Earlier this month, the SEC secured a huge win in SEC v. Wily, but on the same day the SEC was handed a crushing defeat in a bigger case, SEC v. Graham. Furthermore, a jury in Manhattan on Friday returned a verdict against the SEC and in favor of the three defendants in SEC v. Obus, a lengthy high profile insider trading case.
The SEC had brought an insider trading action against Nelson Obus, Peter Black, and Thomas Strickland following the acquisition of SunSource, Inc. by Allied Capital Corporation in June 2001. In May of that year, Allied approached GE Capital about financing its acquisition of SunSource. While performing due diligence on SunSource, Strickland learned of the proposed deal. Strickland then discussed SunSource with Peter Black. Both claim that there was no tip, just a routine due diligence conversation. Black did, however, suspect that SunSource was considering a transaction that would dilute existing shareholders and relayed that information to his boss, Obus. Obus later called the President of SunSource, who would later claim that he learned during this conversation that Obus had been tipped. Obus would later deny that claim.
Two weeks after the Strickland-Black conversation, Wynnefield Capital, Inc., where Black and Obus worked, purchased 287,200 shares of SunSource at $4.50 per share. Nine days later the deal was announced, the share price doubled, and the hedge fund gained a profit of about $1.3 million.
The SEC claimed that Strickland illegally tipped Black who in turn tipped Obus. The District Court granted summary judgment in favor of the defendants, but the Court of Appeals for the Second Circuit reversed and remanded the case for trial. Despite receiving favorable rulings regarding the duty and knowledge of tippees from the Second Circuit, the SEC was unable to prevail at trial as the jury rejected its claims, finding in favor of the defendants.
If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies.