© 2014 The Texas Lawbook.
By Mark Curriden
Senior Writer for The Texas Lawbook
(April 4) – Dallas billionaire investor Sam Wyly wrote in his book 1,000 Dollars and an Idea that “the world owes a debt of gratitude” to junk bond king Michael Milken, who hosted one of Wyly’s first book signings in 2008.
Wyly, a prominent figure in Texas political and philanthropic circles, is now on trial in the very same federal courthouse in New York where Milken pleaded guilty 24 years ago this month to financial fraud and insider trading.
The U.S. Securities and Exchange Commission accuses Wyly and the estate of his deceased brother, Charles Wyly, of profiting more than $550 million from an elaborate fraud that violated insider-trading laws through the use of offshore trust accounts.
The trial, which is expected to continue for more than two months and is being closely monitored by corporate general counsel across the country, will almost certainly have significant legal ramifications on current and future SEC investigations and prosecutions, according to legal experts.
This is the first case the SEC has taken to trial since it implemented its get tough policy of requiring defendants in the most egregious fraud and insider trading cases to officially admit to wrongdoing as part of resolving the allegations by the government.
Lawyers for the SEC told the judge in February that a settlement agreement with Wyly was impossible because he refused to admit guilt. Prior to the new policy instituted under SEC Chairwoman Mary Jo White, the Wylys would have been allowed to settle their case by paying a large fine but not having to admit to wrongdoing.
“The SEC in this case isn’t seeking a double or triple but is going for a grand slam,” says Toby Galloway, the former lead trial lawyer for the SEC’s regional operations in Fort Worth.
Securities lawyers say that the SEC desperately needs to win the Wyly case because the agency suffered a humiliating loss in its last high-profile trial last October when a North Texas jury rejected the SEC’s charges of insider trading against Dallas Mavericks owner Mark Cuban.
“If the SEC loses too many more high-profile cases, defendants who have the financial wealth to fund a topnotch defense such as Mark Cuban or the Wylys will start saying ‘screw it’ to the SEC’s settlement demands and start taking more cases to trial,” says former SEC enforcement lawyer Ed Tomko.
“The SEC’s threat of taking defendants to trial is only a stick if they are able to use it by winning,” says Tomko, who is now a lawyer at the Dykema law firm in Dallas. “The SEC is definitely feeling the pressure.”
The SEC told jurors this week that the Wylys used these offshore trusts to conceal $550 million in profits.
Charles Wyly, who was one year older than his brother, died in a car crash in Colorado in 2011.
Sam Wyly started his first business providing computer services to other professionals in 1963. He had $1,000 in his pocket and only three customers, according to his memoir. By 1971, the company, University Computing, generated more than $120 million in revenues.
Records show that the Wylys contributed about $10 million to political campaigns, starting with Richard Nixon’s 1968 election bid through their support of George W. Bush. The brothers were prolific in their support of charities, donating a reported $90 million to various causes, including assisting minority businessmen in starting their own companies.
Wyly’s first run-in with the SEC came in 1979 when the agency accused him of making undisclosed payments to colleagues to purchase bonds in a company he owned that was facing bankruptcy. He settled the case without admitting he did anything wrong.
The SEC says that will not happen this time.
“This is a case about lies, deception and fraud,” SEC trial attorney Bridget Fitzpatrick told the eight-women and four men on the Manhattan jury.
Houston trial lawyer Steve Susman, who represents Wyly, countered during opening statements that his client “acted in complete good faith.” Susman is representing Wyly along with his partner at Susman Godfrey, Terry Oxford, who offices in Dallas. Bickel & Brewer has also represented the Wylys in this case.
Susman told jurors that his client relied on lawyers to advise them what was legal and illegal.
But the defense’s argument blaming the lawyers became more difficult last month when Michael French, the Wylys’ lawyer who handled their offshore trusts, cut a deal with the SEC in which he admitted wrongdoing and agreed to pay nearly $800,000 in fines and penalties.
More importantly, according to lawyers familiar with the case, French, who is a former lawyer at Jackson Walker in Dallas, agreed to cooperate with the SEC in its case against the Wylys.
“It will be much harder for the defendants to argue that they relied completely on their lawyers and that it is all their lawyers’ fault if the lawyer is on the witness stand pointing the finger back at them,” says Galloway.
Securities lawyers say the SEC’s case against the Wylys is stronger than the government’s case against Mark Cuban because the SEC has French and Wyly’s former Lehman Brothers stockbroker, Louis Schaufele, as witnesses who are able to take jurors inside the scheme.
“No doubt the cooperating witnesses help significantly,” says Tom Melsheimer, the Dallas lawyer who represented Mark Cuban in his trial last year. “This case is very different from Mark’s.
Melsheimer also points out that the SEC “picked a much better forum” – Manhattan – to conduct the trial against the Wylys.
“The Southern District of New York is a ‘home court’ for the SEC in many respects and the government has had great success in trying these kinds of cases in front of New York juries,” he says.
“The best thing the defense has going for them, other than Steve Susman and Terry Oxford, is the anticipated length of the trial,” says Melsheimer. “I don’t think long, protracted trials help the plaintiff in most instances.
“But that’s not a lot to hang your hat on,” he adds.
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