The lawyer for Samuel Wyly and the estate of Charles Wyly told a judge they shouldn’t have to pay regulators as much as $750 million after being found liable for using a web of offshore trusts to hide stock holdings and evade trading limits, arguing the figure was miscalculated.

The brothers, founders of Michaels Stores Inc., didn’t harm investors when the transactions involving shares in the company began to be disclosed in public statements in 2005, the attorney, Stephen Susman, told U.S. District Judge Shira Scheindlin in Manhattan.

The Wylys were found by a Manhattan jury three months ago to have perpetrated a fraud that made them at least $550 million in illegal profit over 13 years. A second trial began Aug. 4 in which Scheindlin will determine how much Samuel Wyly and the estate of his late brother, who died in a car accident three years ago, must pay in fines and disgorgement.

“The case is unlike any other SEC disgorgement case,” Susman said today in opening statements. “There was no reaction in the stock price” after the disclosures, he said.

The SEC cut the demand for damages almost in half after Scheindlin rejected a request for $1.41 billion.

The brothers hid ownership of shares of companies on whose boards they sat and broke disclosure rules by failing to reveal the full extent of their offshore holdings, according to the SEC.

Inside Information

They also profited from using information gained from sitting on the board of Sterling Software Inc. and accumulating shares ahead of the company’s sale to Computer Associates International Inc., the government said.

Scheindlin threw out an SEC claim of insider trading against both brothers.

The Wylys knew they were doing something “quite risky” and chose to break the law to make a profit, Bridget Fitzpatrick, a lawyer for the SEC, told Scheindlin in an opening statement yesterday. The Wylys concealed their transactions from 1992 to 2003, Fitzpatrick said.

The Wylys received at least $600 million in untaxed dollars, spending about $85 million on real estate and $30 million on art and jewelry, Fitzpatrick said.

The Wylys took issue with those figures, arguing in court they should be “far smaller than what the SEC claims.” The Wylys’ lawyers argued in court papers that if the judge decides to impose a penalty, the Wylys shouldn’t have to pay more than $1.38 million. The trial may take three days, lawyers in the case have said.

No Proof

Scheindlin ruled July 29 that regulators didn’t offer any proof to show the trades by Isle of Man trusts controlled by the brothers “were unlawful, manipulated the market, distorted the price of the shares or constituted insider trading.”

Samuel Wyly testified in April that he didn’t violate federal securities laws. He said trustees on the Isle of Man had acted independently, approving transactions without his direction.

The Wylys claimed they used the offshore trusts for tax purposes, estate planning and asset protection. They said they never concealed the offshore trusts and relied on the advice of “an army of lawyers” they trusted to ensure they complied with the law.

The SEC alleged the Wylys made $31.7 million by using inside information they gained from sitting on the board of Sterling Software to accumulate shares before the company’s $4 billion sale to Computer Associates International Inc. Scheindlin last month dismissed the SEC’s claim of insider trading against both brothers.

During the jury trial, SEC lawyers called witnesses who testified that the Wylys exercised control over the offshore trusts through trustees who always complied with their orders.

The case is Securities and Exchange Commission v. Wyly, 1:10-cv-05760, U.S. District Court, Southern District of New York.

 

Source: bloomberg

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