By Jonathan Stempel
NEW YORK (Reuters) - The Securities and Exchange Commission charged billionaire Samuel Wyly and his brother Charles with fraud for reaping more than $550 million of illicit gains by trading stock in four companies while they were serving as directors.
Samuel Wyly, 75, and Charles Wyly, 76, were accused of concocting a sham web of trusts and subsidiaries in the Isle of Man and the Cayman Islands to conceal over a 13-year period more than $750 million of stock sales in Michaels Stores Inc, Sterling Commerce Inc, Sterling Software Inc and Scottish Annuity & Life Holdings Ltd.
In its 78-page complaint filed in Manhattan federal court, the SEC said the Wylys also reaped a $31.7 million insider trading gain by making a "massive and bullish" bet in Sterling Software in October 1999 after they, as chairman and vice chairman, decided to sell the company. They would sell Sterling to Computer Associates International Inc in early 2000.
"The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws," SEC deputy enforcement chief Lorin Reisner said 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 lawsuit seeks to recoup ill-gotten gains, impose civil fines, bar the Wylys from being an officer or director of a public company, and other remedies.
Also charged in the scheme were the Wylys' lawyer Michael French, 67, and a stockbroker, Louis Schaufele, 55, the SEC said. All the defendants live in Dallas, the agency added.
NO MERIT TO CASE, WYLYS' LAWYER SAYS
A lawyer for the Wylys said the charges lack merit.
"It will come as little surprise to those who know them that the Wylys intend to vigorously defend themselves, and expect to be fully vindicated," said the lawyer William Brewer, a partner at Bickel & Brewer in Dallas, in a statement.
"At best, we believe the claims filed today are a misapplication of the law," he went on. "At worst, the claims appear to represent an after-the-fact justification for a misguided six-year investigation."
Martin Auerbach, a lawyer for Schaufele, declined to comment, saying he had yet to review the complaint. French's lawyers did not return immediately calls seeking comment.
The SEC said French is now a consultant at Challenger Capital Group Ltd, and Challenger's website says French is also a director at the financial services company. Challenger did not answer calls after market hours seeking comment, and did not immediately return an e-mail request for comment.
BLOCK TRADES
According to the SEC complaint, the Wylys and French knew or were reckless in not knowing their disclosure obligations tied to their roles as directors or owners of more than 5 percent of company stock.
The SEC said the defendants made hundreds of misleading statements that allowed the Wylys to conduct many trades, including large block trades of more than 14 million shares, without being detected, resulting in the $550 million of gains.
The Wylys built Michaels into one of the nation's biggest arts and crafts retailers before selling it to private equity firms Blackstone Group LP
They sold Sterling Software to Computer Associates, now known as CA Technologies
Scottish Annuity & Life Holdings Ltd is a reinsurer now known as Scottish Re Group Ltd
Forbes magazine in March estimated Samuel Wyly's net worth at $1 billion.
The case is SEC v. Wyly et al, U.S. District Court, Southern District of New York, No. 10-05760.
(Reporting by Jonathan Stempel in New York; Additional reporting by Karey Wutkowski in Washington, D.C.; Editing by Tim Dobbyn, Steve Orlofsky and Richard Chang)
