Sam Wyly & Brother's Estate on Trial for Securities Fraud
"... The SEC says the Wylys illegally hid their ownership interests and stock sales in companies in which they served as directors, including Irving-based Michaels Stores, by establishing fake trusts and corporate subsidiaries based in the Cayman Islands and on the Isle of Man. The SEC told jurors last week that the Wylys used these offshore trusts to conceal $550 million in profit. ..."
By MARK CURRIDEN
The Texas Lawbook/Dallas News, April 5, 2014
Dallas billionaire investor Sam Wyly wrote in his book 1,000 Dollars and an Idea that “the world owes a debt of gratitude” to junk bond king Michael Milken. Milken even hosted one of Wyly’s first book signings in 2008. Wyly, a prominent figure in Texas political and philanthropic circles, is on trial in the same federal courthouse in New York where Milken pleaded guilty 24 years ago this month to financial fraud and insider trading.
The Securities and Exchange Commission accuses Wyly and the estate of his brother, Charles Wyly, of profiting more than $550 million from an elaborate fraud that violated insider-trading laws through the use of offshore trust accounts. The trial, expected to continue for more than two months and closely monitored by corporate attorneys, will almost certainly have significant legal ramifications on SEC investigations and prosecutions, legal experts say. This is the first case the SEC has taken to trial since it implemented its policy requiring defendants in the most egregious fraud and insider trading cases to officially admit wrongdoing as part of resolving government allegations.
Lawyers for the SEC told the judge in February that a settlement with Wyly was impossible because he refuses to admit guilt. Before the new policy instituted under SEC Chairwoman Mary Jo White, Wyly and his brother’s estate could have settled the case by paying a large fine but not admitting any wrongdoing.
“The SEC in this case isn’t seeking a double or triple but is going for a grand slam,” said Toby Galloway, the former lead trial lawyer for the SEC’s regional operations in Fort Worth.
“The SEC needs to show that its threat of going to trial and winning is real and legitimate or more defendants will balk at settling their case and will take their chances at trial,” said Galloway, a partner at Kelly Hart & Hallman in Fort Worth. “Winning this case will definitely strengthen the SEC’s hand in future settlement negotiations.”
Securities lawyers say the SEC desperately needs to win the Wyly case because its last high-profile trial was such a humiliating loss. In October, a North Texas jury rejected insider trading charges against Dallas Mavericks owner Mark Cuban.
“If the SEC loses too many more high-profile cases, defendants who have the financial wealth to fund a top-notch defense such as Mark Cuban or the Wylys will start saying ‘screw it’ to the SEC’s settlement demands and start taking more cases to trial,” former SEC enforcement lawyer Ed Tomko said.
“The SEC’s threat of taking defendants to trial is only a stick if they are able to use it by winning,” said Tomko, a lawyer at the Dykema law firm in Dallas. “The SEC is definitely feeling the pressure.”
The SEC says the Wylys illegally hid their ownership interests and stock sales in companies in which they served as directors, including Irving-based Michaels Stores, by establishing fake trusts and corporate subsidiaries based in the Cayman Islands and on the Isle of Man. The SEC told jurors last week that the Wylys used these offshore trusts to conceal $550 million in profit.
Wealth and power
Charles Wyly, who was one year older than his brother, died in a car crash in Colorado in 2011. Sam Wyly started his first business providing computer services to other professionals in 1963. He had $1,000 in his pocket and only three customers, according to his memoir. By 1971, the company, University Computing, generated more than $120 million in revenue.
Records show that the Wylys contributed about $10 million to political campaigns, starting with Richard Nixon’s 1968 election bid. The brothers were prolific in their support of charities, donating a reported $90 million to causes including assisting minority businessmen in starting their own companies.
Sam Wyly’s first run-in with the SEC came in 1979, when the agency accused him of making undisclosed payments to colleagues to buy bonds in a company he owned that was facing bankruptcy. He settled without admitting he did anything wrong. The SEC says that will not happen this time.
“This is a case about lies, deception and fraud,” SEC trial attorney Bridget Fitzpatrick told the eight women and four men on the Manhattan jury. Houston trial lawyer Steve Susman, who represents Wyly, countered during opening statements that his client “acted in complete good faith.”
Susman told jurors that his client relied on lawyers to tell him and his brother what was legal and illegal. But the defense’s argument blaming the lawyers became more difficult last month when Michael French, the Wylys’ lawyer handling the offshore trusts, cut a deal with the SEC in which he admitted wrongdoing and agreed to pay nearly $800,000 in fines and penalties. More important, according to lawyers familiar with the case, French, a former lawyer at Jackson Walker in Dallas, agreed to cooperate with the SEC in its case against the Wylys.
“It will be much harder for the defendants to argue that they relied completely on their lawyers and that it is all their lawyers’ fault if the lawyer is on the witness stand pointing the finger back at them,” Galloway said.
Securities lawyers say the SEC’s case against the Wylys is stronger than the government’s case against Cuban because the SEC has two witnesses who can take jurors inside the scheme, French and Louis Schaufele, a former Lehman Brothers stockbroker. Schaufele cut his own deal in January. He admitted wrongdoing and agreed to pay nearly $500,000 in fines and penalties and to help the SEC in its case.
“No doubt the cooperating witnesses help significantly,” said Tom Melsheimer, the Dallas lawyer who represented Mark Cuban in his trial last year. “This case is very different from Mark’s.
“The SEC has live, cooperating witnesses, not videotaped testimony,” said Melsheimer, a partner at Fish & Richardson. “And those witnesses are people in a position to know the scope and intent of the transactions at issue.”
Melsheimer also points out that the SEC “picked a much better forum” — Manhattan — to conduct the trial against the Wylys. “The Southern District of New York is a home court for the SEC in many respects, and the government has had great success in trying these kinds of cases in front of New York juries,” he said.
“The best thing the defense has going for them, other than Steve Susman and Terry Oxford [Susman’s partner in the trial who is based in the firm’s Dallas office], is the anticipated length of the trial,” Melsheimer said. “I don’t think long, protracted trials help the plaintiff in most instances.
“But that’s not a lot to hang your hat on,” he said.
Bloomberg News contributed to this report.
For a longer version of this article, visit Texaslawbook.net.