July 13, 2024

DealBook: The Curious Case of Nelson Obus

NELSON OBUS is on no one’s list of Wall Street titans. He is just another guy who chased that golden dream: catch the morning train into Manhattan, run a small but prosperous hedge fund, catch the evening train out, back to a leafy island of suburban wealth.

But on the morning of July 11, 2002, a FedEx package from Washington arrived at his Midtown office, and his world collapsed beneath him.

Mr. Obus is the target of an insider trading investigation.

He insisted from the start that he had done nothing wrong. But, almost a decade later, he is still fighting to clear his name. His case has become one of the longest-running civil actions by the Securities and Exchange Commission in recent memory — a sort of “Les Miserables” of Wall Street.

Nelson ObusChang W. Lee/The New York TimesAccused of insider trading in 2002, Nelson Obus refuses to settle: “That is the same as guilty to me.”

“This has turned into a nightmare,” Mr. Obus, 64, says. He has run up $6 million in legal bills.

It might be difficult to rouse much sympathy for the likes of Nelson Obus. Federal authorities, after all, say insider trading is rampant on Wall Street, particularly among hedge funds like his. Hardly a week passes without the revelation of some financial skullduggery. Many ordinary Americans wonder why more Wall Street highfliers are not in trouble — or behind bars — after all those taxpayer bailouts and mortgage shenanigans.

Few people, aside from the accused, argue that the authorities should go easy on financial black hats who swindled investors. To the contrary: many say the S.E.C. and others have not been tough enough. Next to the fiascos of the financial collapse, insider trading almost seems old-fashioned. Some legal experts suspect the S.E.C. is pursuing insider trading cases to, in effect, make up for past failures, like sleeping through the Ponzi scheme that Bernard L. Madoff ran for so long.

“Regulators didn’t do well with the Ponzi schemes, with the Madoffs of the world,” says Robert A. Prentice, a professor at the University of Texas at Austin. “Insider trading cases are something they know how to do.”

All of which makes the case of Nelson Obus all the more curious.

Whether Mr. Obus is guilty of trading stocks on an insider’s tip a decade ago depends on whom you ask. The S.E.C. insists he is, and filed a case against him in 2006. But a federal judge late last year sided with Mr. Obus, ruling that the commission had failed to provide sufficient evidence and throwing out the case. Unbowed, the S.E.C. has appealed that decision. A commission spokesman declined to comment on the case.

Not since the days of Ivan F. Boesky in the 1980s has insider trading been discussed so much on or off Wall Street. The two-month trial of Raj Rajaratnam, the billionaire money manager who was convicted of securities fraud and conspiracy in May, seemed only to confirm many people’s worst fears about this business: the game is rigged. (Mr. Rajaratnam is appealing.) Last month, an employee at the Nasdaq Stock Market pleaded guilty to trading on information he had gleaned from his perch in the exchange.

And so the Obus case — which began years before the housing market sputtered, Lehman Brothers collapsed and Mr. Rajaratnam was indicted — rolls on. It has pitted Mr. Obus, a man of considerable financial resources and, apparently, a will to fight, against an S.E.C. that is eager to show that it is back on the beat.

WHAT is insider trading, anyway? Most people probably view the actions embraced by that term much the way Supreme Court Justice Potter Stewart summed up pornography: they know it when they see it. Someone gets a tip and trades on it. Case closed.

Legally, it is not so simple. In the United States, insider trading was not even addressed in the law until the 1930s, and it was not until the 1960s that the authorities began to crack down on the crime. Here is how the S.E.C. defines insider trading on its Web site today: “Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.”

Federal prosecutors won a conviction of Mr. Rajaratnam with an approach more often associated with organized crime figures than stock traders: wiretaps. They produced hours of recorded telephone conversations that, to the jury, showed that Mr. Rajaratnam, the founder of the Galleon Group hedge fund, had used a vast network of executives and experts to glean information.

