SEC V. Wyly Insider Trading Opinion
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Case 1:10-cv-05760-SAS Document 405 Filed 07/10/14 Page 1 of 28 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK -------------------------------------------------------::X SECURITIES AND E::XCHANGE COMMISSION, Plaintiff, - against - OPINION AND ORDER SAMUEL WYLY, and DONALD R. 10-cv-5760 (SAS) MILLER, JR., in his Capacity as the Independent Executor of the Will and Estate of Charles J. Wyly, Jr., Defendants. -------------------------------------------------------::X SHIRA A. SCHEINDLIN, U.S.D.J.: I. INTRODUCTION The Securities and Exchange Commission ("SEC") brought this civil enforcement action against Samuel Wyly and Donald R. Miller, Jr. as the Independent Executor of the Will and Estate of Charles J. Wyly Jr. (Charles Wyly and, together with Samuel Wyly, the "Wylys"). The SEC alleged ten securities violations arising from a scheme in which the Wylys established a group of offshore trusts and subsidiary entities in the Isle of Man ("IOM"), used those offshore entities to trade in shares of four public companies on whose boards the Wylys sat, and failed to make the requisite disclosures. I presided over a jury trial 1 Case 1:10-cv-05760-SAS Document 405 Filed 07/10/14 Page 2 of 28 on nine of the ten claims from March 31 to May 7, 2014. On May 12, 2014, the jury returned a verdict of “liable” as to both Sam and Charles Wyly on all nine claims. The tenth claim, alleging insider trading in connection with several October 1999 equity swaps, was not tried to the jury because the SEC was time- barred from seeking civil penalties for this claim.1 The parties agreed that no new testimony is necessary for the Court to decide the insider trading claim.2 The parties made post-trial submissions on June 3, 2014 and I heard oral argument on July 2, 2014. Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, I make the following findings of fact and conclusions of law. In reaching these findings and conclusions, I considered the testimony admitted during the jury trial, examined the documentary evidence, and reviewed the arguments and submissions of counsel. II. FINDINGS OF FACT A. The Offshore Trusts Between 1992 and 1996, Sam and Charles Wyly created a number of 1 See SEC v. Wyly, 950 F. Supp. 2d 547, 558 (S.D.N.Y. 2013); Transcript of 2/19/14 Conference, at 3. 2 Pursuant to a joint stipulation, the parties moved to admit an additional thirty exhibits for purposes of the insider trading trial. See 7/1/14 Notice of Joint Agreement (Dkt. No. 402). These exhibits are hereby admitted. 2 Case 1:10-cv-05760-SAS Document 405 Filed 07/10/14 Page 3 of 28 IOM trusts, each of which owned several subsidiary companies.3 The relevant trusts and subsidiary companies for purposes of the insider trading claim are 1) Delhi International Trust and its subsidiary, Greenbriar Limited (“Greenbriar”); 2) Pitkin Non-Grantor Trust and its subsidiary, Roaring Fork Ltd. (“Roaring Fork”); 3) Lake Providence International Trust and its subsidiary, Sarnia Investments Limited (“Sarnia”); 4) Castle Creek International Trust and its subsidiary, Quayle Limited (“Quayle”); and 5) Plaquemines Trust and its subsidiary, Moberly Limited (“Moberly”).4 Michael French, the Wylys’ family attorney, and Sharyl Robertson, the Chief Financial Officer (“CFO”) of the Wyly Family Office, served as protectors of the IOM trusts.5 French, Robertson, and Michelle Boucher, the CFO of the Irish Trust Company, a Wyly-related entity in the Cayman Islands,6 conveyed the Wylys’ investment recommendations to the IOM trustees. Most, if not all, of the IOM trustees’ transactions were based on these recommendations.7 3 See Stipulation of Undisputed Facts (“Stip. Facts”) ¶¶ 20-46. 4 See id. ¶¶ 22, 24-26, 29, 36-40. 5 See id. ¶¶ 49-50. 6 Boucher also became a Protector in 2001. See id. ¶ 50. 7 See Trial Transcript (“Trial Tr.”) at 96 (opening statement of Stephen Susman, counsel for defense) (“We don’t dispute that the trustees followed the recommendations. Yes, indeed, they did, most of the time for sure, and almost 3 Case 1:10-cv-05760-SAS Document 405 Filed 07/10/14 Page 4 of 28 B. Sterling Commerce and Sterling Software Sam and Charles Wyly co-founded Sterling Software with a former employee, Sterling Williams, in 1981.8 In 1996, Sterling Software spun off its electronic commerce division into a separate company – Sterling Commerce.9 During the relevant time period, Sam Wyly served as the Chairman of the Board of Sterling Software and a Director of Sterling Commerce, Charles Wyly served as the Vice-Chairman of the Board of Sterling Software and a Director of Sterling Commerce, and Williams served as Chief Executive Officer of Sterling Software and Chairman of the Board of Sterling Commerce.10 Sterling Software’s Board of Directors also included Sam Wyly’s son Evan, Charles Wyly’s son-in-law, Miller, and French.11 C. Equity Swap In late September 1999, Robertson, Boucher, Evan Wyly, and Louis Schaufele, a broker at Lehman Brothers, began to discuss a transaction whereby always . when it came to the four securities that were in companies that the Wylys were more familiar with than anyone in the world.”). 