Wynnefield’s Obus Traded on Inside Tip, SEC Says in Trial

May 20, 2014 4:05 pm ET

(Updates with penalty sought by SEC in 10th paragraph.)

May 20 (Bloomberg) -- Wynnefield Capital Inc.’s Nelson Obus traded on confidential information to make $1.3 million for his hedge fund and confessed to it twice, a lawyer for the U.S. Securities and Exchange Commission said in a civil trial of Obus and two others.

Paul Kisslinger, the SEC’s lawyer, told jurors in his opening statement that Obus twice confessed to getting a tip that SunSource Inc. was being sold, including in a May 2001 phone call to SunSource’s chief executive officer in which Obus allegedly told him that “a little birdie” at General Electric Capital Corp. had told him about the company’s planned sale to a “financial buyer.”

The case in Manhattan federal court is at least the third brought to trial by the SEC in the past year involving conduct almost or more than a decade old.

In June 2001, SunSource, a maker of nuts, bolts and key- cutting equipment, announced publicly a planned sale to Allied Capital Corp., doubling its stock price, according to the SEC.

“These three defendants had no excuse for their conduct,” Kisslinger told jurors. “They all knew what they did was wrong.”

‘Little Birdie’

The SEC is also suing Obus’s alleged “little birdie,” Brad Strickland, a former GE Capital underwriter, and Peter Black, a former analyst for New York-based Wynnefield. The regulator says Strickland passed the tip about the SunSource sale to his friend Black, who passed the information to Obus. All three men deny wrongdoing.

“Why would someone who wanted to secretly trade on a tip call up the CEO of the company and say, ‘‘‘I’ve been tipped’?’’ Joel M. Cohen, a lawyer for Obus, asked in his opening statement. ‘‘The SEC’s theory makes no sense.’’

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

The SEC sued Obus, Black and Strickland in 2006. U.S. District Judge George Daniels, who’s overseeing the trial that began yesterday, threw the case out in 2010, citing the GE Capital investigation and ruling that the SEC hadn’t produced sufficient facts to prove that Strickland had passed illegal inside information.

The SEC is seeking money penalties and to ban the defendants from serving as public-company officers and directors. All three men will be called to testify in the trial, their lawyers said.

Appeals Court

A federal appeals court revived the case in 2012, overturning Daniels’s ruling.

Last week, in a case that also involved conduct from more than a decade ago, a jury in Manhattan ruled that Samuel and Charles Wyly used a web of offshore trusts to illegally hide their stock holdings and evade trading limits, leaving Samuel Wyly and his late brother’s estate potentially liable for as much as $550 million.

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.

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