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SEC charges billionaire Texas brothers who donate to GOP with fraud

By Zachary A. Goldfarb and Philip Rucker
Washington Post Staff Writer
Friday, July 30, 2010; A01

Sam and Charles Wyly, billionaire Texas brothers who gained prominence spending millions of dollars on conservative political causes, committed fraud by using secret overseas accounts to generate more than $550 million in profit through illegal stock trades, the Securities and Exchange Commission charged Thursday.

The Wylys, who have been generous contributors to the Republican Party and GOP candidates, have spent the past several years facing questions, including from a Senate investigative committee, about whether they hid millions of dollars in tax shelters abroad.

Through their lawyer, the Wylys denied all charges.

According to the SEC, the brothers, who live in Dallas, created an elaborate and clandestine network of accounts and companies on the Isle of Man and in the Cayman Islands. The brothers then used these accounts and companies to trade more than $750 million of stock in four public companies on whose boards they served, not filing the disclosures required for corporate insiders, the SEC said.

In one case, the SEC alleges that the Wylys traded based on insider information they learned as board members, netting a profit of $32 million.

"The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws," Lorin L. Reisner, deputy director of SEC enforcement, said Thursday in a statement announcing the civil charges.

The agency is seeking unspecified financial penalties and a variety of other sanctions, including barring the Wylys from serving as directors or top executives of public companies.

William Brewer III, a lawyer representing the Wylys, said they intend to clear their name.

"After six years of investigations, the SEC has chosen to make claims against the Wyly brothers -- claims that, in our view, are without merit," Brewer said in a statement. "It will come as little surprise to those who know them that the Wylys intend to vigorously defend themselves -- and expect to be fully vindicated."

Charles Wyly, 76, and Sam Wyly, 75, have led a largely reclusive life, with their public persona defined by their political activities. Charles Wyly and his wife, Dee, have given more than $1.5 million to more than 200 Republican candidates, party committees and conservative political action committees over the past 20 years, according to an analysis by the Center for Responsive Politics. Sam Wyly and his wife, Cheryl, gave more than $970,000 over the same period, the analysis shows.

The Wylys have given to dozens of Republican candidates, none more so than the Bush family. The brothers were supporters of the campaigns of former President George H. W. Bush and his son, former President George W. Bush.

In 2000, the Wylys financed a third-party group, Republicans for Clean Air, that launched a television advertising broadside against George W. Bush's chief opponent, Sen. John McCain (R-Ariz.), on the eve of crucial GOP presidential primaries. Later that year, the brothers each gave $100,000 to fund Bush's inaugural festivities.

In 2004, the Wylys helped fund Swift Boat Veterans for Truth, another third-party organization that ran controversial television ads attacking the military record of Sen. John F. Kerry (Mass.), Bush's Democratic opponent.

"They are among the biggest of the big when it comes to campaign bank-rollers, and their donors list is a who's who of the Republican Party over the past decade," said Dave Levinthal, a spokesman at the nonpartisan Center for Responsive Politics. "It's almost hard to find prominent Republicans who haven't been a beneficiary of their financial largess. They've definitely been very kind, financially speaking, to a number of Republicans."

Their biggest beneficiaries include three Texas Republicans, Sen. Kay Bailey Hutchison, National Republican Congressional Committee Chairman Pete Sessions and former House Republican leader Richard K. Armey, according to the Center for Responsive Politics analysis. The Wylys also have given to Senate Minority Leader Mitch McConnell (Ky.), former New York mayor Rudolph W. Giuliani and many other members of the GOP.

Both brothers, according to Forbes magazine, are billionaires who amassed their fortune by founding a computer company and investing in a wide range of interests including oil, insurance and restaurants. In 1979, Sam Wyly faced sanctions by the SEC for improper regulatory disclosures.

They have been the subject of probes into potential financial wrongdoing since then. In 2006, the Senate permanent subcommittee on investigations completed a report on tax havens that focused on the Wylys.

Over 13 years, the Wylys used an "armada" of lawyers, brokers and other professionals to manage hundreds of millions of dollars in transactions that amounted to "the most elaborate offshore operations reviewed by the Subcommittee," according to the panel's report.

In announcing its case, the SEC alleged that the Wylys' improper trades benefited them in many ways. They used the proceeds to buy art, collectibles, and jewelry worth tens of millions of dollars, according to the complaint. They spent $100 million to buy real estate, including two ranches in Aspen, Colo., two condominiums in Aspen, and a 100-acre horse farm outside Dallas. They also used the proceeds to cover charitable contributions made by the Wylys, including $8 million to Sam Wyly's business school alma mater and a $2.5 million contribution to a church Charles Wyly attended.

The agency alleges that the Wylys committed fraud and various other violations of securities laws while sitting on the boards of four companies over the course of a decade: Michaels Stores, Sterling Software, Sterling Commerce and Scottish Annuity & Life Holdings.

The SEC says that by using offshore accounts to trade shares of these public companies, the Wylys were able to escape filing the regulatory disclosures required of board members when they buy or sell shares.

By keeping their trading activity secret, the Wylys deprived outside investors of information they could use "to gauge the sentiment of public companies' insiders and large shareholders about the financial condition and prospects of those companies," the SEC said.

In one instance, the Wylys used insider information to make an offshore purchase of shares in Sterling Software, where they served as chairman and vice chairman, according to the complaint. They did not disclose the purchase even though they knew the company was soon going to be sold, according to the SEC. Less than four months later, Sterling Software was sold, and the Wylys netted nearly $32 million.

"The Wylys have always received the advice and counsel of leading accounting and legal professionals," said Brewer, the brothers' attorney in the SEC matter. "They have never been given any reason to believe the financial transactions in question were anything other than legal and fully appropriate."

The SEC also charged the Wylys' longtime personal attorney, Michael French, and their stockbroker, Louis Schaufele III, for their roles in the alleged scheme. French also served on the board of three of the companies.

A lawyer for French did not return calls or e-mails seeking comment. A lawyer for Schaufele declined to comment.

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