8 See Stip. Facts ¶ 4; Trial Tr. at 2501-2504 (Sterling Williams). 9 See Stip. Facts ¶ 2. 10 See id. ¶¶ 4, 6, 8. 11 See Plaintiff’s Exhibit (“PX”) 750 (2/13/00 minutes of Sterling Software’s Board of Directors meeting). 4 Case 1:10-cv-05760-SAS Document 405 Filed 07/10/14 Page 5 of 28 several offshore entities would take a long position in Sterling Software. Sam Wyly testified that he did not remember who came up with the idea for the transaction, but that he recommended the investment because he believed Sterling Software was undervalued.12 The Wylys originally planned to structure the transaction with call options,13 but Schaufele recommended a swap “as an alternative . because there are less moving parts . if one wanted out [of the deal] before the maturity [date].”14 Evan Wyly negotiated the terms of the swaps with Schaufele.15 The terms of the transaction were confirmed and approved by the Wylys and entered into by the IOM trustees upon recommendations from Robertson and Boucher.16 On October 8, Greenbriar, Moberly, and Quayle executed the first 12 See Trial Tr. at 1856-1858 (Sam Wyly). 13 See PX 626 (9/28/99 fax from Michelle Boucher to Sharyl Robertson). 14 PX 625 (9/28/99 email from Louis Schaufele to Robertson). 15 See PX 633 (9/30/99 email from Robertson to Boucher) (“Evan is having discussions with Lou”); PX 645 (10/7/99 email from Schaufele to Boucher) (referencing “conversations with Evan” about the terms of the swap). 16 See PX 653 and 654 (10/8/99 emails between Robertson, Boucher, and Evan Wyly confirming the terms); PX 649 (10/7/99 fax from Boucher to Ken Jones, trustee of Plaquemines Trust, recommending that Moberly participate in the swap); PX 660 (10/8/99 fax from Boucher to Kathy Harding, trustee for Castle Creek International Trust, recommending that Quayle participate in the transaction). 5 Case 1:10-cv-05760-SAS Document 405 Filed 07/10/14 Page 6 of 28 three swap agreements with Lehman as the counterparty. In total, these three swaps referenced 1,500,000 common shares of Sterling Software.17 Each swap had a term of eighteen months, subject to early termination provisions. If the price of the stock rose over this term, “Lehman was required to pay each of its Isle of Man counterparties a cash amount equal to the total return on the relevant number of underlying shares of Sterling Software stock over the term of the swap, including both dividends and any capital appreciation.”18 “The terms of the swap required Lehman to purchase the 1.5 million Sterling Software shares, as the notional value of the swap and the total return calculation were both based directly on Lehman’s average purchase price for those shares.”19 “Over eight trading days from October 8, 1999 through October 20, 1999, Lehman gradually purchased the 1,500,000 Sterling Software shares . at a weighted average price of $20.4273 per share. October 20, 1999 was thus considered the trade date for the swap.”20 “Together, 17 See Declaration (“Decl.”) of Professor Charles M. Jones in Support of the SEC’s Submission Seeking a Liability Finding on the Insider Trading Claim ¶ 28. Defendants have no objection to admitting the Jones declaration for the limited purpose of describing the economic structure of the swap agreements. 18 Id. ¶ 29. 19 Id. ¶ 30. 20 Id. Lehman’s purchases during this period comprised 49.21% of Sterling Software’s trading volume. See PX 656 (10/8/99-10/21/99 emails from Robertson to Sam, Evan, and Charles Wyly about the day’s trading “on the SSW 6 Case 1:10-cv-05760-SAS Document 405 Filed 07/10/14 Page 7 of 28 these three total return swaps had a notional value of $30,640,950.”21 On October 20, 1999, Roaring Fork and Sarnia entered into additional swap agreements referencing a a total of 500,000 shares.22 The average purchase price of Lehman’s shares for these two swaps was $20.1623 per share and the notional value of the swaps was $10,081,150.23 The parties unwound the swaps in June 2000, approximately ten months before the expiration of the eighteen month term. The equity swaps are financially complicated transactions, but in substance, the IOM’s “long position was economically equivalent to the [IOM entities] (a) borrowing $40 million from the Lehman affiliate for up to 18 months, (b) using the loan proceeds to purchase 2 million shares of Sterling Software stock, (c) holding the shares for up to 18 months, and (d) selling the shares at the end of hedge”).