Texas Securities Fraud: SEC May Pursue Disgorgement Claim from Charles Wyle’s Estate Now that He is Deceased

Now that Texas insider trading defendant Charles Wyly has passed away, the Securities and Exchange Commission may decide to pursue disgorgement from his estate. In the U.S. District Court for the Southern District of New York last month, Judge Shira Scheindlin said that the SEC’s bid for disgorgement survives Wyly’s death because this type of claim is remedial (preventing the alleged wrongdoer from financially benefiting from the alleged violations) and not punitive.

The SEC sued Charles and his brother Samuel Wyly in 2010, charging the Dallas siblings with insider trading and violating federal securities laws. The two men were accused of making over $550 million while making trades with the stocks of public companies that they served on as board members. They allegedly used hidden entities abroad to hide their trading and ownership of the securities.

The Commission accused the brothers of setting up subsidiary companies and trusts in the Cayman Islands and the Isle of Man to sell over $750M in stock in a number of companies that were public. Companies that they involved in their Texas securities scam included Sterling Software Inc., Scottish Annuity & Life Holdings Ltd., Michaels Stores Inc., and Sterling Commerce Inc. They allegedly made an unlawful gain of over $31.7 million after committing an insider trading violation related to one of the companies.

Also facing civil charges over the SEC’s Texas securities fraud case were broker Louis J. Schaufele III and the brothers’ lawyer, Michael C. French, who also belonged on the boards of three of the companies mentioned above. According to the Commission, the Wylys and their lawyer knew, or should have known, what their legal duties were as public company directors and over 5% beneficial owners. Per the law, these persons have to report trading and holdings in their companies’ securities to the SEC. The three of them also should have known that these disclosures are key for investors when they are deciding whether to invest.

The SEC accused the brothers and French of making it appear as if all of the Wylys’ trading and holdings only involved what they traded and held in the US. By not letting potential investors and shareholders know about this material information, the Wylys sold over 14 million issuer securities shares over 13 years for gains totaling over $550 million that were undisclosed.

Charles Wyly died in August 2011 at the age of 77. According to police, he died when an SUV struck his Porsche in Colorado where he has a home.

SEC Disgorgement Claim Survives Death of Insider Defendant, Bloomberg/BNA, January 31, 2012

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