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S.E.C. vs. the Wyly Brothers

S.E.C. vs. the Wyly Brothers

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Published by DealBook
The Securities and Exchange Commission's lawsuit against Samuel Wyly and Charles J. Wyly.
The Securities and Exchange Commission's lawsuit against Samuel Wyly and Charles J. Wyly.

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Published by: DealBook on Apr 04, 2011
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UNITED
STATES
DISTRICT COURT 
SOUTHERN
DISTRICT
OF
NEW
YORK 
~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
~
SECURITIES
AND
EXCHANGECOMMISSION,
OPINION
AND
ORDER
Plaintiff,
10 Civ. 5760 (SAS)
-
against-
SAMUEL
WYLY,
CHARLES
J.
WYLY,
JR.,
MICHAEL
C.
FRENCH,
AND
LOUIS
J.
SCHAUFELE III,
Defendants.
.
_--------------------------------------------------
)(
SHIRA
A.
SCHEINDLIN,
U.S.D.J.:
I. INTRODUCTION
On July 29, 2010, following a six-year investigation into mattersspanning almost two decades, the Securities and Exchange Commission ("SEC")filed this suit alleging thirteen Claims for securities violations by billionairebrothers Samuel Wyly and Charles
J.
Wyly (together, the "Wylys"), their attorneyMichael
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
four1
Case 1:10-cv-05760-SAS Document 50 Filed 03/31/11 Page 1 of 74
 
public companies
1
on whose boards of directors they sat
2
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 regardingthe disposition of the stock – all while preserving their anonymity and evadingfederal securities laws governing trading by corporate insiders and significantshareholders.
3
Attorney French and stockbroker Schaufele were allegedly essentialto the success of this scheme, which also included a singular instance of insidertrading by the Wylys and Schaufele in 1999. The SEC seeks penalties, injunctive
1
These companies were Michaels Stores, Inc. (“Michaels”), SterlingSoftware, Inc. (“Sterling Software”), Sterling Commerce, Inc. (“SterlingCommerce”), and Scottish Annuity & Life Holdings Ltd. (now known as ScottishRe Group Limited) (“Scottish Re”) (hereinafter collectively referred to as “theIssuers”).
See
Complaint (“Compl.”) ¶ 2.
2
See id.
¶¶ 1-2, 23-27. Sam Wyly served at various times relevant tothe Complaint as Chairman and Vice Chairman of Michaels, Chairman of SterlingSoftware, Executive Committee Chairman and Board member of SterlingCommerce, and Chairman of Scottish Re.
See id.
¶ 15. Charles held similar,though not identical, positions at each of the Issuers.
See id.
16. The Wylyswere not only board members of these companies, but also founders, executives,and significant shareholders – “quintessential insiders” who, in violation of theirfiduciary duties to the Issuers and their shareholders, used their power and controlto realize hundreds of millions of dollars of undisclosed gain.
See id.
¶¶ 1, 15-16,74-76.
3
See
sections 13(d) and 16(a) of the Securities and Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78m(d), 78p(a).2
Case 1:10-cv-05760-SAS Document 50 Filed 03/31/11 Page 2 of 74
 
relief, and disgorgement of roughly $550 million in gains and prejudgment interest.Defendants now move to dismiss Claims One through Four of theComplaint, which allege that, through the use of the Offshore System, the Wylysand 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 inClaim One under section 10(b) (Claim Three); and that the Wylys and Schauefeengaged in insider trading, also in violation of section 10(b) of the Exchange Act(Claim Two). The most interesting and complicated questions raised by thedefendants’ motions, however, have nothing to do with the substance of the federalsecurities laws’ antifraud provisions; rather, they concern the applicability andinterpretation of various limitations periods purportedly governing the SEC’sclaims for monetary penalties for both their fraud claims (Claims One throughFour) and their non-fraud claims (Claims Five through Thirteen). I first addressthese threshold questions before turning to the defendants’ more substantivearguments.
II. BACKGROUND
4
A. False Filings
4
All facts are drawn from the Complaint and presumed to be true.3
Case 1:10-cv-05760-SAS Document 50 Filed 03/31/11 Page 3 of 74

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