Sec. v. Wyly
| Decision Date | 31 March 2011 |
| Docket Number | No. 10 Civ. 5760 (SAS).,10 Civ. 5760 (SAS). |
| Citation | 788 F.Supp.2d 92 |
| Parties | SECURITIES and EXCHANGE COMMISSION, Plaintiff,v.Samuel WYLY, Charles J. Wyly, Jr., Michael C. French, and Louis J. Schaufele III, Defendants. |
| Court | U.S. District Court — Southern District of New York |
OPINION TEXT STARTS HERE
Alan M. Lieberman, Esq., Gregory Nelson Miller, Esq., Cheryl J. Scarboro, Esq., John David Worland, Jr., Esq., Martin Louis Zerwitz, Esq., United States Securities and Exchange Commission, Washington, DC, for the SEC.William Andrew Brewer, III, Esq., Michael J. Collins, Esq., James S. Renard, Esq., Michael L. Smith, Esq., Bickel & Brewer, Dallas, TX, Martin Robert Pollner, Esq., John Anthony Piskora, Esq., Loeb & Loeb, LLP, New York, NY, for Samuel E. Wyly and Charles J. Wyly, Jr.Martin Joel Auerbach, Esq., Laura Elizabeth Neish, Esq., Zuckerman Spaeder, LLP, New York, NY, Luke Madole, Esq., Todd Murray, Esq., Carrington, Coleman, Sloman & Blumenthal, LLP, Dallas, TX, for Louis J. Schaufele, III.
Danny S. Ashby, Esq., Robert E. Davis, Esq., Barrett R. Howell, Esq., Casey P. Kaplan, Esq., K & L Gates, LLP, Dallas, TX, Laura A Brevetti, Esq., K & L Gates, LLP, New York, NY, for Michael C. French.
On July 29, 2010, following a six-year investigation into matters spanning almost two decades, the Securities and Exchange Commission (“SEC”) filed this suit alleging thirteen Claims for securities violations by billionaire brothers Samuel Wyly and Charles J. Wyly (together, the “Wylys”), their attorney Michael C. French (“French”), and their stockbroker Louis J. Schaufele III (“Schaufele”). The gist of the fraud alleged is that, from 1992 through at least 2005, the Wylys hid their ownership of and trading activity in the shares of four public companies 1 on whose boards of directors they sat 2 by creating a labyrinth of offshore trusts and subsidiary entities in the Isle of Man and the Cayman Islands (the “Offshore System”); transferring hundreds of millions of shares of the Issuers' stock to those entities; and installing surrogates to carry out their wishes regarding the disposition of the stock—all while preserving their anonymity and evading federal securities laws governing trading by corporate insiders and significant shareholders.3 Attorney French and stockbroker Schaufele were allegedly essential to the success of this scheme, which also included a singular instance of insider trading by the Wylys and Schaufele in 1999. The SEC seeks penalties, injunctive relief, and disgorgement of roughly $550 million in gains and prejudgment interest.
Defendants now move to dismiss Claims One through Four of the Complaint, which allege that, through the use of the Offshore System, the Wylys and French committed primary violations of section 10(b) of the Exchange Act (Claim One) and section 17(a) of the Securities Act of 1933 (the “Securities Act”) (Claim Four); that French and Schaufele aided and abetted the fraud alleged in Claim One under section 10(b) (Claim Three); and that the Wylys and Schaufele engaged in insider trading, also in violation of section 10(b) of the Exchange Act (Claim Two). The most interesting and complicated questions raised by the defendants' motions, however, have nothing to do with the substance of the federal securities laws' antifraud provisions; rather, they concern the applicability and interpretation of various limitations periods purportedly governing the SEC's claims for monetary penalties for both their fraud claims (Claims One through Four) and their non-fraud claims (Claims Five through Thirteen). I first address these threshold questions before turning to the defendants' more substantive arguments.
