U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19667 / April 25, 2006
SEC v. Nelson J. Obus, Peter F. Black, Thomas Bradley Strickland, Wynnefield Partners Small Cap Value L.P., Wynnefield Partners Small Cap Value L.P. I, Wynnefield Partners Small Cap Value Offshore Fund, Ltd., Civil Action No. 06-3150 (GBD) (S.D.N.Y. filed Apr. 25, 2006)
SEC Charges Hedge Fund Manager Nelson Obus and Two Others with Insider Trading Prior to SunSource, Inc. Merger Announcement
Three Hedge Funds Gain $1.3 Million of Illicit Profits
The Securities and Exchange Commission today filed a contested insider trading action against Nelson J. Obus, Peter F. Black, and Thomas Bradley Strickland in connection with trading for three hedge funds in advance of the June 19, 2001, public announcement of a merger agreement between SunSource, Inc. and Allied Capital Corporation. In a complaint filed in the United States District Court for the Southern District Court of New York, the Commission alleged that Obus directed the purchase of 287,200 shares of SunSource stock in accounts of three hedge funds he managed after being tipped by Black, who had been tipped by Strickland. As a result of the trading, the three funds - Wynnefield Partners Small Cap Value L.P. ("Wynn"), Wynnefield Partners Small Cap Value L.P. I ("Wynn I"), Wynnefield Partners Small Cap Value Offshore Fund, Ltd. ("Wynn II") - had illicit gains of $1,335,700. The Commission is seeking injunctions, disgorgement, and other sanctions. The three funds are named as relief defendants.
In its complaint, the Commission alleged that Strickland, an employee of GE Capital Corporation, learned material, nonpublic information about the proposed acquisition of SunSource by Allied in mid-May 2001, after being assigned to work on the deal and attending a meeting with members of SunSource's management. According to the complaint, shortly thereafter, Strickland called his close friend Black, who was an analyst for Wynnefield Capital, Inc., and tipped him about the upcoming merger. Black then tipped his boss, Obus, who was a founder and principal of Wynnefield Capital.
The Commission also alleged that on June 8, 2001, Obus directed the purchase of a block of 287,200 shares of SunSource stock at $4.75 per share. This was the largest purchase of SunSource stock that Obus had ever made and comprised more than 99% of SunSource stock that was traded that day. The shares were deposited into accounts of relief defendants Wynn, Wynn I, and Wynn II. On June 19, 2001, SunSource and Allied jointly announced that they had signed a definitive merger agreement. SunSource's stock closed that day at $9.50 per share, an increase of 91.5% over the prior day's closing price. Based on the closing price, the relief defendants had profits of $1,335,700. According to the complaint, Obus and Black each had an interest in two of the relief defendant funds.
In its complaint, the Commission seeks a final judgment enjoining Obus, Black, and Strickland from violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5, ordering disgorgement of $1,335,700 in illicit gains jointly and severally from the individual defendants and relief defendants, imposing a civil money penalty on the individual defendants, and prohibiting Obus and Black from serving as an officer or director of a public company.