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SEC v. Wyly

United States District Court, S.D. New York

July 29, 2014

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
SAMUEL WYLY, and DONALD R. MILLER, JR., in his Capacity as the Independent Executor of the Will and Estate of Charles J. Wyly, Jr., Defendants

Page 261

For the SEC: Bridget Fitzpatrick, Esq., Hope Augustini, Esq., Gregory Nelson Miller, Esq., John David Worland, Jr., Esq., Martin Louis Zerwitz, Esq., Daniel Staroselsky, Esq., United States Securities and Exchange Commission, Washington, DC.

For Defendants: Stephen D. Susman, Esq., Harry P. Susman, Esq., Susman Godfrey LLP, Houston, TX; David D. Shank, Esq., Terrell Wallace Oxford, Esq., Susman Godfrey LLP, Dallas, TX; Steven M. Shepard, Esq., Mark Howard Hatch-Miller, Esq., Susman Godfrey LLP, New York, NY.

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OPINION AND ORDER

Shira A. Scheindlin, U.S.D.J.

I. INTRODUCTION

The Securities and Exchange Commission (" SEC" ) brought this civil enforcement action against Samuel Wyly and 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 SEC alleged ten securities violations arising from a scheme in which the Wylys established a group of offshore trusts and subsidiary entities in the Isle of Man (" IOM" ), used those offshore entities to trade in shares of four public companies (the " Issuers" ) on whose boards the Wylys sat, and failed to properly disclose their beneficial ownership of that stock.

The liabilities and remedies phases of the trial were bifurcated. I presided over a jury trial on nine of the ten claims from March 31 to May 7, 2014. On May 12,

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2014, the jury returned a verdict against both Sam and Charles Wyly on all nine claims, including securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934 (the " Exchange Act" ) and section 17(a) of the Securities Act of 1933 (the " Securities Act" ), and failure to make various disclosures, in violation of sections 13(d), 14(a), and 16(a) of the Exchange Act.[1] Following the jury verdict, I set a discovery and trial schedule for the remedies phase.

On June 6, 2014, the SEC disclosed for the first time in an amended response to defendants' contention interrogatory that it " intends to seek in disgorgement . . . all of the profits Sam [and Charles] Wyly earned through their [o]ffshore Issuer securities transactions." [2] Defendants move to preclude the SEC's theory of " total profit" disgorgement as insufficient as a matter of law or, in the alternative, as untimely. For the following reasons, defendants' motion is GRANTED.

II. BACKGROUND

Between 1992 and 1996, Sam and Charles Wyly created a number of IOM trusts, each of which owned several subsidiary companies.[3] Michael French, the Wylys' family attorney, and Sharyl Robertson, the Chief Financial Officer (" CFO" ) of the Wyly Family Office, served as protectors of the IOM trusts.[4] French, Robertson, and Michelle Boucher, the CFO of the Irish Trust Company, a Wyly-related entity in the Cayman Islands,[5] conveyed the Wylys' investment recommendations to the IOM trustees. Most, if not all, of the IOM trustees' transactions were based on these recommendations.[6]

The Wylys served as directors of Michaels Stores, Sterling Software, Sterling Commerce, and Scottish Re.[7] As part of

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their compensation, the Wylys received stock options and warrants. " Between 1992 and 1999, Sam and Charles Wyly sold or transferred to the [IOM] trusts and companies stock options in Michaels Stores, Sterling Software and Sterling Commerce." [8] Between 1995 and 2005, the IOM trusts and companies exercised these options, separately acquired options and stock in all four companies, and sold the shares.[9] The SEC's expert, ...


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