If the U.S. Securities and Exchange Commission (SEC) is correct, billionaire brothers Samuel E. Wyly and Charles J. Wyly Jr., of Dallas, have more than savvy investing and brilliant business minds to thank for their wealth.
A civil suit brought by the SEC after a six-year investigation accuses the brothers – both in their 70s – of hiding $550 million in undisclosed gains through an “elaborate sham system” of offshore accounts. This occurred, according to the SEC, while the Wyly brothers sat on the boards of the companies whose stock they were trading. At the center of their collective fortune is Michaels, a popular arts and crafts store.
Brothers with a golden touch
Sam and Charles Wyly were born during the Great Depression in a small town in northeast Louisiana. The Washington Post reported that they have been inseparable since childhood. They played football on the state champion football team and later became business partners. They “turned ideas into billion-dollar companies,” supported charitable causes, and gave much support to politicians.
The Wall Street Journal describes the Wyly brothers as pioneers in the computer software industry. In 1983, they bought Michaels and built the stores into a national chain. The stores are now owned by private equity firms. Sam Wyly started Maverick Capital in 1990 and grew it to $11 billion in assets. Later he left Maverick and started Ranger Capital.
Now, the inseparable brothers are in trouble together. The SEC has filed fraud charges against the Wyly brothers, their attorney, Michael C. French, and stockbroker Louis J. Schaufele III.
“The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws,” said Lorin L. Reisner, deputy director of the SEC’s Enforcement Division. “They used these structures to conceal hundreds of millions of dollars of gains in violation of the disclosure requirements for corporate insiders.”
The charges describe how the SEC believes that, over a 13-year period, the Wylys avoided reporting their holdings and sales of stock in public companies by funneling them through offshore trusts and subsidiary companies located in the Isle of Man and the Cayman Islands. Using 17 offshore trusts, they were able to conceal their ownership and their trading activities, according to the SEC. In one charge alone they are alleged to have profited $31.7 million from insider trading of Sterling Software stock while they served as the company’s chairman and vice- chairman.
The alleged improper trading involved stock in Michaels, a unit of Michaels Holdings LLC, as well as Sterling Software, Sterling Commerce Inc., and Scottish Re Group Ltd. Both brothers sat on the boards of all four companies in some capacity.
SEC rules require that corporate insiders who own at least 5 percent of a company must disclose their ownership and their trades of the company. The reasoning behind the regulation is that investors watch this activity to get a feel for how the executives view the future of the company. The 78-page complaint filed in the U.S. District Court for the Southern District of New York against the Wylys alleges they used offshore vehicles to trade 14 million shares in companies in which they had ownership, but made sporadic, incomplete filings about their holdings.
In one instance, the Wylys reported that they owned 5.6 percent of the common stock in Sterling Software. But, the SEC stated that if they had accurately disclosed the holding in their offshore accounts, their ownership would have amounted to 22 percent.
According to the SEC’s charges, the Wylys created many trusts and then divided their holdings among them as a way to avoid disclosure. French and Schaufele helped perpetrate the fraud, according to the SEC, by telling the attorneys for the companies and brokerage firms that the trusts were independent.
The charges also state that the Wylys, along with French, made hundreds of “false and materially misleading” statements to brokerage firm officials. At the same time, the Wylys have long claimed that they didn’t own or control any offshore interests and, therefore, did not need to disclose ownership.
The Wyly brothers and French are accused of "reckless behavior," because they knew or should have known their legal obligations. The SEC also asserted that the brothers and French should have known that the investing public relies on such disclosures when making their investment decisions.
What did the brothers do with their wealth?
They bought four properties in Aspen, Colorado, a 100-acre farm near Dallas, expensive jewelry and artwork, and they contributed money to charity, according to the SEC. A large part of their money might have been used to fund Maverick Capital, the longest running, most successful hedge fund in the industry, and later, Ranger Capital. That use of money gave rise to the SEC charge that the Wylys channeled approximately $300 million of their offshore assets to Maverick Capital, Ranger Capital funds, and other entities.
Adding to the controversy is the fact that, over the years, the brothers gave $160,000 to the National Republican Congressional Committee and $35,000 to Rep. Pete Sessions (R-TX).
The SEC is seeking injunctive relief, disgorgement of ill-gotten gains, prejudgment interest, financial penalties, and officer-and-director bars against the Wylys and French.