Louis J. Schaufele, the former Lehman Brothers Holdings Inc. and Banc of America Securities broker sued by U.S. regulators for helping Charles and Samuel Wyly employ offshore entities to mislead investors, defended the use of the companies before Congress in 2006.
“The firms that I was with knew that the Wylys were beneficial owners of these accounts, and I relied on the compliance folks for what they would recommend,” Schaufele told a U.S. Senate subcommittee examining offshore trusts, according to a transcript. “My work with the offshore companies has been subject to the compliance and guidance requirements of the firms where I’ve been employed.”
Schaufele at the time worked in Dallas for R. Allen Stanford’s Stanford Group Co. The committee in August 2006 was probing the use of offshore entities to bypass tax, securities and money-laundering laws.
Senator Norm Coleman, a Minnesota Republican, said he was concerned that transactions involving Wyly-related offshore entities “were done to circumvent or avoid federal security laws reporting.” Schaufele said he knew of no violations.
The U.S. Securities and Exchange Commission said in its July 29 fraud lawsuit that the Wylys used “an elaborate sham system of trusts and subsidiary companies” in the Isle of Man and Cayman Islands for 13 years to hide the control of securities linked to companies on whose boards they sat. They kept investors in the dark as they sold holdings, in one case making illegal insider trades, the SEC said.
The agency claimed the Wylys’ lawyer, Michael French, knew or was “reckless in not knowing” that the brothers were obligated to disclose stock transactions in regulatory filings. French’s lawyer, Robert Davis, didn’t immediately return a call seeking comment.
Schaufele, now at JPMorgan Chase & Co., was accused in the suit of using his position as the Wylys’ longtime stockbroker to deceive his bosses at Lehman and Banc of America Securities about the brothers’ control of securities held in the offshore accounts. He was also accused of illegally trading in Sterling Software Inc. stock after learning of the Wylys’ intention to make a “massive, bullish and undisclosed transaction.”
Schaufele joined JPMorgan Securities Inc. in Dallas last year. He was employed at Stanford Group from February 2005 to March 2009, according to records of the Financial Industry Regulatory Authority.
Stanford, the group’s founder and chairman, is in jail awaiting trial on charges that he defrauded investors of $7 billion, which he denies.
“I don’t think he’s in any way related” to the Stanford case, Schaufele’s lawyer, Martin Auerbach, said of his client in a July 30 phone interview. He declined to comment on the SEC’s allegations against Schaufele, who is on leave from JPMorgan.
When Stanford Group hired Schaufele, it issued a statement saying he would be “responsible for managing portfolios and investments for high net worth individuals and families.”
Schaufele previously worked for units of Bank of America Corp., Lehman Brothers and Credit Suisse Group AG in Boston and New York, according to Finra.
Shirley Norton, a spokeswoman for Charlotte, North Carolina-based Bank of America, and Darin Oduyoye, a spokesman for New York-based JPMorgan, which has acquired Lehman Brothers, declined to comment.
The Wyly brothers began setting up the offshore network in 1992, the SEC said. They established 17 trusts bearing names of personal significance, according to the agency’s complaint.
In the following years, they transferred millions of stock options and warrants they received for work as directors, the SEC said. They also added to the stockpile through other transactions, such as private offerings, it said.
$31.7 Million Profit
The brothers also used the offshore network for illegal insider trading, reaping a $31.7 million profit, the SEC said.
“In 2004, when Bank of America demanded to know the identity of the offshore entities’ beneficial owners in order to comply with the anti-money laundering provisions of the Patriot Act, Schaufele upheld his promise” to the brothers “and worked to keep the Wylys’ control over their offshore system concealed,” according to the complaint.
“He first tried to dissuade the bank from obtaining the information, then tried to move the accounts to the bank’s prime broker division,” which he believed wouldn’t request the information, the SEC said in the complaint.
The case is SEC v. Wyly, 10-cv-05760, U.S. District Court, Southern District of New York (Manhattan).