U.S. SEC wins hundreds of millions in Wyly fraud case

Reuters News
Posted: Sep 25, 2014 1:27 PM

By Joseph Ax and Nate Raymond

NEW YORK (Reuters) - Texas tycoon Sam Wyly and his late brother Charles' estate must pay hundreds of millions of dollars to the U.S. Securities and Exchange Commission for a fraudulent offshore scheme, a U.S. judge said on Thursday, one of the largest awards ever imposed on individual defendants.

U.S. District Judge Shira Scheindlin in New York ruled that the Wyly brothers must pay $187.7 million in disgorgement and an undetermined amount of interest that she estimated would increase the total to between $300 million and $400 million.

The "staggering" amount, she noted, is equal to about 10 percent of the total SEC enforcement awards in 2013.

A jury found the Wylys liable for fraud in May in what was the SEC's largest case to reach trial in years. Scheindlin presided over a separate non-jury trial in August to determine damages.

The judge on Thursday also left open the possibility that the damages could increase, scheduling a November hearing to consider an alternate theory of liability the SEC has advanced. It was not immediately clear how much money the SEC would seek.

A spokesman for the Wylys declined to comment on the ruling.

The brothers were accused of constructing a complex system of trusts in the Isle of Man that netted them $553 million in untaxed profits through more than a decade of hidden trades in four companies they controlled: Sterling Software Inc, Michaels Stores Inc [MSII.UL], Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd, now Scottish Re Group Ltd.

The regulator had initially sought $1.4 billion in damages, though it aimed for half as much at trial after Scheindlin issued a ruling limiting its claims.

Despite falling short of that figure, SEC Enforcement Division Director Andrew Ceresney said the agency was pleased with Thursday's ruling.

"No matter how complex or well-disguised their schemes may be, we will uncover the wrongdoing and aggressively hold individuals accountable for their securities law violations," he said in a statement.

The Wylys' lawyers argued the trades did not harm any investors. Nevertheless, Scheindlin said, the scheme was clearly aimed at preserving tax benefits by hiding the Wylys' control of the trades.

The judge ordered Sam Wyly to pay $123.8 million and the estate of Charles Wyly to pay $63.9 million. She rejected the SEC's bid for a separate $51 million penalty against Sam Wyly.

Sam Wyly, 79, last appeared on Forbes' list of the 400 richest Americans in 2010, with a net worth of $1 billion. Charles Wyly died in a 2011 car crash.

Lawyers for the Wylys said at trial that a massive award would bankrupt them. Sam Wyly's net worth would be $99 million by 2017 after receiving several annuities, while Charles Wyly's estate had roughly $20 million in assets, they said.

But Scheindlin rejected that argument.

"Disgorgement...would have no deterrent value if defendants could avoid it by spending their unlawful gains before the government discovers the fraud," she wrote.

The case is U.S. Securities and Exchange Commission v. Wyly et al, U.S. District Court for the Southern District of New York, 10-5760.

(Reporting by Joseph Ax and Nate Raymond; Editing by Meredith Mazzilli, Dan Grebler and Lisa Shumaker)