Chang W. Lee/The New York TimesNelson Obus has been fighting charges of insider trading for 10 years.One of the country’s longest-running insider trading lawsuits has just gotten longer.
A federal appeals court on Thursday revived a decade-old insider-trading case brought by the Securities and Exchange Commission against Nelson J. Obus, a New York hedge fund manager.
In 2006, after a four-year investigation, the S.E.C. charged Mr. Obus, president of Wynnefield Capital, with illegal trading in the stock of SunSource after receiving confidential company information. The agency also filed a civil lawsuit against Peter F. Black, an analyst at Wynnefield, and Thomas B. Strickland, a former employee at General Electric who was accused of being the source of a secret tip.
Judge George B. Daniels, a federal court judge in Manhattan, threw out the case in 2010, disagreeing with the S.E.C.’s definition of insider trading. But on Thursday, a three-judge panel for the United States Court of Appeals for the Second Circuit reversed the decision.
“The S.E.C. established genuine issues of material fact with respect to its claims of insider trading,” wrote Judge John M. Walker Jr., a federal appeals court judge.
Joel M. Cohen, a lawyer for Wynnefield, said he and Mr. Obus were disappointed by the ruling. “We will now prepare for trial and welcome the full airing of the facts, which will confirm the merits of our case,” Mr. Cohen said.
The lawyer for Mr. Strickland, Roland G. Riopelle, said that while he believed his client would ultimately be vindicated, he knew that a reversal “was a possibility based on the complexity of the law in this area.”
In many of the recent criminal insider trading prosecutions, hedge fund managers were caught on wiretaps brazenly swapping secret information about companies. But the facts in the case against Mr. Obus are grayer.
The lawsuit centers on Allied Capital’s 2001 acquisition of SunSource, a manufacturer of bolts, washers and lock nuts. Wynnefield Capital, Mr. Obus’s hedge fund, owned nearly 6 percent of the company. The S.E.C. said that Wynnefield made $1.3 million in illegal profits trading on an inside tip about the deal.
Wynnefield’s secret source that SunSource might be in play was Mr. Strickland, a G.E. executive, according to regulators. A unit of the company, GE Capital, was exploring the possibility of financing Allied’s acquisition of SunSource. Mr. Strickland spoke with Mr. Black, his friend and a Wynnefield employee, but they insisted that they did not discuss the potential merger.
The federal appeals court, however, said upon reviewing the facts “a rational jury could reasonably infer from the S.E.C.’s evidence that Strickland did tell Black that SunSource was about to be acquired.”
The S.E.C. contended that Mr. Obus added to his position in SunSource stock while in possession of secret information about the Allied deal. When Allied announced its purchase, SunSource’s stock price nearly doubled. Mr. Obus said he had no knowledge of any possible transaction.
Among the sticky legal issues in the case is whether Mr. Strickland violated a duty to his employer, G.E., a necessary element of an insider trading claim. Lawyers for Mr. Obus also argued that G.E. had not entered into any confidentiality agreement with SunSource.
Judge Daniels, the trial court judge, dismissed the case, ruling that “neither Strickland nor his employer, GE Capital, was a corporate insider of SunSource.” He also added that the S.E.C. had not “demonstrated the requisite degree of deceptive conduct on the part of any defendant.”
The appeals court disagreed, ruling that there were legitimate questions about whether Mr. Obus traded in SunSource stock while in possession of secret information. It also said that the S.E.C. had demonstrated that Mr. Strickland might have breached a duty to GE Capital.
For more than 10 years, Mr. Obus has refused to settle the lawsuit as a matter of principle, according to his lawyer. His battle with the S.E.C. is a rare one. Most insider trading defendants settle lawsuits brought by regulators, agreeing to forfeit ill-gotten gains and pay a fine, without admitting or denying wrongdoing.
“The facts remain the same: the lawsuit is baseless,” Mr. Cohen said. “Obus and Wynnefield behaved properly, and this case never should have been brought.”
Though it suffered redemptions after the S.E.C. filed its lawsuit, Wynnefield has remained in business. The fund, which invests mostly in small publicly traded companies, manages about $255 million and was up 7.4 percent through June 30 of this year.
In an interview with The New York Times last summer, Mr. Obus said he had racked up more than $6 million in legal bills, a number that is now certain to grow higher as the case heads toward a trial. “This,” Mr. Obus said at the time, “has turned into a nightmare.”