Wyly Brothers’ $550 Million Stock Sales Prompt SEC Fraud Claim
July 30, 2010, 12:02 AM EDTBy Bloomberg
By David Scheer
July 30 (Bloomberg) -- Samuel Wyly and Charles Wyly, the Texan brothers and entrepreneurs who funded ads helping George W. Bush’s presidential campaigns, were sued by U.S. regulators who accused them of misleading investors while selling hundreds of millions of dollars in stock.
The Wylys used “an elaborate sham system of trusts and subsidiary companies” in the Isle of Man and Cayman Islands over a 13-year period to hide control of securities linked to companies where they were board members, the Securities and Exchange Commission said yesterday in a lawsuit filed in New York federal court. They illegally kept investors in the dark as they sold off holdings, and in one case made illegal insider trades, the SEC said.
“The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws,” the SEC’s deputy enforcement director, 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 brothers “intend to vigorously defend themselves -- and expect to be fully vindicated,” said their attorney, William A. Brewer III in Dallas.
Board members’ stock purchases and sales can help other investors gauge leadership’s confidence in a company’s future earnings. The Wylys used their offshore network to sell $750 million in securities, including $550 million of shares in large-block trades, most of which were done under “materially false or misleading” regulatory filings, the SEC said.
‘Knew or Were Reckless’
The lawsuit also targets a lawyer and a stockbroker for their alleged roles in the fraud. The Wylys and the lawyer either “knew or were reckless in not knowing” that the brothers were obligated to disclose stock transactions in regulatory filings, the agency wrote in the complaint.
In a statement, Brewer said “the Wylys have always received the advice and counsel of leading accounting and legal professionals. They have never been given any reason to believe the financial transactions in question were anything other than legal and fully appropriate.”
The brothers began setting up the offshore network in 1992, establishing 17 trusts that bore names of personal significance, such as one called Lake Providence, their birthplace, according to the SEC complaint. In the following years, they transferred millions of stock options and warrants they received for work as directors. They also added to the stockpile through other transactions, such as private offerings, the agency said.
Insider Trading
They kept control of the trusts, and they were aware that if later sales were publicly disclosed, it could have an impact on the stocks’ values, the regulator said.
The brothers also used the offshore network for illegal insider trading, reaping a $31.7 million profit, the SEC said. In October 1999, they bought shares of Sterling Software Inc. after learning that its chairman had decided to sell the firm. Sterling, which developed software to manage corporate computer systems, was sold to Computer Associates International Inc., now known as CA Inc.
Other publicly traded companies whose securities were involved in the Wylys’ alleged misconduct include Michaels Stores Inc., Sterling Commerce Inc. and a predecessor of Scottish Re Group Ltd., according to the SEC’s complaint.
Forbes magazine estimated in March that Samuel Wyly, 75, has a $1 billion fortune. He and Charles Wyly, 76, live in Dallas and are Republican donors. Since 1989, they and their spouses have made more than $1.8 million in campaign donations, according to the Washington-based Center for Responsive Politics.
Swift Boat Ads
Charles Wyly raised more than $100,000 for former President Bush’s first campaign for the White House in 2000, making Wyly part of an elite class of fundraisers whom the Bush campaign called “Pioneers.”
The brothers also funded Republicans for Clean Air, which aired advertisements for Bush and against rival Senator John McCain of Arizona during the primary election campaign in 2000. In 2004, Samuel Wyly donated funds to the Swift Boat Veterans for Truth, which ran advertisements opposing Democratic presidential nominee John Kerry, the Massachusetts senator.
--With assistance from Jonathan Salant in Washington. Editors: Gregory Mott, Lawrence Roberts.
To contact the reporter on this story: David Scheer in New York at dscheer@bloomberg.net.
To contact the editor responsible for this story: Alec McCabe at amccabe@bloomberg.net.
