Wynnefield’s Obus Called Innocent or ‘Lamest Insider’

Wynnefield Capital Inc.’s Nelson Obus 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, his lawyer told the panel.

The U.S. Securities and Exchange Commission claimed, in a trial that began last week in Manhattan federal court, that Obus traded on inside information that SunSource Inc. was being sold and then confessed, in two telephone calls, to getting the tip. In one May 2001 call, Obus told SunSource’s chief executive officer that “a little birdie” at General Electric Capital Corp. 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 yesterday in his closing argument in the trial. “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, according to the SEC.

The SEC claims Brad Strickland, a former GE Capital underwriter connected to the SunSource sale, passed information about the deal to his friend Peter Black, a former analyst for New York-based Wynnefield. Black then passed the information to to his boss, Obus, who made $1.3 million for himself and his hedge fund when news of the transaction became public, the agency alleges.

SEC Lawsuit

The SEC sued all three men in 2006. They deny the insider trading allegations. Lawyers for the SEC and the defendants completed their closing arguments yesterday. Jurors began their deliberations after being instructed by U.S. District Judge George B. Daniels on how to apply the law in the case.

An internal investigation by GE Capital concluded that Strickland hadn’t breached any duty to his employer by sharing information with Black.

Daniels threw out the SEC lawsuit in 2010, citing the GE Capital investigation and finding that the agency hadn’t produced sufficient facts to prove that Strickland had passed illegal inside information. A federal appeals court revived the case in 2012, overturning Daniels’s ruling.

At trial, the SEC is seeking money penalties and to ban the defendants from serving as public-company officers and directors.

SEC Lawyer

Kyle DeYoung, an SEC lawyer, yesterday urged jurors to find Obus, Black and Strickland liable for insider trading. He said Obus’s purchase of 287,000 SunSource shares was the largest-ever by his hedge fund.

“He knew he couldn’t buy that stock before the information became public, period,” DeYoung argued. “But he bought it anyway. That’s insider trading.”

DeYoung said the defendants lied when they testified they didn’t pass or trade on the basis of an illegal tip.

“Obus could only have gotten this information from Black,” he said. “And Black could only have gotten this information from his call with Mr. Strickland.”

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

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