Few insider-trading cases are so clear-cut. A vast majority more closely resemble the case against Mr. Obus. It centers on a corporate acquisition in 2001 that will be remembered as a footnote in the annals of finance, if it is remembered at all. The S.E.C. says his hedge fund made $1.3 million trading on an inside tip about the deal.

Most people who are accused of insider trading make a deal with the authorities rather than face a jury, as Mr. Rajaratnam did. A settlement often involves forfeiting ill-gotten gains, paying a fine and being prohibited from serving as a director of a public company.

There is, of course, an unwritten penalty — the one exacted by the marketplace. Even a whisper of insider-trading allegations can effectively end careers and kill hedge funds. After getting caught up in the widening insider trading investigation, Level Global Investors, a $3 billion hedge fund in New York, liquidated its entire portfolio and closed in February.

Mr. Obus could have settled with the S.E.C. He still could. But he insists he will not, despite the urgings of friends and family members. In most cases, people settle without admitting or denying wrongdoing.

“That is the same as guilty to me,” Mr. Obus says.

NELSON OBUS does not look like Gordon Gekko. He does not sound like Gordon Gekko. In fact, Mr. Obus comes across as a sort of an anti-Gekko. He rarely tucks in his shirt and often has dirt under his fingernails. His reading glasses, which have rhinestones at the temples, came from the women’s display at Duane Reade. He grew up in Wynnefield, Pa., a suburb of Philadelphia, in a downwardly mobile family that had made, then lost a fortune in the wool business. After earning a master’s in political science from Brandeis University, Mr. Obus turned down a job on Wall Street and taught natural history for organizations like the Massachusetts Audubon Society. Then, in 1981, a friend from Philadelphia offered him a job at the investment bank Lazard, and Mr. Obus decided it was time to “come in from the woods.”

Eleven years later, in 1992, he struck out on his own, founding a hedge fund, Wynnefield Partners, named after his old neighborhood. Today the firm manages $280 million in assets.

SunSource of Philadelphia was never a sexy company. It mostly sold industrial products like nuts and bolts. But Mr. Obus knew the company because it was based where he grew up, and he had bought nearly 6 percent of it.

Then, in May 2001, the Allied Capital Corporation, an old-line investment firm, began circling SunSource, and Mr. Obus, according to the S.E.C.’s complaint, made a fateful decision.

The General Electric Company, which has a big finance arm, was looking to bankroll an Allied-SunSource deal. Brad Strickland, an associate at G.E., noticed Wynnefield owned a lot of SunSource stock and spoke to a friend there, Peter F. Black. Both insist they didn’t talk about the pending merger.

“It was pretty vague,” Mr. Black later told investigators of the conversation. He said he was simply doing broad due diligence on SunSource. Mr. Black told Mr. Obus that he had had a call from someone at G.E. who had questions about SunSource’s management. Mr. Obus picked up the phone and called the chief executive of SunSource. According to the S.E.C., Mr. Obus told him that “a little birdie” had told him SunSource might be in play.

Mr. Obus has a different recollection. He says he told the executive that he had heard SunSource was thinking of a financing arrangement, which he felt might hurt existing shareholders.

Whatever the case, Wynnefield bought more SunSource stock two weeks later, at $4.75 a share. A few weeks after that, Allied Capital announced its buyout of SunSource, and the stock almost doubled.

Just how the S.E.C. caught wind of Mr. Obus’s trade is unclear. Mr. Obus says he did not think about the deal again until the FedEx package arrived from Washington, 13 months later.

In its complaint against Mr. Obus, Mr. Black and Mr. Strickland, the S.E.C. claimed the men had “knowingly or recklessly violated” securities laws. Mr. Obus’s lawyer, Joel M. Cohen, countered that Mr. Strickland had not violated any duty to G.E. There is no evidence, Mr. Cohen said, that he said anything that would violate his duty to G.E., and G.E. had not entered into a confidentiality agreement with SunSource.

