http://www.nytimes.com/2010/07/30/business/30sec.html?_r=1&th&emc=th
July 29, 2010
NEW YORK TIMES
S.E.C. Charges Brothers With $550 Million Fraud
By EDWARD WYATT
The brothers, who founded
The civil charges, coming just two weeks after the S.E.C. reached a $550 million settlement with Goldman Sachs, are part of a concerted effort by the commission to focus more sharply on prominent enforcement cases.
The agency came under fierce attack after the financial crisis of 2007-8 for failing to uncover fraudulent activity in the mortgage securities markets and for missing chances to halt the Ponzi scheme operated by Bernard L. Madoff.
The Wyly brothers are in many ways a study in contrasts, paradigms of self-made billionaires who for years have fought investigations into suspected tax dodges by the offshore trusts that the S.E.C. claims they controlled.
Samuel E. Wyly, 75, and Charles J. Wyly Jr., 76, who through a lawyer called the charges “without merit,” have given millions of dollars to Republican candidates and organizations, but Sam Wyly this year was also named one of the world’s 10 “greenest” billionaires by Forbes magazine.
The S.E.C. case, which was filed in
The ill-gotten gains, according to the S.E.C., were used to buy tens of millions of dollars of art, collectibles and jewelry; $100 million of real estate, including two ranches in Aspen, Colo., and a 100-acre horse farm near Dallas; and for charitable contributions, including $10 million to the business school at Samuel Wyly’s alma mater, the University of Michigan.
The charges are the result of a six-year investigation that began in 2004 when Bank of America reported to the S.E.C. that it had terminated numerous accounts held in the name of companies based in the
The S.E.C. found that those companies, and similar entities registered in the
Through a lawyer, the Wylys said that they believed the charges were “a misapplication of the law” and that they had conducted all of their activities on the basis of accounting and legal advice that they received.
“They have never been given any reason to believe the financial transactions in question were anything other than legal and fully appropriate,” said William A. Brewer III, a partner at the Dallas law firm of Bickel & Brewer who is lead counsel for the Wylys. The brothers “expect to be fully vindicated,” he said.
Also charged in connection with the case were a lawyer for the Wylys, Michael C. French of Dallas, and a stockbroker, Louis J. Schaufele III, also of
Lawyers representing Mr. French and Mr. Schaufele did not immediately respond to phone calls seeking comment.
The S.E.C. can bring only civil actions, but the brothers have previously been reported to be under criminal investigation for actions related to their investment activities. Lorin L. Reisner, the deputy director of the S.E.C.’s enforcement division, declined to comment on whether the commission had referred its current findings to the Justice Department or other law enforcement agencies.
The S.E.C. claimed that a scheme of undisclosed investments and securities sales took place over 13 years and involved three-quarters of a billion dollars in stock. As longtime executives and directors of public companies, the S.E.C. said that the Wylys knew or should have known their obligations as the owners of more than 5 percent of the stock of several companies.
S.E.C. regulations require that holders of more than 5 percent of a company’s stock disclose that fact, and that company directors and executives report any and all sales or purchases of shares. Though they claimed to own only small stakes in their companies, the S.E.C. charged that they owned from 16 percent to 36 percent of the four companies named in the complaint.
Many investors track stock sales by company insiders because they believe that can provide clues to a company’s prospects; if well-informed company insiders are selling, investors might conclude that a company’s financial position is weakening.
“By concealing that the entities making the sales were under the control of the Wylys, other investors paid inflated prices for the shares they sold,” Mr. Reisner said.
If the S.E.C. is successful in proving all of its allegations, it could result in one of the biggest judgments ever in a securities fraud case. The commission is seeking disgorgement of the $550 million in gains and prejudgment interest and financial penalties.
Unlike some billionaires who maintain a cloak of privacy around their private lives, the Wylys maintain their own Web site extolling their business history, philanthropic activities and other interests.
They have been, at times, similarly open about their political affiliations. In 2000, Sam Wyly was a principal contributor to Republicans for Clean Air, a group that bought ads extolling then-Gov. George W. Bush’s environmental record and criticizing the record of Senator John McCain.
Four years later, the Wyly brothers were substantial contributors to the Swift Boat campaign that raised questions about the war record of Senator John Kerry, the
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