In an 83-page opinion, Judge Shira Scheindlin ordered Texas businessman Sam Wyly to disgorge almost $124 million after hearing the remedies phase of the SEC’s enforcement action against Wyly and the estate of his deceased brother Charles. The court ordered the estate to disgorge an additional $63 million. Judge Scheindlin also left open the possibility that the Wyly brothers could have to disgorge more.
In reaching her decision, Judge Scheindlin determined the SEC’s proposed disgorgement amount for the securities violations involving registered securities was appropriate – namely the taxes that would have been paid on the profits from the sale of securities of four public companies on whose boards the Wylys sat “had the Wylys accurately disclosed beneficial ownership of the securities.” According to the court, the unpaid taxes were causally connected to the securities violations because the Wylys’ ”motivation to preserve tax benefits was important to their decision to misrepresent their beneficial ownership” and the “securities fraud was intimately connected to protecting the tax benefits in other ways.” Judge Scheindlin also ordered the Wylys to disgorge twenty five percent of their total profits on the sale of unregistered securities, which is within the range of the average discount received on unregistered securities.
Judge Scheindlin also granted the SEC’s request for the Wylys to pay prejudgment interest, although she ordered the SEC to recalculate the amount due. When done, the defendants will likely owe $300 million to $400 million dollars. In light of the “staggering” amount of money due, Judge Scheindlin concluded that “disgorgement of this magnitude is more than sufficient to deter future violations” and declined to impose additional financial penalties. She did, however, impose injunctive relief despite noting the general “toothlessness” of “obey-the-law” injunctions, evident from this case given that Sam Wyly was already subject to an earlier injunction. Still, Judge Scheindlin found, “the extensiveness of this scheme, the brazenness of Wyly’s conduct, and his position of wealth and importance in the community warrants the imposition of a permanent injunction in this case.”
In an addendum to her opinion, Judge Scheindlin left open the possibility that the Wylys could end up having to disgorge even more. The SEC had proposed an alternative measure of disgorgement for the sale of the registered securities based on all trading profits made from those sales. Prior to the remedies trial, Judge Scheindlin granted defendants’ motion to preclude the SEC from seeking disgorgement based on all trading profits, but permitted the SEC to present a revised calculation based on those trading profits. The SEC submitted a proffer of its revised trading profit disgorgement theory and an expert report positing three different calculations of unlawful gains. The Wylys opposed the SEC’s request to leave the record open for the purpose of addressing this alternative theory of disgorgement, but Judge Scheindlin granted it and will hold a one-day hearing on November 17. The parties will be able cross-examine each other’s experts on an alternative theory of disgorgement based on the “difference between the Wylys’ gains from their offshore transactions in the Issuers’ securities, and the gains that an ordinary buy and hold equity investor would have earned in those securities.”
Our earlier reports on the SEC’s enforcement action can be read here, including our recent post about the parties’ dispute over the proper measure of disgorgement.