'SEC v. Obus': Second Circuit Clarifies Standards for Insider Trading

The line separating legitimate research from improper inside information can at times be hard to find. The U.S. Court of Appeals for the Second Circuit recently issued an important insider trading decision, SEC v. Obus, which provides some clarity.¹ In doing so, however, the court seemingly expanded the scope of potential liability for tippees who might lack actual knowledge that information was disclosed improperly or that the inside source provided information in exchange for personal benefit, even though proof of personal benefit is required to pursue the insider.

Background

The SEC brought insider trading charges against Thomas Strickland, an employee of GE Capital, and two employees of Wynnefield Capital, Peter Black and Nelson Obus. The SEC alleged that Strickland “tipped” his college friend Black about the possible acquisition of SunSource Inc. by Allied Capital Corporation which GE Capital was financing. Black in turn passed this information to Obus, who allegedly traded SunSource stock based on it.