NEW YORK (Reuters) - The wealthy Texas brothers Samuel and Charles Wyly on Thursday lost their bid to dismiss a U.S. Securities and Exchange Commission lawsuit accusing them of orchestrating a $550 million securities fraud and committing insider trading.
U.S. District Judge Shira Scheindlin in Manhattan denied motions to dismiss the complaint in its entirety. She said the SEC adequately alleged the Wylys’ liability for fraud, and stated a claim for insider trading against the brothers.
Following a six-year probe, the SEC last July accused the Dallas-based brothers of creating a sham web of offshore trusts in the Isle of Man and Cayman Islands to conceal 13 years of stock sales in four companies they founded or where they served as directors.
The regulator said the Wylys hid the sales to eliminate the risk that disclosure would send a bearish signal to the market and cause share prices to fall while they were selling.
Scheindlin agreed the SEC adequately pled the concealment of sales in Sterling Software, Michaels Stores Inc, Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd.
The judge also said the SEC may pursue a claim that the Wylys reaped $31.7 million from insider trading on Sterling Software after deciding in late 1999 to sell the company.
“A reasonable investor would almost certainly want to know information related to the Wylys’ planned sale,” she wrote.
William Brewer, a lawyer for the Wylys, in a statement said his clients were disappointed with the decision. “The Wylys will continue to vigorously defend themselves, and they remain confident they will be fully vindicated,” he said.
Scheindlin also refused to dismiss SEC charges against Louis Schaufele, a stockbroker, and Michael French, a lawyer for the Wylys. Schaufele’s lawyer Martin Auerbach declined to comment. A lawyer for French did not immediately return a call seeking comment.
The lawsuit is among the higher-profile cases that the SEC has pursued following criticism that its enforcement had been lax and it failed to uncover Bernard Madoff’s Ponzi scheme.
According to the SEC, the Wylys used their improper gains to acquire nearly $100 million of real estate, including two ranches in Aspen, Colorado, and a 100-acre horse farm outside Dallas; to buy tens of millions of dollars in art, collectibles and jewelry; and to make large donations to charitable causes.
The brothers built Michaels into a big arts and crafts retailer before selling it for about $6 billion in 2006 to private equity firms Blackstone Group LP and Bain Capital Partners LLC. Sterling Commerce was sold for about $4 billion in 2000 to what is now AT&T Inc. Scottish Annuity is a reinsurer now called Scottish Re Group Ltd.
Forbes magazine last September estimated that Samuel Wyly was worth $1 billion.