“Charges were filed in Federal Court Thursday against a pair of billionaire brothers and two of their abettors alleging securities fraud and targeting more than $550 million held in the Cayman Islands and the Isle of Mann. 

A six-year investigation into two Dallas billionaire brothers has culminated in a 78-page complaint detailing alleged securities violations and the uncovering of an estimated $550 million of potentially recoverable funds – cash the US government plans to wrest back by any means necessary.

Charges were filed Thursday in the US Southern District Court of New York alleging that Samuel E. Wyly and Charles J. Wyly, Jr., in concert with associates Michael C. French and Louise J. Schaufele III, “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.”

During that time, the SEC alleges that the Wylys and their associates engaged in $750 million worth of fraudulent transactions.
“We asked the court to enjoin their assets and plan to target them for recovery,” said an SEC spokesperson.

In the complaint, the Securities and Exchange Commission also charged that the brothers utilized “an elaborate sham system of trusts and subsidiary companies” in the Isle of Man and the Cayman Islands to obfuscate their assets. Investigators dubbed the brothers’ network of nominee and front corporations the “Offshore System,” which is thought to contain $550 million in illegal gains that represent recoverable assets.

“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, in a statement. “They used these structures to conceal hundreds of millions of dollars of gains in violation of the disclosure requirements for corporate insiders.”

The SEC requested to that the defendants “disgorge, with prejudgment interest thereon, all their respective illegal insider trading profits flowing from their transactions in connection with Sterling Software set forth above, together with prejudgment interest thereon.” The commission also asked the court to consider civil penalties pursuant to Section 21A of the Exchange Act.

Among the companies alleged to have had their share values fraudulently manipulated are Michaels Stores, Sterling Software, Sterling Commerce and Scottish Annuity & Life Holding.

The complaint details 13 claims against the defendants, including a 1999 incident when the Wylys used insider information about Sterling to earn $31.7 million by using offshore entities to trade the software company’s stock before it was announced to be for sale four months later.

Sam Wyly, 75, and Charles Wyly, 76, did not break the law by consummating the transactions, but their lack of disclosure to the market was an SEC violation.

While sales by officers and directors provide a bearish signal, there is no necessary correlation between the stock price and information about transactions by corporate insiders. The S.E.C. will have to show what effect the withheld information would have had on the price of the shares at the time of the sales, and that impact may be far less than the total alleged gain of $550 million.

William A. Brewer III, the brothers’ lawyer, said his clients had been led astray by bad advice given by their accountants. “After six years of investigations, the SEC has chosen to make claims against the Wyly brothers – claims that, in our view, are without merit,” Brewer said.

The Wyly brothers earned their fortune in the ’70s as computer software pioneers and then as the founders of the hedge fund Maverick.

A source within the Department of Justice confirmed that the Wylys and their abettors could soon face criminal charges as a result of the fraud and that they had been the subject of a criminal probe for “some years.”

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