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Texas tycoons Wylys should pay $750 mln for fraud, SEC tells judge

NEW YORK (Reuters) – Texas tycoon Sam Wyly and his late brother Charles’ estate should pay about $750 million in damages for their role in a fraudulent offshore tax scheme, a lawyer for the U.S. Securities and Exchange Commission told a judge in New York on Monday.

“There was a decision to violate the law here, Your Honor, and that decision was made in part because Sam Wyly knew it would be profitable, even if he were caught,” Bridget Fitzpatrick said at the outset of a trial to determine the amount of damages the Wylys must pay after a jury found them liable for fraud in March.

But lawyers for the Wylys have said in court papers the appropriate penalty is $1.38 million, arguing the SEC’s theory of disgorgement is unsupported by the law.

U.S. District Judge Shira Scheindlin is overseeing the nonjury trial, which is expected to last three days.

A federal jury found the Wylys liable for a system of offshore trusts in the Isle of Man that netted the brothers $553 million in profits through hidden trades between 1992 and 2004 in companies they controlled.

Last month, Scheindlin cleared the Wylys of insider trading after a one-day nonjury trial. That claim, however, was only a small part of the case, which the SEC brought in 2010 after years of investigation.

The four companies involved in the offshore transactions were Sterling Software Inc, Michaels Stores Inc, Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd, now Scottish Re Group Ltd.

On Monday, Fitzpatrick said the SEC should be entitled to collect all unpaid taxes on the scheme’s profits, plus interest, because the Wylys’ failure to disclose their control of the trusts effectively fooled the government into accepting they owed no taxes.

But the Wylys’ lawyers have argued the SEC cannot step into the shoes of the Internal Revenue Service.

Fitzpatrick acknowledged the SEC’s tax-based theory of disgorgement is “novel” but nevertheless appropriate, given that the trusts were constructed explicitly to gain tax benefits.

The SEC originally sought as much as $1.4 billion, based on every dollar of profit earned through the trusts, but Scheindlin last week barred the agency from pursuing that theory.

Sam Wyly, 79, last appeared on Forbes’ list of the 400 richest Americans in 2010 with a net worth of $1 billion. His brother Charles died in a car crash in 2011.

The case is U.S. Securities and Exchange Commission v. Wyly et al, U.S. District Court for the Southern District of New York, 10-5760.

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