Sec. & Exch. Comm'n v. Obus

• Decision Date: 06 September 2012
• Docket Number: Docket No. 10–4749–cv.
• Citation: 693 F.3d 276
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellant, v. Nelson J. OBUS, Peter F. Black, Thomas Bradley Strickland, Defendants–Appellees, Wynnefield Partners Small Cap Value L.P., Wynnefield Partners Small Cap Value L.P. I, Wynnefield Partners Small Cap Value Offshore Fund, Ltd., Relief Defendants.
• Court: U.S. Court of Appeals — Second Circuit

693 F.3d 276

SECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellant,

v. Nelson J. OBUS, Peter F. Black, Thomas Bradley Strickland, Defendants–Appellees,Wynnefield Partners Small Cap Value L.P., Wynnefield Partners Small Cap Value L.P. I, Wynnefield Partners Small Cap Value Offshore Fund, Ltd., Relief Defendants.

Docket No. 10–4749–cv.

United States Court of Appeals, Second Circuit.

Argued: Nov. 18, 2011.

Decided: Sept. 6, 2012.

David Lisitza (Mark D. Cahn, Michael A. Conley, Mark Pennington, on the brief), Securities and Exchange Commission, Washington, DC, for Plaintiff–Appellant.

Joel M. Cohen, Gibson Dunn & Crutcher LLP, New York, N.Y. (Mary Kay Dunning, Christopher Muller, Gibson, Dunn & Crutcher LLP, New York, NY, David Debold, Gibson, Dunn & Crutcher LLP, Washington, DC, on the brief), for Defendant–Appellee Nelson Obus.

Mark S. Cohen, Sandra C. McCallion, Jonathan S. Abernethy, Cohen & Gresser LLP, New York, NY, for Defendant–Appellee Peter F. Black.

Roland G. Riopelle, Sercarz & Riopelle, LLP, New York, NY, for Defendant–Appellee Thomas Bradley Strickland.

Before: WALKER, RAGGI and CARNEY, Circuit Judges.

JOHN M. WALKER, JR., Circuit Judge:

The Securities and Exchange Commission (“SEC”) filed this civil enforcement action against defendants Nelson J. Obus, Peter F. Black, and Thomas Bradley Strickland alleging insider trading in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b–5, 17 C.F.R. § 240.10b–5. The SEC alleges that Strickland learned material non-public information in the course of his employment and revealed it to Black, his friend and a hedge fund employee, and that Black in turn relayed the information to his boss, Obus, who traded on the information. The District Court for the Southern District of New York (George B. Daniels, Judge ) granted summary judgment in favor of the defendants on both the classical and misappropriation theories of insider trading. We hold that the SEC's evidence created genuine issues of material fact as to each defendant's liability under the misappropriation theory, and therefore that summary judgment for the defendants was erroneous. VACATED and REMANDED.

BACKGROUND

I. Facts

We recite only those facts pertinent to this appeal. As the non-moving party, the SEC is entitled to have all factual inferences drawn in its favor. See Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 456, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992). The facts are undisputed unless noted otherwise.

A. The Planned Acquisition of SunSource and GE Capital's Financing Bid

In May 2001, Strickland worked as an assistant vice president and underwriter at General Electric Capital Corporation (“GE Capital”), a Connecticut-based company that provides corporate financing. Defendants' Statement of Undisputed Facts (“Def. 56.1 Stmt.”) ¶¶ 3, 23–26, 82; Joint Appendix (“JA”) 351 27:13–17. That spring, Allied Capital Corporation (“Allied”) had approached GE Capital about financing Allied's planned acquisition of SunSource, Inc. (“SunSource”), a publicly traded company that distributed industrial products. JA 373 70:18–71:4; 301 93:14–94:23; 2301. Strickland was assigned to perform due diligence on SunSource as part of the GE Capital team working on the SunSource/Allied financing proposal. JA 299–300 88:2–89:5; 373 70:5–9; 454–55 59:24–60:12; 646 113:6–8. His tasks included analyzing SunSource's financial performance, but the parties dispute whether Strickland was authorized to gather information about SunSource's management. Def. 56.1 Stmt. ¶¶ 65–66; SEC's Response to Defendants' Joint Statement of Material Facts (“Pl. 56.1 Resp.”) ¶¶ 65–66; 353–54 31:4–32:5.

In the course of his work, Strickland learned non-public information about SunSource, including the basic fact that SunSource was about to be acquired by Allied. Strickland testified that he understood that Allied's acquisition of SunSource was confidential. JA 314 146:8–10; 379–80 83:6–85:14; 383 90:4–91:2; 384 92:6–13. Each page of the transaction's deal book, which Strickland received, was marked “ Extremely Confidential.” JA 2308–24. In addition, Strickland had reviewed and annually signed GE Capital's employee code of conduct, which required employees to “safeguard company property [including] confidential information about an upcoming deal.” JA 2270; see JA 314 148:10–22; 436 23:5–22. GE Capital also maintained a transaction-restricted list, containing the companies about which GE Capital and its employees possessed material non-public information, and which were therefore off-limits for securities trading. Def. 56.1 Stmt. ¶ 72; JA 554–55 123:11–124:3; 730 122:6–123:4; 2342–43. SunSource and Allied were not placed on the Transaction Restricted List until June 19, 2001, after Strickland and the GE Capital team had completed their due diligence work and submitted a financing proposal to Allied. Def. 56.1 Stmt. ¶ 71. The parties dispute whether, under GE Capital policies, SunSource should have appeared on the Transaction Restricted List at an earlier date, and whether it was among Strickland's responsibilities to add SunSource to the list. Pl. 56.1 Resp. ¶ 73; JA 371–72 67:14–68:7; 646 113:2–8; 730 123:1–9.

