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From Securities Regulation Daily, February 27, 2015

Judge sets terms of $299 million judgment against Wylys

By Mark S. Nelson, J.D.

A federal judge in Manhattan this week signed off on the terms of the SEC’s final judgment against Samuel E. Wyly and the estate of Charles J. Wyly, Jr. in the agency’s long-running securities fraud case against the two brothers. Depending upon the outcome of a future Internal Revenue Service (IRS) finding, the Wylys may end up paying a combined total of between $198 to $299 million (SEC v. Wyly, February 26, 2015, Scheindlin, S.).

According to an opinion by Judge Shira A. Scheindlin, a key issue in reaching the final judgment had to do with whether the SEC might get paid twice. The SEC argued that it should get any amount paid to the IRS above that imposed by a December 2014 court order. The Wylys objected that the agency’s plan violated the doctrine of election of remedies.

But Judge Scheindlin found this doctrine inapt because she had forged consistent, alternative payment scenarios in a pair of orders she issued last year. A September order allowed for disgorgement based on taxes the Wylys avoided, and a December order set the disgorgement amount based on the difference between the Wylys’ trading profits and the gains of an ordinary buy-and-hold investor. The December order’s measure of disgorgement would apply only if an appeals court vacated the September order.

Moreover, Judge Scheindlin resolved issues regarding the structure of the offset and the language of the payment terms. Sam Wyly is permanently enjoined from violating the federal securities laws cited by the SEC in its case against him. He is also permanently barred from being an officer or director of a company that is registered or reports to the SEC under the Exchange Act.

Judge Scheindlin’s final judgment also deals with bankruptcy issues, including use of the automatic stay, and clarifies the court did not view the final judgment as a “collection” by the SEC against Sam Wyly. Still other terms govern how the final judgment applies to Charles Wyly’s estate and to the bankruptcy filing of his widow, Caroline D. Wyly.

The case is No. 10-cv-5760.

Attorneys: Daniel Staroselsky and David J. Gottesman for the SEC. David Leon Kornblau (Covington & Burling LLP) for David Matthews. Donald P. Lan, Jr. (Kroney Morse Lan, P.C.) for Samuel E. Wyly.

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