M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, July 30, 2010

Now that's insider trading!

You know, I can't understand why people risk so much (career, reputation, family) for so little.  How many times have you heard about the lawyer who gave in to the temptation to trade on client confidence only to reap $5,000 profit and an indictment.  Now, comes word of two guys who know what they are doing.  The SEC alleges that the Wyly brothers of Texas used a series of offshore trusts and corporations to engage in a monumental sized insider trading scheme to the tune of $750 million worth of stock and profits in excess of half a billion dollars!  On one series of transactions they allegedly earned more than $30 million. "Go big, or go home" as they say.  

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 SEC's complaint alleges that the Wylys and French knew or were reckless in not knowing their legal obligations as public company directors and greater-than-five-percent beneficial owners. The laws require such persons to report holdings and trading in their companies' securities on Schedule 13D and Form 4, which are filed with the SEC. The Wylys and French also knew or were reckless in not knowing that the investing public routinely uses such disclosures to gauge the sentiment of public companies' insiders and large shareholders about the financial condition and prospects of those companies, relying on those disclosures when making investment decisions.

The SEC alleges that the Wylys and French systematically and falsely created the impression that the Wylys' entire holdings and trading were limited to the fraction that they held and traded domestically. By depriving existing shareholders and potential investors of information deemed material by the federal securities laws, the Wylys were able to sell — in large-block trades alone — more than 14 million shares of issuer securities over a period of 13 years for undisclosed gains in excess of $550 million. The SEC further alleges that the sales generating most of these illicit gains were made pursuant to materially false or misleading SEC filings.

Read the complaint here.  My first reaction was, “Thank goodness the Wylys not lawyers.”  Then I realized that their alleged co-conspirator is French, the lawyer.  And, that their entire scheme would have been impossible without the help of a lawyer.  In fact, as far as I’m concerned if what has been alleged is true then the lawyer is at the heart of this decade long scheme.  It gets worse.  The lawyer was not content to simply set up and help run this conspiracy (while also sitting on boards), but he is alleged to have set up his own (smaller) network to carry out similar trades.  If you are a rising 3L studying for your MPRE next week, these guys as described in the SEC's complaint are not exemplary figures. 

I doubt ignorance of the disclosure rules will fly as an excuse (from the complaint):

Moreover, by the time the fraudulent scheme detailed herein commenced in early 1992, Sam Wyly and Charles Wyly each had over twenty years' experience as public company directors and Schedule13D and Form 4 filers; and Michael French had over twenty years' experience as a federal securities lawyer. They were each thus on abundant notice of the relevant SEC reporting obligations.

The SEC alleges that the Wylys with help from their lawyer used their positions as directors of public companies to trade on inside information in advance of mergers and other material corporate transactions.  You know, like during the Gilded Age, when public company directors routinely traded on inside information. 

In October 1999, after having agreed to put Sterling Software on the selling block, the Wylys had their Offshore System enter into a bullish offshore transaction in the form of a security-based swap agreement with Lehman Brothers that economically replicated the purchase of two million shares of Sterling Software for approximately $20.36 per share. Based on Sterling Software's closing price of$36.25 on February 14, 2000-the date that Sterling Software's agreement to be acquired by Computer  Associates was announced-the Wylys' illegal imputed profits from this transaction totaled approximately $31.7 million.

In what universe can someone think that this kind of activity would not violate federal securities laws?!  They probably knew it violated lots of securities laws, but that doesn’t seemed to have mattered much (again from the SEC's complaint).

As high level insiders of the Issuers, the Wylys and French were aware of the negative impact that sales by them of Issuer Securities-including the above detailed large-block sales-would potentially have on the Issuers' share prices if they were disclosed in accordance with law. In effecting these sales offshore, the Wylys and French were motivated by a desire both to avoid such declines and to eliminate any risk thereof. On March 24, 1995, for example, French wrote to Sam Wyly that filing of "insider sales reports ... seem to set everybody off" and that selling offshore without making such filings would facilitate "pull[ing] some gains out ... without attracting any attention." In September 2001, Sam Wyly elected to forgo an onshore collar transaction in Issuer Securities and instead attempted the same transaction offshore, in order to avoid any bearish signal to the market; and Charles Wyly, in September 2003, took a similar action for the same stated reason.

Hmm.  The best way for an insider to pull out some gains without attracting any attention is with a planned sale program.  Lots of firms have them.  Maybe the Wylys have heard about such programs.  On the other hand, planned programs are terrible if you want to make money on inside information about a pending transaction.  So, I can understand why one might neglect to pursue that option.  You’ve got to hand it to them.  They’ve got guts thinking that they could carry this out for so long.  ... And there’s a question worth asking.  How is it possible that the SEC, brokers, I-Banks, etc let them get away with this for so long?  I mean $500 million is still a lot of money.


July 30, 2010 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Thursday, July 29, 2010

Corporate Governance Around the World

I spent some of this week in Washington, D.C. at the XVIIIth International Congress of Comparative Law.  The congress, which is presented by the International Academy of Comparative Law and the American Society of Comparative Law is taking place all of this week and is hosted by three local law schools, American University Washington College of Law, George Washington University Law School and Georgetown University Law Center.  The conference is a wonderful gathering of jurists, lawyers and scholars from around the world.

