United States District Court, S.D. New York
Appearances: For the SEC: Gregory Nelson Miller, Esq., Alan M. Lieberman, Esq., John David Worland, Jr., Esq., Martin Louis Zerwitz, Esq., United States Securities and Exchange Commission, Washington, DC.
For Samuel E. Wyly: William Andrew Brewer, III, Esq., Michael J. Collins, Esq., James S. Renard, Esq., Michael L. Smith, Esq., Bickel & Brewer, New York, NY.
For Donald R. Miller, Jr.: Stephen D. Susman, Esq., Mark H. Hatch-Miller, Esq., Susman Godfrey, LLP, New York, NY; Terrell W. Oxford, Esq., David D. Shank, Esq., Susman Godfrey, LLP, Dallas, TX.
For Louis J. Schaufele, III: Martin Joel Auerbach, Esq., Law Offices of Martin J. Auerbach, New York, New York; Laura Elizabeth Neish, Esq., Zuckerman Spaeder, LLP, New York, New York.
For Michael C. French: Joshua Klein, Esq., Nelson A. Boxer, Esq., Petrillo Klein & Boxer LLP, New York, NY.
OPINION AND ORDER
Shira A. Scheindlin, United States District Judge.
The Securities and Exchange Commission (" SEC" ) brings suit against Samuel
Wyly; Donald R. Miller, Jr. as the Independent Executor of the Will and Estate of Charles J. Wyly Jr. (Charles Wyly and, together with Samuel Wyly, the " Wylys" ); the Wylys' attorney Michael C. French;  and their stockbroker Louis J. Schaufele III  (together, " Defendants" ). The SEC alleges thirteen securities violations based on Defendants' participation in a scheme from 1992 through at least 2004, in which the Wylys hid their ownership of and trading activity in the shares of four public companies (the " Issuers" )  on whose boards they sat by creating a labyrinth of offshore trusts and subsidiary entities in the Isle of Man (" IOM" ) 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. The SEC seeks penalties, injunctive relief, disgorgement of roughly $550 million in gains, and prejudgment interest.
Defendants now move for summary judgment on the grounds tat: (1) the SEC's claims for civil penalties and injunctive relief are time-barred; (2) unpaid federal income taxes are not the proper subject of disgorgement; (3) the insider trading claims against the Wylys and Schaufele did not involve material non-public information; (4) the aiding and abetting claims against the Wylys and French fail as a matter of law; (5) the SEC has not established scienter to support the fraud claims against the Wylys and French; (6) the SEC has not established scienter to support the aiding and abetting fraud claim against Schaufele.  I address each ground below with the exception of the disgorgement issue, which I will address in a separate opinion. 
A. The False Filing and Fraud Claims
The crux of the allegations against the Wylys is 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."  Through this scheme, the Wylys allegedly " s[old] without disclosing their beneficial ownership over $750 million worth of Issuer Securities, and [committed] an insider trading violation resulting in unlawful gain of over $31.7 million."  The Wylys' attorney, French, and their stockbroker, Schaufele, allegedly substantially assisted the scheme and reaped financial rewards for doing so. 
Specifically, between March 1992 and January 1996 a number of trusts were settled in IOM (the " Offshore Trusts" ) and governed and administered by IOM-based corporate trust and corporate service providers (the " Trustees" ).  The trust agreements governing the Offshore Trusts purported to confer upon the Trustees broad and exclusive authority to manage trust assets, but in practice the Offshore Trusts were controlled by trust " Protectors," Wyly-appointed loyalists who did the Wylys' bidding: French, Sharyl Robertson, Michelle Boucher, and Keeley Hennington.  The Wylys used the Offshore Trusts to transfer and allocate millions of shares of the Issuers to ensure that no single trustee held more than five percent of an Issuer's outstanding stock -- the trigger for filing requirements under Section 13(d) of the Securities Exchange Act of 1934 (" Exchange Act" ).  This enabled the Wylys to hide their beneficial ownership of and trading in the Issuers' shares held in the Offshore System and to evade the federal securities laws' beneficial ownership reporting provisions. The Wylys knew that they met the requirements for beneficial ownership because they initiated or approved all investment decisions regarding trust-held securities vis-a-vis their employees, and the Trustees never failed to comply with the Wylys' instructions. 
The allegedly false 13D filings fall into three general categories: (1) Schedule 13Ds filed by Lorne House between 1992 and 1995 and prepared by Jackson Walker; (2) Schedule 13Ds filed by Trident Trust Company (IOM) Ltd. between 1997
and 1998 prepared by Jones Day; (3) Schedule 13Gs filed by IFG International Trust Company Ltd. (" IFG" ) between 2001 and 2003 and prepared by Jones Day.  The Wylys, through their agents, told the Trustees that they would take responsibility for preparing and filing the Trustee filings and decided which law firms would prepare the SEC filings. 
