SEC v. Wyly
United States District Court for the Southern District of New York
March 31, 2011, Decided; March 31, 2011, Filed
10 Civ. 5760 (SAS)
[*96] OPINION AND ORDER
SHIRA A. SCHEINDLIN, U.S.D.J.:
On July 29, 2010, following a six-year investigation into matters spanning almost two decades, the Securities and Exchange [**2] Commission ("SEC") filed this suit alleging thirteen Claims for securities violations by billionaire brothers Samuel Wyly and Charles J. Wyly (together, the "Wylys"), their attorney Michael C. French ("French"), and their stockbroker Louis J. Schaufele III ("Schaufele"). The gist of the fraud alleged is that, from 1992 through at least 2005, the Wylys hid their ownership of and trading activity in the shares of four public companies on whose boards of directors they sat by creating a labyrinth of offshore trusts and subsidiary entities in the Isle of Man and the Cayman Islands (the "Offshore System"); transferring hundreds of millions of shares of the Issuers' stock to those entities; and installing surrogates to carry out their wishes regarding the disposition of the stock — all while preserving their anonymity and evading federal securities laws governing trading by corporate insiders and significant shareholders. Attorney French and stockbroker Schaufele were allegedly essential to the success of this scheme, which also included a singular instance of insider trading by the Wylys and Schaufele in 1999. The SEC seeks penalties, injunctive relief, and disgorgement of roughly [**3] $550 million in gains and prejudgment interest.
Defendants now move to dismiss Claims One through Four of the Complaint, which allege that, through the use of the Offshore System, the Wylys and French committed primary violations of section 10(b) of the Exchange Act (Claim One) and section 17(a) of the Securities Act of 1933 (the "Securities Act") (Claim Four); that French and Schaufele aided and abetted the fraud alleged in Claim One under section 10(b) (Claim Three); and that the Wylys and Schauefe engaged in insider trading, also in violation of section 10(b) of the Exchange Act (Claim Two). The most interesting and complicated questions raised by the defendants' motions, however, have nothing to do with the substance of the federal securities laws' antifraud provisions; rather, they concern the applicability and interpretation of various limitations [*97] periods purportedly governing the SEC's claims for monetary penalties for both their fraud claims (Claims One through Four) and their non-fraud claims (Claims Five through Thirteen). I first address these threshold questions before turning to the defendants' more substantive arguments.
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788 F. Supp. 2d 92 *; 2011 U.S. Dist. LEXIS 35793 **; Fed. Sec. L. Rep. (CCH) P96,277
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, - against - SAMUEL WYLY, CHARLES J. WYLY, JR., MICHAEL C. FRENCH, AND LOUIS J. SCHAUFELE III, Defendants.
Subsequent History: Later proceeding at SEC, Inc. v. Wyly, 2011 U.S. Dist. LEXIS 68143 (S.D.N.Y., June 17, 2011)
offshore, Software, trading, insider trading, allegations, fraudulent concealment, stock, discovery rule, swap, Exchange Act, entities, statute of limitations, violations, insiders, statute of repose, Issuers, trusts, motion to dismiss, due diligence, concealment, tolling, shares, filings, limitations period, defendants', nonpublic, shareholder, discover, discovery, purchases
Securities Law, Civil Liability Considerations, General Overview, Civil Procedure, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Pleadings, Heightened Pleading Requirements, Fraud Claims, Governments, Legislation, Statute of Limitations, Time Limitations, Securities Exchange Act of 1934 Actions, Insider Trading, Penalties, Remedies, Damages, Punitive Damages, Tolling, Equitable Estoppel, Pleadings & Proof, Classical Theory, Misappropriation Theory