Judge Shira A. Scheindlin, Southern District of New York (Rick Kopstein/NYLJ)
After winning the liability phase of its securities fraud case against Texas entrepreneur Samuel Wyly and the estate of his deceased brother Charles, the U.S. Securities and Exchange Commission has encountered a major setback in its bid to collect $1.4 billion from the duo.
In a ruling issued on Tuesday, U.S. District Judge Shira Scheindlin in Manhattan precluded the SEC from recovering the total profits it accuses Sam and Charles Wyly of netting from stock trades orchestrated through a secret offshore system. The ruling caps the SEC’s potential recovery in the case at around $750 million as the agency gears up for a damages-only bench trial next month.
The SEC sued Sam and Charles Wyly in July 2010, alleging that they used trusts in the Isle of Man to trade stock in four public companies for which they were corporate directors—Michaels Stores Inc., Sterling Software Inc., Sterling Commerce Inc. and Scottish Annuity & Life Holdings Ltd. (known as Scottish Re). After Charles Wyly’s death from a car accident in 2011, the agency substituted his estate as a defendant in the case.
Scheindlin opted to hold a jury trial in April on the liability phase of the case. A Manhattan jury returned a verdict in favor of the SEC on May 12, rejecting arguments by the defendants that they acted in good faith on advice from their lawyers and financial planners. The father-and-son team of Stephen and Harry Susman made the case for the Wylys, along with other attorneys at Susman Godfrey and Bickel & Brewer.
Scheindlin has scheduled trial in the remedies phase of the case for Aug. 4. In a brief filed on July 25, the SEC wrote that it planned to seek $1.4 billion from Sam Wyly and Charles Wyly’s estate, including disgorgement of $553 million in undisclosed gains, $788 million in interest and a $72 million penalty that only applies to Sam Wyly. The $553 million figure represents the brothers’ total combined profits on trades conducted while the alleged offshore scheme was underway.
Scheindlin rejected that approach in Tuesday’s decision, concluding that the SEC failed to show that all of the profits resulted from a fraudulent scheme. “It defies logic to presume that all of the rise in the value of a company’s stock price over 13 years—in the highly charged market of the ’90s tech bubble, no less—is reasonably attributable to two directors’ failure to disclose their trading,” the judge wrote. “The jury found that the Wylys engaged in a scheme to hide their beneficial ownership of a large block of securities in companies they controlled. The jury did not find that the trading itself was unlawful.”
Scheindlin’s ruling doesn’t affect the SEC’s ability to seek the disgorgement of unpaid taxes in the hundreds of millions of dollars and to impose the proposed $72 million on Sam Wyly.
Defense counsel Stephen Susman of Susman Godfrey didn’t return a phone call seeking comment.