The lawyer also says that Mr. Obus had never deceitfully traded on the information — a crucial component of the legal definition of insider trading. In fact, Mr. Obus went as far as to call the C.E.O. of the target company and tell him what he knew.

“MAD DOG.” That is what people inside the S.E.C., and out on Wall Street, call Leo Wang. Mr. Wang was an enforcer at the S.E.C., and his doggedness has won him some high-profile victories. He was a player in bringing down Dennis Levine, a powerful investment banker and prominent figure in the insider trading scandals of Boesky era.

Mr. Wang says he “vaguely remembers” the Obus case. In documents filed in connection with the case, the S.E.C. painted a picture of an insider-trading conspiracy. They claimed that Mr. Strickland and Mr. Black met over drinks at the Bryant Park Grill in Midtown to coordinate responses to the S.E.C. Both men say they met but did not coordinate. Lawyers for the men declined to comment.

Mr. Obus’s lawyer, Mr. Cohen, said he told Mr. Wang early on that the S.E.C. had a weak case. Why would Mr. Obus call the C.E.O. of SunSource and say he had been tipped?

“There is no understanding the reasoning of a criminal mind,” Mr. Wang replied, according to Mr. Cohen. Mr. Wang says that is not something he would say. For a time, the matter seemed to die. Then in April 2006, a month before the statute of limitations was to expire, the S.E.C. filed insider trading charges against the three men, all of whom have not settled.

“We are simply astounded that this lawsuit was filed at all,” Mr. Obus wrote in a letter to his fund investors on April 26, 2006.

One of the last things anyone wants to hear about people who manage their money is that they have been accused of wrongdoing. Some Wynnefield investors headed for the exits, withdrawing about $20 million from the fund.

“We deeply regret to have to inform you of our intent to withdraw 100 percent of our interest,” a big investor wrote in an e-mail to Wynnefield that April. “Our investment guidelines prevent us from investing with managers that are the subject of regulatory actions like the suit filed by the S.E.C.”

Later, as the financial crisis struck, JPMorgan Chase severed ties with Wynnefield, Mr. Obus says. So did Republic National Bank. Mr. Obus, an activist investor who sometimes seeks board seats, also was rebuffed by corner offices. For instance, Crown Crafts, which makes baby products, told shareholders to reject Mr. Obus as a board member because of the S.E.C. action.

In April 2006, Linda C. Thomsen, the director of enforcement at the S.E.C., testified on Capitol Hill about insider trading. In her written testimony, which appeared on the S.E.C.’s Web site, she said Mr. Obus had settled with the commission.

He hadn’t.

“I was speechless when I saw this,” Mr. Obus recalled. The S.E.C. later amended the testimony on its site.

Dejected, Mr. Obus went to visit a business acquaintance, Kenneth Langone, the founder of Home Depot. Mr. Langone had had his own scrapes with the authorities.

Mr. Langone showed Mr. Obus a transcript of a deposition with Eliot Spitzer, the New York attorney general at the time, who in 2004 had accused Mr. Langone of misleading fellow directors of the New York Stock Exchange. Mr. Langone had settled claims brought against him in the ’80s, which were dredged up in the Spitzer deposition. Mr. Langone told Mr. Obus he has always regretted settling those charges in the ’80s, both men say.

NELSON OBUS finally got his day in court last September. In a 33-page decision, federal Judge George B. Daniels wrote that the S.E.C. had failed to demonstrate that Mr. Strickland, the supposed tipper, had breached a duty to either SunSource or G.E. “The S.E.C. acknowledges that its case is based, in large part, upon circumstantial evidence that a duty existed,” the judge said. Additionally, the S.E.C. failed to prove that Mr. Obus had tried to deceive anyone.

The S.E.C. has appealed Judge Daniel’s decision. A final decision could come this year.

Mr. Obus says he will not give up now. He says he still remembers the advice that Mr. Langone gave him in 2007, “You will find that defending your character is a good use of financial resources.”

Article source: http://feeds.nytimes.com/click.phdo?i=f9ae3927d757581356947cafc866f22a

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