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Texas tycoon Wyly found not liable for insider trading

By Joseph Ax

NEW YORK (Reuters) - Texas tycoon Sam Wyly and his late brother, Charles, were found not liable for insider trading by a U.S. judge on Friday but still could face hundreds of millions of dollars in damages after a jury in May found they committed fraud.

U.S. District Judge Shira Scheindlin in New York said the Securities and Exchange Commission failed to show that the Wylys possessed material nonpublic information when they executed $40 million of offshore swap transactions in October 1999 involving a company they controlled, Sterling Software.

In May, a federal civil jury found Sam Wyly and the estate of Charles Wyly liable on nine other counts, including fraud for using a secret network of offshore trusts. It was the SEC's largest case to reach trial in recent years.

Scheindlin's decision came a week after she presided over a one-day nonjury trial on the insider trading claim, a small part of a broader case the SEC brought in 2010 after years of investigation.

SEC Director of Enforcement Andrew Ceresney declined to comment.

Despite Friday's ruling, the Wylys still face a potentially massive amount of damages based on the jury verdict.

Scheindlin is expected to determine, in a bench trial in August, how much the Wylys must pay to the SEC. The SEC has said it will seek more than $553 million in disgorgement and penalties, a figure the Wylys have strongly disputed.

In a statement, the Wylys' lawyer, Stephen Susman, said they were "grateful" that Scheindlin had ruled in their favor.

"We have tried in good faith to resolve this case, but the government, to date, has been unrealistic and unreasonable in what it can expect to extract from the Wyly family," he added.

Charles Wyly died in a car crash in 2011.

The SEC lawsuit focused on a complicated system of trusts in the Isle of Man that the Wylys said they created for tax purposes. An executor for Charles Wyly's estate was substituted as a defendant after his death.

Regulators claimed the Wylys used the trusts to conceal trading from 1992 to 2004 in four companies on whose boards they sat - Sterling Software Inc, Michaels Stores Inc, Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd, now called Scottish Re Group Ltd.

Scheindlin separated the insider trading claim from the rest of the case for technical legal reasons.

The insider trading allegations centered on whether the Wylys had already decided to sell Sterling Software when they executed transactions involving shares of the company in October 1999, allowing them to profit when it was sold a few months later.

But Scheindlin said the Wylys took no concrete steps to sell the company until after the trades had been completed.

"While it is difficult to draw the line between inchoate desire and something more material, that line must be drawn somewhere," she wrote.

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 Bernadette Baum, G Crosse and Steve Orlofsky)

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