We’re still reading and digesting the details of the just-announced insider trading charges against Texas investors The Wyly brothers, but one thing is already clear: this is a major shot across the bow aimed at offshore tax.The whole case revolves around the allegation that the Wyly brothers were able to use their corporate board seats to trade under the radar using a network of tightly controlled (though ostensibly independent) financial institutions.
Here’s just one example of how the SEC claims the brothers flew under the radar:
In late 1995, in another example of the Wylys’ deceptive offshore allocations, the Wylys significantly expanded their Offshore System by creating five new Offshore Trusts administered by three new Offshore Trustees. Soon thereafter, the Wylys transferred offshore 2.65 million Sterling Software options, 1.35 million Michaels options, and 4.6 million Sterling Commerce Options, and also caused components of their Offshore System to enter into a private placement transaction involving 2 million
Michaels shares. The Wylys carefully allocated these securities-which respectively comprised well over 5% of’each respective Issuer’s then-outstanding securities-among multiple Offshore Trusts administered by both newly hired and pre-existing Offshore Trustees, so that none ofthe Offshore Trustees’ holdings exceeded 5% of any Issuer’s shares. By relying upon the false and fraudulent rationale that each Offshore Trustee was the sole holder such securities’ voting and investment power, the Wylys ensured that none ofthe Offshore Trustees made any Schedule 13D disclosures. And because no Schedule 13D disclosure was made initially, no subsequent 13D disclosures concerning
the frequent material changes in the Wylys’ offshore Issuer Securities holdings were made, either.
Bear in mind, this isn’t the first time the Wylys have brought themselves trouble via their offshore holdings.
In 2006, the brothers came under investigation both from prosecutors and politicians.
The Wyly trusts will be examined tomorrow at a hearing by a U.S. Senate panel called the Permanent Subcommittee on Investigations. The panel’s senior Democrat, Sen. Carl Levin of Michigan, has been probing offshore tax evasion and money laundering for several years. The panel is also looking into how the elite New York law firm Cravath, Swaine & Moore LLP provided legal advice on offshore tax shelters to wealthy individuals, people familiar with the probe say.
U.S. prosecutors and regulators already are targeting people who promote offshore tax-avoidance plans. One former lawyer for the Wyly family is now in prison on tax and fraud charges involving work for other clients, while another is under investigation by the Internal Revenue Service. The Wyly family’s affairs are now the subject of a federal grand-jury investigation in Dallas.
So at the time, it seems, that the controversy involved possible tax avoidance. These new civil charges from the SEC would seem to raise the stakes.