NEW YORK, Aug 22 (Reuters) - A lawyer for Texas tycoon Sam Wyly and the estate of his late brother Charles told a federal judge on Friday that a U.S. securities regulator’s demand for more than $729 million in damages would “bankrupt” the one-time billionaire.
Harry Susman told U.S. District Judge Shira Scheindlin in Manhattan the U.S. Securities and Exchange Commission’s demand was excessively punitive and unsupported by the law, at the close of a nonjury trial to determine how much the Wylys should pay for their role in a fraudulent offshore scheme.
“The total amount will bankrupt the Wylys,” Susman said, adding there was no evidence their conduct harmed a single investor.
But Bridget Fitzpatrick, a lawyer for the SEC, said the proposed award was appropriate given “egregious” violations that allowed the Wylys to accumulate “staggering wealth.”
The trial comes three months after a federal jury found the Wylys liable for fraud and other civil charges, in what was the SEC’s largest case to reach trial in years.
The agency accused the Wylys of creating a complex system of trusts in the Isle of Man that netted them $553 million in profits through more than a decade of hidden trades in four companies they controlled.
The companies were Sterling Software Inc, Michaels Stores Inc, Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd, now Scottish Re Group Ltd.
The SEC is seeking damages equivalent to unpaid taxes on the scheme’s profits, arguing that failure to disclose the trades left the Internal Revenue Service with no clue as to what was happening offshore.
Susman said the SEC should be barred from doing so because federal law only permits the IRS to assess tax penalties. But Fitzpatrick said the agency is not attempting to collect unpaid taxes but merely using them to gauge the Wylys’ ill-gotten gains.
In addition to the taxes, which total more than $540 million including interest, the SEC is seeking nearly $140 million in profits on sales of unregistered securities and a $51 million penalty for Sam Wyly, all amounts the Wylys dispute.
Fitzpatrick said the Wylys should not be permitted to profit from the scheme, which she said grew so sophisticated that it became a virtual business in itself.
“Since 1992, the Wylys have had what amounts to an interest-free loan from the government, and they have used it to accumulate staggering wealth,” she told Scheindlin.
Closing arguments will conclude on Friday, though the judge is not expected to rule immediately.
Sam Wyly, 79, last appeared on Forbes’ list of the 400 richest Americans in 2010 with a net worth of $1 billion. His brother Charles died in a 2011 car crash and an executor for his estate was substituted as a defendant.
The case is U.S. Securities and Exchange Commission v. Wyly et al, U.S. District Court for the Southern District of New York, 10-5760. (Reporting by Joseph Ax; Editing by Tom Brown)