Wyly Family Fights SEC Asset Freeze in $550 Million Fraud

The children of craft store kingpins Charles and Sam Wyly say they shouldn’t suffer for their fathers’ transgressions.

The U.S. Securities & Exchange Commission says they shouldn’t be allowed to spend the proceeds of the brothers’ fraud.

The Wyly brothers used gains from secret, illegal, offshore transactions “as their own personal piggy bank,” the SEC had said ahead of a Wednesday appeals hearing in New York where the family sought to lift a judge-imposed freeze on its assets.

U.S. District Judge Shira Scheindlin’s order against 16 people, including both men’s wives and 10 children, unfairly applies to “any asset that was acquired or commingled with funds received from the Wyly Brothers at any time during the past 10 years,” the family said.

“It was a shotgun approach,” David Kornblau, a lawyer for Wyly family members, said at the hearing.

Kornblau argued that if the Wyly brothers gave money to their children decades ago, they shouldn’t have to return it now.

“It depends on the gift,” said Judge Rosemary Pooler, one of three hearing the case. “If it’s a bottle of perfume, perhaps you’re right, but if you’re gifted $23 million, perhaps you’re wrong.”

The appeals panel, which also included judges Jose Cabranes and Christopher Droney, didn’t immediately rule.

$300 Million Penalty

The SEC won the freeze on the family assets as it seeks to collect a $300 million penalty levied on the Wyly brothers, following a trial in which a federal jury found they perpetrated an offshore stock-trading fraud for 13 years.

The SEC said the fraud yielded them $550 million in illegal profits.

Each of the Wyly relatives is allowed $15,000 a month for living expenses and items such as education, taxes and legal fees, under the freeze order.

After the verdict, Scheindlin ordered Sam Wyly and the estate of Charles, who was killed in a 2011 auto accident, to return $299.4 million, one of the largest such penalties against individual defendants. Sam Wyly then filed for bankruptcy, followed by Caroline Wyly, Charles’s widow.

The SEC sought the freeze, saying members of the Wyly family spent an illegally acquired fortune on private aircraft, clothing, cars, artwork, jewelry and a horse farm. With regulators arguing they might deplete resources needed to pay the fine, the judge extended the asset freeze in October.

Asset Dissipation

“Judge Scheindlin said there needs to be a freeze to prevent the dissipation of assets by third parties,” Daniel Staroselsky, an SEC lawyer, told the appeals panel.

“The district court’s finding wasn’t a shotgun,” he said. “There was an afternoon of testimony about how the family benefited.”

Evidence of recent transfers cited by Scheindlin included one trust’s $27 million distribution to Charles Wyly’s children and the use of $10 million to establish a family trust in the Cook Islands.

Wyly family spreadsheets showed it had net assets of $1.4 billion in 2004, according to the SEC.

The SEC had said Wyly’s children live in customized homes on a Colorado ranch without paying for maintenance, utilities, snow removal, cleaning or Internet.

The ranch, located high in the Rocky Mountains about 10 miles (16 kilometers) from Aspen, includes six new homes, various historic structures, a barn and other outbuildings, according to Wyly.

Family Spending

Staroselsky told the appeals court Wednesday that Scheindlin found that Wyly family members were spending $50 million a year in assets.

“The family benefited, this is clear,” he said, and quoted Scheindlin as saying of Wyly family members benefiting from the offshore trusts established by the brothers, telling Wyly lawyers, “C’mon, I had a whole trial about this.”

The bankruptcy case is In re Samuel E. Wyly, 14-bk-35043, U.S. Bankruptcy Court, Northern District of Texas (Dallas). The SEC lawsuit is SEC v. Wyly, 10-cv-05760, U.S. District Court, Southern District of New York (Manhattan).

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