Wyly Family Loses Bid to Unfreeze Assets Tied to Stock Fraud

  • Order came after Sam Wyly held liable for hidden trades
  • Family members claimed seizure order unfairly harmed them

The relatives of former billionaire entrepreneur Samuel Wyly can’t expect a thaw any time soon in an order freezing their assets in connection with a jury’s finding that the family’s patriarch ran an offshore stock-fraud scheme.

The order, temporarily locking up the assets of Wyly, his late brother Charles and 16 family members, doesn’t violate federal bankruptcy law, an appeals court ruled Friday in a win for the U.S. Securities and Exchange Commission. The Wylys face a demand from the government that they forfeit money illegally reaped from the 13-year fraud operation.

The family “has no legitimate claim” to tainted funds generated by fraudulent stock sales, the appeals court said in its ruling. A jury concluded last year the Wyly brothers used a web of offshore trusts to hide their stock holdings and evade trading limits, generating as much as $550 million in ill-gotten gains.

The U.S. Court of Appeals for the Second Circuit did order U.S. District Judge Shira Scheindlin in Manhattan to take another look at whether there is evidence that seven Wyly family members got funds from the fraud and should continue to have their assets frozen.

Family Encouraged

“We are encouraged that the Second Circuit recognized the lack of evidence against many of the” family members, David Kornblau, their lawyer, said in a statement. SEC officials declined to comment on the ruling.

Scheindlin placed the freeze order on the family after Wyly, who helped develop companies such as arts and crafts retailer Michaels Stores Inc., and his brother’s estate said they couldn’t pay the estimated $300 million in penalties in the stock-fraud case.

In seeking the freeze, the SEC had said members of the Wyly family spent an illegally acquired fortune on private aircraft, clothing, cars, artwork, jewelry and a horse farm. The regulator feared the Wylys would further deplete the resources needed to pay the fine. The family members challenged Scheindlin’s extension of the freeze order, saying it improperly harmed innocent third parties.

Sam Wyly and and his late brother’s wife, Caroline, both filed for bankruptcy last year after Scheindlin’s ruling, citing a need to preserve assets. Charles Wyly was killed in a 2011 car wreck.

The lower-court case is SEC v. Wyly, 10-cv-05760, U.S. District Court, Southern District of New York (Manhattan).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE