Bloomberg News

Wynnefield’s Obus Found Not Liable for Inside Trading

May 31, 2014

Wynnefield Capital Inc.’s Nelson Obus was found not liable a day after his lawyer said he would have to be “the lamest insider trader in history” for a jury to believe he relied on an illegal merger tip to make $1.3 million.

In a quick defeat for the U.S. Securities and Exchange Commission, the jury in Manhattan federal court rejected claims that Obus traded on inside information about the sale of SunSource Inc.

“I’m very gratified that the jury saw through the SEC’s 11-year campaign of overreaching,” Obus said after yesterday’s verdict. “This is not only about me, but this is about systematic regulatory overreaching without accountability.”

The verdict was a setback for the SEC after it won a trial this month in which it accused Michaels Stores Inc. founders Samuel and Charles Wyly of using a web of offshore trusts to illegally hide their stock holdings and evade trading limits. In a loss for the SEC in October, a jury in Dallas decided that Mark Cuban, the billionaire owner of pro basketball’s Dallas Mavericks, didn’t engage in insider trading in 2004.

In Obus’s case, the SEC claimed Brad Strickland, a former General Electric Capital Corp. underwriter connected to the SunSource sale, passed information about the deal to his friend Peter Black, a former analyst at New York-based Wynnefield. Black told his boss, Obus, who made $1.3 million for himself and his hedge fund when news of the transaction became public, the agency claimed.

Strickland and Black also were found not liable by the jury. As the verdict was announced, the defendants and some of their supporters applauded.

Two Calls

Obus made two telephone calls in which he discussed the alleged tip, according to the SEC. In one May 2001 call, Obus told SunSource’s chief executive officer that “a little birdie” at GE Capital told him about the company’s planned sale to a “financial buyer,” the SEC said.

“Why would you do that if you were insider trading?” Joel Cohen, a lawyer for Obus, asked jurors in his closing argument. “You wouldn’t.”

In June 2001, two weeks after Obus bought 287,000 SunSource shares, Allied Capital Corp. announced it was buying the company, a maker of nuts, bolts and key-cutting equipment. The announcement caused SunSource shares to double, the SEC said.

The SEC sued all three men in 2006. An internal investigation by GE Capital concluded that Strickland hadn’t breached any duty to his employer by sharing information with Black.

Obus, whose company is based in New York, has previously said he manages about $400 million. In a letter to his investors after the case was filed, Obus said his funds researched and followed SunSource for more than 10 years and repeatedly invested in the company for more than five years.

Investors Remained

After the verdict, Obus said he was gratified his investors stuck with him and only withdrew about 7 percent of their capital after the SEC sued him in 2006. Obus said his father, a retail stock broker in Philadelphia, had taught him to act with integrity.

“Somewhere up there my father is extremely proud,” Obus said, adding that he’d also listened to advice given to him by his friend, Kenneth Langone, the billionaire co-founder of Home Depot (HD:US) Inc. “It’s Ken Langone who inspired me, he told me there is no better use of one’s wealth but to clear one’s name.”

As jurors filed out of the courtroom after announcing their verdict, Black’s mother walked up to some, shook their hands and thanked them. The defendants hugged their supporters and slapped their lawyers on the back.

“On behalf of Peter Black we’re very pleased with the decision,” said Mark Cohen, one of his lawyers, after court.

Roland Riopelle, a lawyer for Strickland, said his client was grateful to the jury.

Respect Verdict

John Nester, a spokesman for the SEC said in an e-mailed statement that the regulator was disappointed, but “we respect the jury’s verdict.”

In the Wyly case, the Manhattan federal jury’s verdict leaves Samuel Wyly and his brother’s estate potentially liable for as much as $550 million.

The jury found the brothers hid ownership of shares of companies on whose boards they sat and broke disclosure regulations by failing to reveal the full extent of their offshore holdings.

The SEC’s claims that Cuban engaged in insider trading when he sold his stake in a Canadian Internet company in 2004 to avoid a $750,000 loss were rejected by jurors after less than five hours of deliberation. The jury found the information Cuban acted on wasn’t confidential and that he hadn’t promised not to trade on it.

The case is SEC v. Obus, 06-cv-03150, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Bob Van Voris in federal court in Manhattan at rvanvoris@bloomberg.net; Patricia Hurtado in Federal Court in Manhattan at

pathurtado@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net David E. Rovella, Joe Schneider


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