II. BACKGROUND 4A. False Filings
The Complaint identifies dozens of false securities filings which serve as the foundation for the defendants' alleged fraudulent scheme.5 Those filings fall broadly into three groups: (1) filings of one or both of the Wylys personally (such as Schedule 13Ds, Schedule 13Gs, or Form 4s (described below)) that understate their shareholdings and stock trading; (2) corporate filings by the Issuers (such as Form 10–Ks, proxies, or registration statements) that also understate the Wylys' (and/or French's) shareholdings in the particular Issuer making the filing; and (3) filings by “Offshore Trustees” (see below) falsely claiming they have sole dispositive power over their shares.6
Schedule 13D is a disclosure report required under section 13(d) of the Exchange Act to be filed by any person who “is directly or indirectly the beneficial owner of more than five percent” of the stock of any class of a public company's outstanding stock.7 A person beneficially owns a security if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares (i) voting power, which includes the power to vote, or to direct the voting of, such security; and/or (ii) investment power, which includes the power to dispose, or to direct the disposition of, such security.8
Form 4 is a disclosure report required under Exchange Act section 16(a) to be filed by every public company officer, director and greater-than-ten-percent shareholder reporting any changes to their beneficial ownership of their company's securities.9
B. The Offshore System Scheme
The Complaint alleges that between March 1992 and January 1996, in the Isle of Man, a self-governing British crown dependency located between Scotland and Northern Ireland in the Irish Sea, the Wylys established seventeen trusts, the beneficiaries of which were Sam or Charles Wyly, their respective family members, or both.10 Initially, they selected a single Isle of Man-based trust management company to serve as their Offshore Trusts' trustee, but between 1992 and 2004 selected numerous additional “Offshore Trustees.” 11 Employees of the various Offshore Trustees served as directors of more than thirty Isle of Man-based shell companies that were wholly-owned by the various respective Offshore Trusts (“Offshore Companies”).12 The Offshore Companies, along with the Offshore Trusts, together comprised the Wylys' “Offshore System.” 13
The trust agreements governing the Wylys' Offshore Trusts purported to confer upon the Offshore Trustees broad and exclusive authority to manage trust assets, but in practice the Offshore Trusts were controlled by trust “Protectors,” 14 Wyly-appointed loyalists who did the Wylys' bidding. 15 Thus, the offshore trusts were paper facades used by the Wylys to hide their beneficial ownership of and trading in the Issuers' shares they held in their Offshore System and to evade the federal securities laws' insider-transaction reporting provisions, beneficial-ownership reporting provisions, or both.16 At various times during the course of their thirteen-year scheme, the Wylys allegedly controlled more than twice as many shares in certain of the Issuers as they disclosed publicly,17 which included directing the voting and disposition of shares in the four Issuers held in the offshore trusts.18 Through their conduct, the Wylys—with awareness of its unlawfulness 19—allegedly deprived the markets and investors of information reflective of potential shifts or changes in corporate outlook important to investment decisions.20 These unlawful nondisclosures also enabled the Wylys freely to sell millions of shares of the Issuers' stock while avoiding the adverse market reaction and decrease in value often attending the required public disclosure of such trading by insiders.21
French, who acted as the Wylys' lawyer, also served on the boards of three of the Issuers and as a trust Protector of the Offshore System. 22 French provided cover to the Wylys' scheme that was essential both to its concealment and its continuation.23 In his role as a trust Protector, he coordinated with the trusts to communicate the Wylys' investment and voting instructions, which without exception were carried out by the Offshore Trustees.24 Despite having intimate knowledge of the Wylys' control over their Offshore System, French repeatedly (and falsely) told the Issuers and their counsel that the Offshore System was “independent of the Wylys.” 25 While participating in the Wylys' fraud, French also established offshore entities of his own, which he, like the Wylys, used to control and trade Issuer securities without disclosing that ownership or trading.26 French received an annual salary of 1.5 million dollars over the course of eight years and a sixteen million dollar share in a hedge fund established by the Wylys.27
Schaufele served for over fifteen years as the registered representative for various accounts established by the Wylys, including those of the Wylys' offshore entities,28 and helped carry out the Wylys' “protocol” for effecting certain transactions in the Offshore System: conveying instructions to the trust Protectors who in turn conveyed the instructions to the appropriate Offshore Trustee, who then faxed the necessary trading instructions to Schaufele or his assistants.29 Schaufele made misrepresentations to his brokerage firm superiors and in-house attorneys about the Wylys' relationship to and control over the offshore entities (of which he had full knowledge), which were allegedly vital to the scheme's operation and continuation.30
C. 1999 Insider Trading Violations
Around June 1999, Sam Wyly personally decided that both Sterling Software and Sterling Commerce should be sold.31 He obtained Charles Wyly's concurrence, and the two agreed that the sale of Sterling Commerce should proceed first.32 At that time, the Wylys comprised two-thirds of Sterling Software's executive committee and, along with other family members and French, comprised half of Sterling Software's Board of Directors.33
In late September 1999—when the plan to sell both Sterling entities was “already underway” 34 and when Goldman Sachs had already been retained by...
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