The SEC won a significant courtroom verdict Monday when a jury in New York returned a verdict in favor of the agency in the complex, high profile trading action brought almost four years ago against Samuel Wyly and the estate of his late brother Charles Wyly, Jr. who passed away during the case. Samuel Wyly is the founder of Michael’s Stores Inc.. SEC v. Wyly, Civil Action No. 10-cv-5760 (S.D.N.Y. Verdict May 12, 2014). The courtroom victory is a rare recent win in a high profile case for an agency which has struggled to find its footing in the wake of its “get tough” enforcement approach which keys to trial wins.
The thirteen year fraudulent scheme detailed in the Commission’s complaint centered on an elaborate system of trusts and subsidiary companies located in the Isle of Man and the Cayman Island involving four public companies. The off-shore system of trusts and entities was used to conceal the ownership and control of the two brothers in Michaels Stores, Inc., Sterling Software, Inc., Sterling Commerce, Inc., and Scottish Annuity & Life Holdings Ltd. This made it appear that the two brothers only stake in each issuer was their small U.S. holdings in each firm. In fact the SEC claimed that the two brothers controlled significant holdings in each issuer, all of which was concealed from the public and the markets.
During the scheme Samuel Wyly and his brother sold over $750 million of stock in the group of issuers without disclosing their beneficial ownership, according to the Commission. The Wyly defendants failed to report their ownership interests in these issues as required by Schedule 13D and Form 4. This permitted them to sell in large block trades alone over 14 million shares of stock in the issuers for a profit of $550 million.
The scheme also permitted them to make a huge investment in Sterling Software in October 1999 based on inside information. As Chairman and vice-Chairman of the company the two brothers had decided to sell the firm. When that transaction was ultimately announced the Wyly defendants had ill-gotten gains of over $31.7 million.
Initially, William French, attorney to the two brothers, was named as a defendant. The complaint alleged that he took key legal steps which were essential to the scheme to conceal the interest of the brothers in the issuers through the offshore trusts and entities. Shortly before trial, however, Mr. French entered into an arrangement with the Commission which included an agreement to testify for the agency. His testimony reportedly detailed the steps he took to conceal the interests of the Wyly defendants.
The Commission’s complaint alleged violations of Exchange Act Section 10(b), 13(d), 14(a) and 16(a). Judge Scheindlin will hold a hearing to consider remedies.
The victory in Wyly may represent a significant turn of fortune for an agency which has struggled in recent major cases and in the courtroom. Indeed, the SEC has lost three of its last four major cases – Primary Reserve Fund, Brian Stoker and Mark Cuban while prevailing only against Fabrice Toure. It also had a series of losses in other cases beginning late last year and continuing through earlier this year (here). Those defeats have undermined the credibility of a program which relies on a “get tough” approached backed by the threat of going to trial. Prevailing in a complex, difficult and high profile case such as Wyly is a step back on the road to credibility for the enforcement program.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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