B. The Alleged Tip from Strickland to Black

In the spring of 2001, Black, a friend of Strickland's from college, worked as an analyst at Wynnefield Capital, Inc. (“Wynnefield”), which managed a group of hedge funds. Def. 56.1 Stmt. ¶¶ 8–10, 12; JA 313 141:5–6; 933 23:10–19. In the course of his due diligence research, Strickland learned from publicly available sources that Wynnefield was a large holder of SunSource stock. JA 312 138:9–140:19; 399–400 123:19–124:16.

On May 24, 2001, Strickland and Black had a conversation about SunSource. We note that Strickland remembered the conversation taking place face-to-face; Black recalled a telephone conversation. Def. 56.1 Stmt. ¶ 98; Pl. 56.1 Resp. ¶ 98. The SEC and the defendants dispute what was said during this conversation. Def. Br. at 44 n. 5. The defendants maintain that Strickland asked Black his opinion of SunSource's management as part of Strickland's due diligence work. Strickland testified that it was common to contact third parties while performing due diligence, and that his practice during such inquiries was to avoid revealing details by stating only that GE Capital was potentially doing business with the relevant company. Def. 56.1 Stmt. ¶¶ 100–102, 104–106; JA 313 142:4–24; 315 149:19–150:1; 336 233:13–234:16; 851–52 148:2–149:4. The SEC maintains that Strickland revealed material non-public information by telling Black that Allied was about to acquire SunSource. Pl. 56.1 Resp. ¶¶ 100–102, 104–106. The SEC relies on testimony that contacting large shareholders was not standard due diligence practice at GE Capital and that Strickland and Black discussed SunSource after GE Capital had completed its financing proposal. JA 301 93:12–16; 463 77:2–6, 574 162:21–163:12; 745–46 153:23–154:19; 2325–30. The SEC further argues that events following Strickland and Black's May 24 conversation, described below, raise a strong inference that Strickland told Black about the SunSource/Allied acquisition.

C. The Alleged Tip from Black to Obus

Obus was Wynnefield's principal and Black's boss. Def. 56.1 Stmt. ¶ 1; 934 24:2–16. Immediately after Black's conversationwith Strickland, Black relayed the information he had learned to Obus. JA 852 149:21–150:2; 861–62 163:22–165:11; 981 118:15–25; 1030 42:19–43:19. Black maintains that Strickland's general questions about SunSource's management led Black to suspect (based on SunSource's prior public actions) that SunSource was considering a transaction that would dilute existing shareholders. JA 852–53 148:25–150:3. Black testified that he conveyed this suspicion to Obus. JA 852 149:21–150:3. The SEC contends that Black told Obus that SunSource was about to be acquired by Allied. Pl. 56.1 Resp. ¶¶ 111–112.

D. Obus's Call to Andrien

Later that same day, Obus called Maurice Andrien, SunSource's CEO. Def. 56.1 Stmt. ¶ 122; JA 850 146:12–147:23; 853 150:4–12; 854 152:8–18; 1360 169:7–10. As a large SunSource shareholder, Obus regularly spoke to Andrien about the company. Def. 56.1 Stmt. ¶ 121. Obus and Andrien gave different accounts of this phone call. Obus testified that the information from Black led him to believe that SunSource was considering a transaction that would dilute the value of its public shares, and he called Andrien to voice his concerns. JA 853 150:4–23; 1030–31 43:20–23; 1032 45:20–46:10; 1088 139:3–13; 1360–61 169:11–171:3. Andrien testified that Obus informed him that Wynnefield had been tipped about SunSource's imminent acquisition:

[I]t was a very funny conversation. And he [Obus] said that he never had a conversation like this before, and didn't know whether he should be having it.

He said[,] I always knew you guys would sell SunSource Technology Services [a subsidiary of SunSource] if you could, but I never figured you'd sell the whole company.

And I said, Nelson, that's just not the kind of thing that I could ever discuss under any circumstances with you. Whether we did, or we didn't, I just refuse to comment about that.

He said, well, a little birdie told me that you guys are planning to sell the company to a financial buyer. I said, a little birdie; he said, a little birdie in Connecticut.

I said, a little birdie in Connecticut, and he said—I might have even said [,] who would tell you something like that. And he said GE.

JA 1449 134:11–135:2; 1721–22 542:14–544:17. The term “financial buyer” referred to a buyer planning to add SunSource to an investment portfolio, as opposed to a “strategic buyer” looking to acquire SunSource for its assets and business capabilities. JA 1355 159:2–19. Black overheard what Obus said on the phone to Andrien. Consistent with Obus's testimony, Black testified that Obus said that a “guy” from “a big conglomerate in Fairfield” might be...