Exhibits 1 and 2 show the price and volume of Vulcan stock.) Loose Lips Prior to the April 11 official 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 Argentum, Bismuth, Cupric, and Ferrous each purchased shares or calls on several occasions during this time period. See Exhibit 3 for a listing of their purchases. The Eager Eavesdropper After leaving the March 7 meeting Bismuth and Ferrous went to the airport lounge to wait for their flights. They excitedly — and loudly — discussed what they had learned at the meeting. Several people overheard their remarks and one of them, Rae Bodie, immediately called her broker and bought 1,500 shares of Vulcan stock. Ms. Bodie also purchased a large tract of land next to Vulcan's site in Montana for approximately $600 per acre. The Crestfallen Security Guard On March 9 Cupric went into the home office very early to finish up the exploratory work on the new find. At the elevator he encountered Celia Tidey, one of the company's security guards. Cupric knew her fairly well since they both had worked for Vulcan for more than fifteen years. Noting her despondent visage, Cupric 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 procedure and their health insurance did not cover it. Cupric felt great empathy for her plight. He told her that big doings were afoot at Vulcan and that if she bought Vulcan stock soon she would make a lot of money in a month or so. She took her savings and bought 200 shares of Vulcan stock, which were as many shares as she could buy. 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 2,500 shares of Vulcan and 5,000 acres of land adjacent to the Vulcan property. The Trusted Tippee On March 8, Argentum called Theodore Griffey, his oldest and dearest friend. After getting Griffey to swear absolute confidentiality, Argentum told him all the details of the strike. After hanging up the telephone, Griffey immediately purchased 15,000 shares of Vulcan stock. Griffey then told his father and sister about the land; both of them bought 15,000 shares. The Scampering Stockbroker Morris Lynch, Argentum's stockbroker, was intrigued by Argentum's purchases of an unusually large volume of Vulcan shares. During the last two weeks of March he put a number of his other clients into Vulcan, telling them: “I've looked at this stock and it's good for you.” About a dozen of his clients purchased a total of 8,000 shares. The Land Grab After the official 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. CASE QUESTION Analyze the legality (i.e., does the conduct violate any criminal laws or civil legal duties owed to anybody) and ethicality of the following conduct. If you write up this case, please submit a three column table with the first column consisting of the seventeen conducts listed below. In column 2 indicate whether each conduct is legal as defined above and why or why not. In column 3 indicate whether each conduct is ethical and why or why not. The first column does not count against your word limit. 1. Vulcan instructed agents to purchase land for Vulcan without disclosing that they represented Vulcan. 2. Vulcan purchased land without disclosing to sellers knowledge of valuable minerals. 3. Officers purchased stock (and calls) during time between discovery of minerals and public announcement of discovery. 4. Officers kept mineral find secret from Board. 5. Officers allowed stock option committee to issue stock options at $23.50 to thirty of Vulcan's top executives on March 15 without informing option committee of discovery. 6. Argentum and Vulcan issued press release about value of mineral find on March 21. 7. Bismuth and Ferrous loudly discussed mineral find in airport lounge. 8. Cupric revealed to Celia Tidey (Security Guard) at Vulcan that “big doings” were afoot at Vulcan that would soon lead to increase in stock value. 9. Tidey purchased 200 shares of Vulcan stock after receiving information from Cupric. 10. Baggio purchased 2,500 shares of company stock for himself. 11. Baggio purchased 5,000 acres of land adjacent to Vulcan property for himself. 12. Bodie purchased 1,500 shares of Vulcan stock after overhearing Bismuth and Ferrous. 13. Bodie purchased large tract of land next to Vulcan's site. 14. Argentum secretly tipped Theodore Griffey on March 8 about the mineral find. 15. Griffey purchased 15,000 shares of Vulcan stock after March 8 call from Argentum. 16. Griffey told father and sister about the land. They both bought 15,000 shares of Vulcan. 17. Lynch advised a number of clients to purchase Vulcan stock. Exhibit 3 Purchases of Vulcan Stock by Selected Executives Purchaser Date Shares Price Calls Price Argentum Jan. 20 10,000 18.00 Feb. 25 10,000 20.00 March 2 15,000 21.25 March 7 5,000 22.25 March 15 5,000 23.75 Bismuth March 7 10,000 22.00 March 15 7,500 23.75 March 18 5,000 24.00 Cupric Jan. 20 5,000 18.00 Feb. 25 8,000 20.00 March 1 12,000 21.00 March 7 6,000 22.00 March 15 4,000 23.50 Ferrous March 7 5,000 22.00 March 15 3,000 23.50 March 18 4,000 24.25