Sam Wyly poses at his Explore book store in Aspen, Colo. in Sept 2008.
The billionaire Wyly brothers of Dallas, Tex. made headlines again this week but probably not in a way they would have preferred.
A decade ago they made headlines for funding what many believe was the first of the political ads known as 527s. It was for George W. Bush against John McCain in the 2000 primary.
This week, however, Charles and Sam Wyly were sued by the Securities and Exchange Commission for what the agency alleged was a massive fraud that was part of an insider-trading scheme.
The SEC alleged a fraud that transpired over a 13-year period that resulted in $550 million in gains.
The agency accuses the Wylys of trading in shares of companies on whose boards they served as members.
The Wylys disguised their transactions through an "elaborate" ruse that used sham off-shore trusts and companies, the agency alleged.
An excerpt from an SEC news release:
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 Dallas Morning News had a response to the lawsuit from the Wylys' lawyer who contends the did nothing wrong. An excerpt:
"It will come as little surprise to those who know them that the Wylys intend to vigorously defend themselves – and expect to be fully vindicated," said William A. Brewer III, partner at Dallas' Bickel & Brewer.
The suit is the first formal accusation of wrongdoing against the Wylys after more than six years of subpoenas, grand jury investigations, congressional hearings and copious speculation about when the legal shoes might drop.
The Wylys have been big political contributors to Republican candidates. The OpenSecrets.org blog at the Center for Responsive Politics has an informative review of their history as major donors to their party.
Meanwhile, the New York Times has a piece that examines the difficulties that lie ahead of the SEC if the case goes to trial. One potential stumbling block for the agency could be the statute of limitations.