B. Insider Trading Claims
The Wylys co-founded Sterling Software in 1981 and spun off Sterling Commerce in 1995.  Leading up to the sale of Sterling Commerce and Sterling Software in 2000, the Wylys served as Chairman and Vice Chairman of the Board of Sterling Software, comprised two-thirds of its executive committee and, along with other family members and French, comprised half of its Board of Directors. 
The SEC has produced evidence that the Wylys agreed that it was time to sell Sterling Software and that Sterling Commerce should be sold first.  In September 1999, discussions took place about selling Sterling Commerce, and Goldman Sachs was retained to identify and evaluate potential buyers.  On October 15, 1999, Richard Hanlon, a friend of Sam Wyly's, met, at Wyly's request, with William Sanders, a Morgan Stanley investment banker focusing on technology companies.  Morgan Stanley had previously provided investment banking services to Computer Associates, a potential purchaser of Sterling Software, and Sam Wyly invited Sanders to a meeting in November 1999 where he informed Sanders that he was interested in selling Sterling Software.  Sanders then arranged a meeting between Sam Wyly and the President and CEO of Computer Associates, Sanjay Kumar, which resulted in a purchase agreement.  Sterling Software's CEO testified to feeling " blindsided" when he learned of the meeting between Kumar and Wyly. 
The insider trading claim against Schaufele is based on his October 1, 1999 purchase of Sterling Software stock. In the four and a half years prior to this purchase, Schaufele negotiated multiple structured transactions between Lehman and either the Wylys domestically or their offshore entities, ranging from half a million to over two million shares.  In a September 28, 1999 email regarding Sterling Software, Schaufele suggested that the Wylys engage in a swap as an alternative to call options -- a suggestion that, given the high fees Lehman charged for structuring a swap, would only make sense if a sizable
number of shares were involved.  Schaufele discussed " the terms of the swap and how it was executed [--] the full description of the transaction" with Sam Wyly's son, Evan Wyly, just days before the alleged insider trading transaction occurred. 
C. Fraudulent Concealment
The SEC filings that form the basis for the SEC's fraud and false filing claims were filed between April 1992 and April 2004 or, according to the SEC, as late as April 2005.  The swap transactions that formed the basis for the insider trading claims were complete no later than November 3, 1999.  The SEC was put on inquiry notice of the potential violations by defendants on November 16, 2004, through information from BofA.  The SEC entered into tolling agreements with the Wylys on February 1, 2006, with French on August 1, 2009, and with Schaufele on October 29, 2009. 
The SEC cites the following acts of concealment in support of equitable tolling: (1) the Wylys caused misrepresentations about their beneficial ownership of securities held by their Offshore Trusts in response to direct SEC inquiries made in connection with SEC filings; (2) in response to Director and Officer Questionnaires (" DOQs" ) provided by the Issuers, the Wylys explicitly denied beneficial ownership or control over securities held by the Offshore Trusts; (3) the Wylys actively managed their offshore holdings to minimize SEC filings under Section 13(d) and avoid disclosure obligations; (4) the Wylys set up a Cayman Islands office as a conduit and repository of information and routed instructions for offshore transactions through that office to further conceal their control over the Offshore Trusts; (5) in early 2004, BofA's clearing firm, National Financial Services, Inc., flagged the Wylys' offshore accounts and insisted on knowing the underlying beneficiaries of the trusts, which the Wylys refused to do. 
III. LEGAL STANDARD
Summary judgment is appropriate " only where, construing all the evidence in the light most favorable to the non-movant and drawing all reasonable inferences in that party's favor, there is 'no genuine issue as to any material fact and . . . the movant is entitled to judgment as a matter of law.'"  " A fact is material if it might
affect the outcome of the suit under the governing law, and an issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." 
" [T]he moving party has the burden of showing that no genuine issue of material fact exists and that the undisputed facts entitle him to judgment as a matter of law."  " When the burden of proof at trial would fall on the non-moving party, it ordinarily is sufficient for the movant to point to a lack of evidence to go to the trier of fact on an essential element of the non[-]movant's claim."  The burden then " shifts to the non[-]moving party to present specific evidence showing a genuine dispute."  This requires " 'more than simply show[ing] that there is some metaphysical doubt as to the material facts,'"  and the non-moving party cannot " rely on conclusory allegations or unsubstantiated speculation." 
In deciding a motion for summary judgment, " [t]he role of the court is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried."  " 'Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.'" 
IV. STATUTE OF LIMITATIONS
A. Applicable Statutes of Limitations
The SEC seeks civil monetary penalties under Section 21(d)(3) of the Exchange Act, which governs recovery for all violations of the Exchange Act except insider trading under Section 21A.  Section 21(d)(3) does not contain an express statute of limitations. Therefore, 28 U.S.C. § 2462 governs the SEC's 21(d) penalty claims, and requires that claims ...