This evening the SEC announced a massive fraud charge against Dallas-based investors The Wyly brothers.
As Paul Murphy at FT Alphaville notes, the charge — which pertains to activity taking place over 13 years, worth $550 million — makes Rajaratnam and Martha Stewart look like small potatoes.
The gist of the allegations: The brothers Wyly (Samuel and Charles J.) used their various board seats and a network of offshore accounts to trade and conceal their holdings.
The Securities and Exchange Commission today charged brothers Samuel E. Wyly and Charles J. Wyly, Jr. of Dallas with violating federal securities laws governing ownership and trading of securities by corporate insiders. The Wyly brothers reaped more than $550 million in undisclosed gains while sitting on corporate boards by trading stock in those public companies through hidden entities located in foreign jurisdictions to conceal their ownership and trading of those securities.
The SEC alleges that the brothers created an elaborate sham system of trusts and subsidiary companies in the Isle of Man and the Cayman Islands to sell more than $750 million worth of stock in four public companies for which they were corporate directors. They also committed an insider trading violation in one of the companies for an unlawful gain of more than $31.7 million.
Along with the Wylys, the SEC charged their attorney Michael C. French of Dallas and their stockbroker Louis J. Schaufele III of Dallas for their roles in the fraudulent scheme. French was on the board of directors at three of the companies.
"The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws," said Lorin L. Reisner, Deputy Director of the SEC’s Division of Enforcement. "They used these structures to conceal hundreds of millions of dollars of gains in violation of the disclosure requirements for corporate insiders."
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the public companies the Wylys used in the scheme were Michaels Stores Inc., Sterling Software Inc., Sterling Commerce Inc., and Scottish Annuity & Life Holdings Ltd. (now known as Scottish Re Group Limited).
The SEC’s complaint alleges that the Wylys and French knew or were reckless in not knowing their legal obligations as public company directors and greater-than-five-percent beneficial owners. The laws require such persons to report holdings and trading in their companies’ securities on Schedule 13D and Form 4, which are filed with the SEC. The Wylys and French also knew or were reckless in not knowing that the investing public routinely uses such disclosures to gauge the sentiment of public companies’ insiders and large shareholders about the financial condition and prospects of those companies, relying on those disclosures when making investment decisions.
The SEC alleges that the Wylys and French systematically and falsely created the impression that the Wylys’ entire holdings and trading were limited to the fraction that they held and traded domestically. By depriving existing shareholders and potential investors of information deemed material by the federal securities laws, the Wylys were able to sell — in large-block trades alone — more than 14 million shares of issuer securities over a period of 13 years for undisclosed gains in excess of $550 million. The SEC further alleges that the sales generating most of these illicit gains were made pursuant to materially false or misleading SEC filings.
According to the SEC’s complaint, the Wylys exploited their illegal non-disclosure of their offshore issuer securities to make a massive and bullish transaction in Sterling Software in October 1999 based upon the material and non-public information that they — while serving as the company chairman and vice chairman — had jointly decided to sell the company. This insider trading yielded ill-gotten gains of more than $31.7 million when Sterling Software’s sale was ultimately announced to the public less than four months later.
The SEC alleges that the Wylys and French made hundreds of false and materially misleading statements to conceal their scheme. Schaufele also made materially misleading statements to brokerage firm intermediaries. The SEC alleges that the Wylys and French established and operated an offshore "Wyly family office" in the Cayman Islands as a conduit and repository for communications and records they wished to conceal. They allocated the Wylys’ offshore holdings among various offshore entities that were often newly created and all under the control of the Wylys in an effort to avoid making required SEC filings.
The SEC’s complaint charges that all four defendants violated, and that French and Schaufele also aided and abetted the Wylys’ violations of, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint further charges the Wylys and French with violations of Section 17(a) of the Securities Act of 1933 as well as Exchange Act Sections 13(d), 14(a) and 16(a) and Rules 13d-1 13d-2, 14a-3, 14a-9, 16a-2 and 16a-3 thereunder. The complaint further charges the Wylys with violations of Securities Act Sections 5(a) and 5(c); and charges the Wylys and French with aiding and abetting violations of Exchange Act Sections 13(a) and 14(a) and Rules 13a-1, 14a-3 and 14a-9 thereunder as well as violations of Exchange Act Section 13(d) and Rules 13d-1 and 13d-2 thereunder. The complaint charges French with aiding and abetting the Wylys’ violations of Exchange Act Sections 13(d), 14(a) and 16(a) and Rules 13d-1, 13d-2, 14a-3 and 14a-9 thereunder. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, prejudgment interest, financial penalties, and officer-and-director bars against the Wylys and French.
The SEC’s investigation was conducted by Martin L. Zerwitz and J. Lee Buck, II in the Division of Enforcement. The SEC acknowledges the assistance of the Isle of Man Attorney General’s Office, the Cayman Islands Monetary Authority and the New York County District Attorney’s Office.
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For more information about this enforcement action, contact:
Lorin L. Reisner
Deputy Director, SEC Division of Enforcement
Cheryl J. Scarboro
Associate Director, SEC Division of Enforcement
J. Lee Buck, II
Assistant Director, SEC Division of Enforcement