Hedge fund billionaire Samuel Wyly and his brother and business partner, Charles, have been accused of running a $550 million fraud, replete with allegations of insider-trading and hiding assets.
According to the Securities and Exchange Commission lawsuit, filed yesterday in Manhattan, the Wylys set up an “elaborate sham system” of offshore companies and family offices to skirt disclosing their holdings in public companies on which they served as directors. They also used the allegedly fraudulent infrastructure to hide sales of those stakes.
The proceeds of the fraud were often diverted to two hedge funds founded by Samuel Wyly, Maverick Capital, which manages $11 billion, and Ranger Capital. The two made their billions as early pioneers in the computer industry, as well as on the Michaels arts-and-crafts chain, which they sold to Bain Capital and the Blackstone Group for $6 billion four years ago. Both men are also prominent donors to the Republican Party.
“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 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 SEC has also named Michael French, the Wyly’s lawyer, and Louis Schaufele, their stockbroker, in the lawsuit.
The Wylys deny any wrongdoing.
“After six years of investigations, the SEC has chosen to make claims against the Wyly brothers—claims that, in our view, are without merit,” their lawyer, William Brewer, said.
According to the SEC, the Wylys sold more than $750 million in shares of companies whose boards they sat on since 1997, using their web of offshore entities. By hiding their block sales of 14 million shares over that period, the SEC alleges the two netted undisclosed gains of $550 million. The SEC also accused the two of false filings with the SEC, by hiding the true size of their stakes in four public companies, and of a single insider-trading violation that allegedly netted them $31.7 million.
The Wylys made “hundreds of false and materially misleading statements to conceal their scheme,” the SEC said in a statement. Schaufele is accused of making misleading statements to brokerage firm intermediaries, while French is accused of helping set up and run the Cayman Islands-based “Wyly family office” as a clearing house for concealing their activities.
Those activities were first brought to the SEC’s attention by Bank of America, which closed the accounts of several offshore trusts when those trusts refused to disclose who owned them.