Appeals Court Exhumes SEC Insider-Trading Case Against Obus

Sep 7 2012 | 11:20am ET

The Securities and Exchange Commission's insider-trading case against Wynnefield Capital founder Nelson Obus and two others will move forward, after all.

The regulator won its appeal of a two-year-old lower court decision dismissing its lawsuit against Obus, Wynnefield analyst Peter Black and Black's friend Thomas Strickland. The SEC accuses Strickland, who worked at GE Capital, of tipping Black off to Allied Capital Corp.'s planned acquisition of SunSource in 2001. Black then allegedly told Obus, who bought up a 6% stake in SunSource, turning a $1.34 million profit for his three hedge funds.

The lower court had cited a GE Capital investigation which found that Strickland had not violated a duty to his employer. But the Second Circuit Court of Appeals in Manhattan said that was not enough evidence to exonerate Obus, Black and Strickland without trial.

"The GE investigation was motivated by corporate interests that may or may not coincide with the public interest in unearthing wrongdoing and affording a remedy," U.S. Circuit Judge John Walker Jr. wrote.

"The SEC established genuine issues of material fact with respect to its claims of insider trading," Walker wrote. A "rational jury could reasonably infer from the SEC's evidence that Strickland did tell Black that SunSource was about to be acquired."

Obus' lawyer, Joel Cohen, said his client was "disappointed" by the ruling, adding, "For over 10 years, Mr. Obus and Wynnefield Capital have refused to settle this lawsuit as a matter of principle. The facts remain the same: The lawsuit is baseless."

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