Part of the week’s events involves the delivery of general and national reports on a variety of legal issues.  This year the International Academy of Comparative Law has decided to deal with corporate governance in a session at its 18th International Congress on Comparative Law and has commissioned a general report, as well as various country reports on the matter.  The general report, which is based on 32 country reports, focuses on (i) Corporate Governance: Concepts and General Problems; and (ii) the Board and the Shareholders as the Two Key Actors in Corporate Governance.  There are also links to specific country reports.  For those interested in a broad comparative survey of corporate governance issues, the reports are a useful summary. 

- AA

July 29, 2010 in Asia, Cross-Border, Europe | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 28, 2010

ASU Business Law Prof

      The Sandra Day O'Connor College of Law, the oldest and largest law school in the nation's fifth largest city, has embarked on a program of transformative growth. Over the past two years the College has experienced record levels of giving, amassed the largest scholarship funds in its history, enrolled its two best entering classes ever, and dramatically increased the size of its faculty and programs. To continue with this ambitious agenda, the College of Law invites applications for faculty positions at all levels, including highly distinguished lateral and entry-level candidates. 

     We invite applications from outstanding individuals in any subject area, although there is some preference for individuals who specialize in business law (including business associations, securities, and finance), commercial law (including bankruptcy and consumer law), land-use and sustainability, empirical studies, transnational issues, and immigration. In addition, the College of Law will be looking to interview highly qualified candidates for a position as Clinical Director within the newly established Diane Halle Center for Family Justice. All individuals with established records of scholarly productivity, experience and interest in administration of centers, and a strong commitment to institutional innovation and growth are encouraged to apply.

     Candidates must have a J.D. degree, or a Ph.D. degree in an area related to the law school curriculum. Candidates must also have teaching, research, or other professional experience appropriate to rank. Application deadline is December 1, 2010; if not filled, the 1st of each month thereafter until search is closed. 

     Please submit resume to:

     CONTACT:       Ms. Nancy Gregory
                    Coordinator for Appointments Committee
                    Sandra Day O'Connor College of Law
                    Arizona State University
                    1100 S. McAllister Avenue 
                   Tempe, AZ 85287-7906
     Email:         Nancy.Gregory@asu.edu

     Additional information about the Sandra Day O'Connor College of Law and Arizona State University is available at:


     ASU is an equal opportunity/affirmative action employer.

July 28, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, July 26, 2010

Scoundrels in Law

Scoundrels  Another edition of things I'm reading cause it's summer:  Scoundrels in Law: The Trials of Howe and Hummel, Lawyers to the Gansters, Cops, Starlets, and Rakes Who Made the Gilded Age by Cait Murphy.  This is a great book about the practice of law in the 19th century.  It will take you back to the days of "Tearful Tom" Shearman and his partner, John Sterling.  You remember them, right?  I think their firm is still around.   Anyway, Tearful Tom was known not only for representing Jay Gould and Jim Fisk, but also for being able to turn on the tears in front of a jury at a moments notice.  This type of over the top performance was typical of lawyers of the Gilded Age.  Who does that now?  When was the last time you saw someone drop to their knees during a negotiation to beg for a provision, or bawl at a deposition?!

Murphy reminds us that the Gilded Age was really the Wild West for the practice of law.  Howe and his partner Hummel were ready and willing to bribe judges, hire witnesses, suborn perjury - whatever was required to get their clients off.  These two even had a side role as lawyers in the trial of Diamond Jim Fisk's murderer. Scoundrels in Law takes the reader from Delmonico's to the Tombs in a tour of the 19th century legal profession in New York City.  They weren't doing big deals, but I bet they were having fun.   Every student of law should read this very entertaining and informative book in conjunction with their legal ethics class! 


July 26, 2010 in Books | Permalink | Comments (0) | TrackBack (0)

Sunday, July 25, 2010

BP Asset Sales

Seems like BP is aggressively seeking to shed assets in a bid to generate cash to fund the $20 billion compensation account for the damages associated with its ongoing mess in the Gulf of Mexico.   BP started with series of sales of Alaskan, Canadian and Egyptian-based assets to Apache, raising $7 billion.  Now comes word from the Vietnam News Agency that BP plans to sell its interests in Vietnam.  These include the Lan Tay and Lan Do offshore gas fields which have been producing for more than a decade, the Nam Con Son gas field, as well as BP's 720MW Phu My gas-fired power plant    The sale may generate an additional $1.3 billion for Gulf compensation fund.


July 25, 2010 in Asia, Asset Transactions, Current Events | Permalink | Comments (0) | TrackBack (0)

Snooki and the Poison Pill

For those of you who didn't get Vice Chancellor Strine's pop-culture "Snooki" reference during day four of the BKS poison pill trial, the New York Times Fashion & Style section has helpfully provided all you need to know (here). 


July 25, 2010 | Permalink | Comments (0) | TrackBack (0)