SEC prevails on two disgorgement theories in Wyly securities law case

SEC v. Wyly, 2014 U.S. Dist. LEXIS 175940 (Dec. 19, 2014) and SEC v. Wyly, 2014 U.S. Dist. LEXIS 135671 (Sept. 25, 2014)

The offshore trading litigation involving the billionaire Wyly brothers and the SEC (and in a separate proceeding the IRS) is noteworthy for many reasons, not least the scale of the securities law violations and the SEC’s request for an order of over $200 million in disgorgement.

Valuation experts working on securities law cases will be interested in the two disgorgement theories the SEC proposed to the court. In its civil enforcement action, the SEC alleged the defendants carried out a 13-year-long tax deferral scheme that involved a number of offshore trusts and subsidiary companies on whose boards they were and which they used to trade in secret to amass tremendous tax-free wealth.

In a bifurcated trial, a jury found the defendants liable on nine violations, including fraud under section 10(b) of the Securities Exchange Act and failure to make various disclosures. A bench trial to determine remedies followed in which the SEC initially persuaded the court to order disgorgement based on unpaid taxes related to profits made from the options and stock transactions of the four companies in which the defendants were “influential insiders.”

But in the event that the SEC’s tax-based theory did not survive an appeal, the court recently approved a backup theory, which calculated disgorgement based on trading profits. According to the SEC’s expert, this model measured the benefit to the Wylys resulting from a lack of disclosure. It compared the Wylys’ actual trading to a buy-and-hold benchmark to capture the difference between what the Wylys actually earned and what they would have earned if they had been buy-and-hold investors.

Read more about the methodology and the court’s response here.