Litigation Release No. 21607 /July 29, 2010

Securities and Exchange Commission v. Samuel E. Wyly, et al., Civil Action No.10-CV-5760 (SAS) (S.D.N.Y., July 29, 2010)

SEC Charges Two Former Public Company Chairmen, Their Lawyer and Their Stockbroker in Fraudulent Scheme

The Securities and Exchange Commission alleged in a civil enforcement action filed today that Samuel E. Wyly and his brother, Charles J. Wyly, Jr. (hereinafter the "Wylys"), engaged in a 13-year fraudulent scheme to hold and trade tens of millions of securities of public companies while they were members of the boards of directors of those companies, without disclosing their ownership and their trading of those securities. According to the complaint, the Wylys' scheme defrauded the investing public by materially misrepresenting the Wylys' ownership and trading of the securities at issue while enabling the Wylys to realize hundreds of millions of dollars of undisclosed gain and other material benefits in violation of the federal securities laws governing the ownership and trading of securities by corporate insiders.

The public companies involved in the Wylys' scheme to defraud were, according to the complaint, Michaels Stores, Inc., Sterling Software, Inc., Sterling Commerce, Inc., and Scottish Annuity & Life Holdings Ltd. (now known as Scottish Re Group Limited) ("Scottish Re") (hereinafter collectively referred to as "the Issuers"). The complaint alleges that shares of the Issuers were traded on the New York Stock Exchange throughout the period of the Wylys' scheme.

According to the complaint, the apparatus of the fraud was an elaborate sham system of trusts and subsidiary companies located in the Isle of Man and the Cayman Islands (collectively hereinafter the "Offshore System") created by and at the direction of the Wylys. The complaint alleges that the Offshore System enabled the Wylys to hide their ownership and control of the Issuers' securities (hereinafter "Issuer Securities") through trust agreements that purported to vest complete discretion and control in the offshore trustees. In actual fact and practice, according to the complaint, the Wylys never relinquished their control over the Issuer Securities and continued throughout the relevant time period to vote and trade these securities at their sole discretion.

The complaint alleges that through their use of the Offshore System, the Wylys were able to sell without disclosing their beneficial ownership over $750 million worth of Issuer Securities, and to commit an insider trading violation resulting in unlawful gain of over $31.7 million. According to the complaint, the Wylys' attorney and fellow director of three of the Issuers, Michael C. French ("French"), and their stockbroker, Louis J. Schaufele III ("Schaufele"), substantially assisted the Wylys' fraudulent scheme, each reaping financial rewards for doing so. The complaint alleges that each also committed primary violations of the antifraud provisions of the securities laws.

The complaint alleges that the Wylys and French knew or were reckless in not knowing their obligations under the federal securities laws as public company directors and greater-than-5% beneficial owners, to report their Issuer Securities holdings and trading on Schedules 13D and Forms 4, public documents filed with the Commission. According to the complaint, the Wylys and French also knew or were reckless in not knowing that the investing public routinely used such disclosures to, among other things, gauge the sentiment of public companies' insiders and large shareholders about those companies' financial condition and prospects, thereby relying on them in making investment decisions. The complaint alleges that despite their knowledge, the Wylys and French systematically and falsely created the impression that the Wylys' holdings and trading of Issuer Securities were limited to the fraction that they held and traded domestically. By depriving existing shareholders and potential investors of information deemed material by the federal securities laws, according to the complaint, the Wylys were able to sell, in large-block trades alone, more than 14 million shares of Issuer securities over many years, realizing gains in excess of $550 million. The complaint further alleges that the sales generating most of these gains were made pursuant to materially false or misleading Commission filings.

The complaint further alleges that the Wylys exploited their illegal non-disclosure of their offshore Issuer Securities to make a massive and bullish transaction in Sterling Software in October 1999 based upon the material and non-public information that they, the Chairman and Vice-chairman of Sterling Software, had jointly decided to sell the company. This transaction, according to the complaint, yielded ill-gotten gains of over $31.7 million when Sterling Software's sale was ultimately announced to the public less than four months later.

The complaint further alleges that throughout the course of their scheme, the Wylys, French and Schaufele engaged in fraud, deception and material misrepresentation to conceal their actions; and that these acts included: (i) the making of hundreds of false and materially misleading statements to the Issuers, the Issuers' attorneys, investors, the Commission, and, in the case of Schaufele, to brokerage firm intermediaries, (ii) the establishment and operation of an offshore "Wyly family office" in the Cayman Islands as a conduit and repository for communications and records "which should not be seen in the USA," and (iii) the allocation of the Wylys' offshore holdings of Issuer Securities among different, and often newly created, offshore entities, all under the Wylys' control, solely to avoid making required Commission filings.

The complaint alleges that French utilized his roles as the Wylys' lawyer and fellow director on three of the four Issuers' boards to cover the Wylys' scheme with a false cloak of legality that was essential both to its concealment and to its execution. The complaint further alleges that French's assistance to the Wylys' scheme continued during French's tenure as Scottish Re's Chairman, when the Wylys, who had left Scottish Re's board, continued covertly to hold more than 5% of its outstanding stock. According to the complaint, French also established offshore entities of his own, which he used to control and to trade Issuer Securities without disclosing his own ownership or trading as required by law.

The complaint alleges that for his part, Schaufele used his position as the Wylys' stockbroker to conceal from and affirmatively misrepresent to his brokerage firm superiors the Wylys' control over the Issuer Securities held in their Offshore System. Schaufele also directly committed an insider trading violation, according to the complaint, by trading in Sterling Software common stock through his wife's accounts based upon non-public material information he learned through his employment at Lehman Brothers, i.e. the Wylys' intent to make a massive, bullish and undisclosed transaction in Sterling Software offshore.

The complaint charges that all four defendants violated, and that French and Schaufele also aided and abetted the Wylys' violations of, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder. The complaint further charges the Wylys and French with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") as well as Exchange Act Sections 13(d), 14(a) and 16(a) and Rules 13d-1 13d-2, 14a-3, 14a-9, 16a-2 and 16a-3 thereunder. The complaint further charges the Wylys with violations of Securities Act Sections 5(a) and 5(c); and charges the Wylys and French with aiding and abetting (i) the Issuers' violations of Exchange Act Sections 13(a) and 14(a) and Rules 13a-1, 14a-3 and 14a-9 thereunder and (ii) three of the Wylys' offshore trustees' violations of Exchange Act Section 13(d) and Rules 13d-1 and 13d-2 thereunder. Finally, the complaint charges French with aiding and abetting the Wylys' violations of Exchange Act Sections 13(d), 14(a) and 16(a) and Rules 13d-1, 13d-2, 14a-3 and 14a-9 thereunder. The SEC seeks injunctions against future violations of the relevant statutes and rules, disgorgement of unlawful profits with prejudgment interest, civil monetary penalties, and officer and director bars against the Wylys and French.

The Commission acknowledges the assistance of the Isle of Man Attorney General's Office, the Cayman Islands Monetary Authority and the New York County District Attorney's Office.

See Also: SEC Complaint


Last modified: 7/30/2010