Tuesday, August 3, 2010
The SEC brought an action charging that Samuel E. Wyly and his brother, Charles J. Wyly, Jr. (hereinafter the "Wylys"), engaged in a 13-year fraudulent scheme to hold and trade tens of millions of securities of public companies while they were members of the boards of directors of those companies, without disclosing their ownership and their trading of those securities. According to the complaint, the Wylys' scheme defrauded the investing public by materially misrepresenting the Wylys' ownership and trading of the securities at issue while enabling the Wylys to realize hundreds of millions of dollars of undisclosed gain and other material benefits in violation of the federal securities laws governing the ownership and trading of securities by corporate insiders.
The public companies involved in the Wylys' scheme to defraud were, according to the complaint, Michaels Stores, Inc., Sterling Software, Inc., Sterling Commerce, Inc., and Scottish Annuity & Life Holdings Ltd. (now known as Scottish Re Group Limited) ("Scottish Re") (hereinafter collectively referred to as "the Issuers"). The complaint alleges that shares of the Issuers were traded on the New York Stock Exchange throughout the period of the Wylys' scheme.
According to the complaint, the fraud involved an elaborate sham system of trusts and subsidiary companies located in the Isle of Man and the Cayman Islands (collectively hereinafter the "Offshore System") that enabled the Wylys to hide their ownership and control of the Issuers' securities (hereinafter "Issuer Securities") through trust agreements that purported to vest complete discretion and control in the offshore trustees. In actual fact and practice, according to the complaint, the Wylys never relinquished their control over the Issuer Securities and continued throughout the relevant time period to vote and trade these securities at their sole discretion.
The complaint alleges that through their use of the Offshore System, the Wylys were able to sell without disclosing their beneficial ownership over $750 million worth of Issuer Securities, and to commit an insider trading violation resulting in unlawful gain of over $31.7 million. According to the complaint, the Wylys' attorney and fellow director of three of the Issuers, Michael C. French ("French"), and their stockbroker, Louis J. Schaufele III ("Schaufele"), substantially assisted the Wylys' fraudulent scheme, each reaping financial rewards for doing so. .
The complaint charges that all four defendants violated, and that French and Schaufele also aided and abetted the Wylys' violations of, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, as well as other statutory violations. The SEC seeks injunctions against future violations of the relevant statutes and rules, disgorgement of unlawful profits with prejudgment interest, civil monetary penalties, and officer and director bars against the Wylys and French.