Wylys Did No Wrong, Says Lawyer

Dallas Business Journal
November 12, 2010

Sam and Charles Wyly should not be held liable for insider trading or other misdeeds the Securities and Exchange Commission has alleged they’ve committed because they’ve done nothing wrong.

That’s the message that Bill Brewer, a partner in the Dallas office of Bickel & Brewer, wants to convey about his clients, who are both in their 70s and who are facing an SEC civil complaint that they hid more than $550 million in undisclosed gains by secretly trading stock overseas.

“The SEC case lacks merit,” Brewer said.

The agency alleged the brothers used companies and trusts domiciled in the Cayman Islands and the Isle of Man to trade in securities of companies while they were on those businesses’ boards. The companies were Michaels Stores Inc., Sterling Software, Inc., Sterling Commerce Inc. and Scottish Annuity & Life Holdings Ltd. They have not been accused of wrongdoing.

“The (Wylys) that the community has known for the last 40 years are good, honorable and law-abiding folks ... about whom the SEC has told a tall tale. It’s a tall tale that’s inconsistent with the people we’ve known for all these decades,” Brewer said.

In an Oct. 29 court filing in federal district court in New York , Bickel & Brewer, along with two law firms located outside the North Texas area, sought to have the SEC ’s lawsuit thrown out. Their reasons are:

·                    Legal time limits have expired for most of the SEC ’s claims for civil penalties.

·                    The SEC fails to allege relevant details of fraud that the Wylys supposedly committed.

·                    The Wylys did not have “material,” non-public information at the time of an October 1999 swap agreement with Lehman Brothers concerning 2 million shares of Sterling Software.

·                    The SEC did not have regulatory jurisdiction over swap agreements of this sort in 1999. Beyond that, while the SEC contends the brothers had decided to sell Sterling Software at the time of the swap deal, the Wylys’ court filings say neither they or anyone at the business had taken firm steps to make that happen.

One outside expert said some of the attorney's arguments will present challenges for the SEC.

For instance, many of the alleged misdeeds happened early in the past decade, and some occurred as early as 1992, SEC filings say. Looking at the SEC ’s complaint, an issue that comes to mind is whether legal time limits have expired, said Peter Henning, a law professor at Wayne State University Law School .

The agency is arguing that it couldn’t have discovered the alleged malfeasance sooner because “the Wylys covered it up,” Henning said. “(The Wylys) argument is, ‘Who covered anything up? We set up trusts. They’re perfectly legal. There was some disclosure about them. If you’d have looked, you’d have found them.’”

The good thing for the Wylys, he added, is that by arguing that legal time limits have expired, “If they win, a good chunk of this complaint is just dismissed, and the case goes no further.”

Another “winner take all argument,” Henning said, is the Wylys’ contention that the swap agreement with Lehman Bros. happened before a 2000 law that gave the agency authority over those types of transactions.

“The issue is, is it truly a swap” Henning said. “There’s no one definition of what is a swap ... If it doesn’t come within the SEC ’s authority,” the case is over.

A gray area, according to Henning, is the question of when the thoughts of an individual amount to material, non-public information that can be used in an insider trading claim. That will be the issue when the court decides whether the Wylys’ decision to sell Sterling Software was based insider information.

“There’s no clear rule on it,” Henning said.

He added that the Wylys have a high hurdle to overcome on this front because to get the SEC ’s action dismissed at this stage, the judge first must accept that the facts as presented by the SEC are accurate. The Wylys would then have to show that the law does not support the case.

Still, it’s an important argument for the Wylys to make, even if they don’t win now, Henning said. The reason: The judge may tell the SEC , “you’ve got to show more than people kicking around the idea,” Henning said. That sets up the possibility that, after the pre-trial exchange of information, the Wylys could again seek to have the SEC ’s case dismissed, he said.

Brewer maintains that if the SEC had more facts to support its claim that the decision to sell Sterling Software was based on material, non-public information, it should have laid them out in its lawsuit.

“Their failure to do so, to answer the who, what, when and why questions, ought to result in the claims being thrown out,” he said.