Judge Shira Scheindlin
The Wylys—accused of securities fraud—purportedly exercised dominion and control over certain allegedly 'non-grantor' trusts. As non-grantor trusts, the tax rates on the trusts' capital gains would be "Isle of Man rates, which are essentially zero." As grantor trusts, the subject trusts would be taxed at the rate of the beneficial owner, making capital gains from the sale of overseas shares income to the Wylys, taxable at the applicable U.S. capital gains rate. The court's June 6 order held disgorgement the only monetary relief available for the SEC's penalty claims accruing before Feb. 1, 2001. On an issue of first impression district court held that the SEC was not foreclosed, as a matter of law, from seeking disgorgement—in its civil action for securities law violations—in the form of unpaid federal taxes that the Wylys avoided. Distinguishing United States ex rel. Lissack v. Sakura Global Capital Markets, the court noted that neither the Tax Code nor Securities Act explicitly prohibits the use of tax benefits as a measure of unjust enrichment. The court also found that the SEC produced evidence of a causal connection between the Wylys' alleged securities violations and the taxes allegedly avoided.
