NEW YORK (Reuters) - A U.S. judge on Tuesday ruled that a securities regulator cannot seek as much as $1.4 billion in damages from Texas tycoon Sam Wyly and his late brother Charles’ estate for their role in a fraudulent offshore scheme.
U.S. District Judge Shira Scheindlin in New York barred the U.S. Securities and Exchange Commission from pursuing the total profits the Wylys earned from hidden trades executed through a system of offshore trusts between 1992 and 2004 in companies they controlled.
A federal jury in May found the Wylys liable for fraud in a scheme that netted them $553 million in undisclosed profits, in what was the SEC’s largest case to reach trial in years. With interest and other penalties, the SEC had requested a total of $1.4 billion in damages.
“There is no evidence here that the defendants’ unlawful conduct – that is, the scheme to hide beneficial ownership by failing to disclose transactions – resulted in any market distortion, price impact, or profit tied to the violation,” Scheindlin wrote in her ruling. “It defies logic to presume that all of the rise in the value of a company’s stock price over 13 years ... is reasonably tied to two directors’ failure to disclose their trading.”
Scheindlin said she would permit the SEC to pursue some smaller amount of profits if it can provide a “credible explanation.”
Absent that, the ruling appears to limit the SEC’s claim to a maximum of about $750 million.
The order preceded an August 4 non-jury trial before Scheindlin to determine the amount of damages the Wylys must pay the government as a result of the verdict.
The SEC did not immediately respond to requests for comment. An attorney for the Wylys declined to comment on the ruling.
The ruling did not affect approximately $138 million in profits and interest from the sale of unregistered securities that the SEC is seeking.
In addition, the agency can still pursue at trial hundreds of millions of dollars it claims the Wylys owe in unpaid taxes tied to the offshore trades.
That amount is $341.3 million for Sam Wyly and $200.4 million for the estate of Charles Wyly, including interest, according to the SEC. The Wylys have disputed those figures.
The SEC is also seeking a $72.3 million penalty for Sam Wyly.
The various amounts total about $750 million.
The regulator said the Wylys used a system of trusts on the Isle of Man to conceal trading in four companies on whose boards they sat: Sterling Software Inc, Michaels Stores Inc [MSII.UL], Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd, now called Scottish Re Group Ltd.
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 car crash in 2011.
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 Jonathan Oatis