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After years of probes, SEC fraud trial over Texas tycoons to start

A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June
A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June

By Nate Raymond

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission faces off against wealthy Texas investor Samuel Wyly and the estate of his late brother, Charles, this week in a trial over long-standing accusations that they engaged in a $550 million fraud.

Jury selection is set to begin Monday in a federal court in New York in what is expected to be the biggest test this year of the SEC's ability to hold individuals accountable at trial, following a recent series of disappointing verdicts in fraud and insider trading cases.

The trial is the culmination of years of litigation and investigations by the SEC of the Wylys. The case has continued even after Charles Wyly died in a car crash in August 2011, with his estate substituted for him.

The SEC accuses the Wylys of concealing stock trading from 1992 to 2004 in Sterling Software Inc, Michaels Stores Inc, Sterling Commerce Inc, and Scottish Annuity & Life Holdings Ltd through the use of offshore trusts and entities.

The SEC also contends the Wylys earned $31.7 million from insider trading in Sterling Software after deciding to sell the company in 1999.

The Wylys have denied wrongdoing, saying they were not the beneficial owners of the stock held in the trusts, which they say were established for their families for tax purposes. The Wylys also have said they were advised by their lawyer that they did not need to disclose the trusts' holdings and sales.

So old is the case that the law has shifted under the SEC, after a U.S. Supreme Court case last year restricted it from pursuing civil penalties for much of the period in question.{ID:nL1N0EI1LF]

As a result, the case has been cut in two, with part of the lawsuit to be heard by U.S. District Judge Shira Scheindlin after the jury rules in the first part. The jury will consider charges stemming from the failure to disclose the trusts and the trading in them.

The judge will decide the insider trading claims and will also determine any penalty that might be warranted from the jury's verdict.

The SEC and Samuel Wyly had been engaged in settlement talks ahead of trial, with the regulator demanding an admission of wrongdoing as part of its shift in settlement terms under Chair Mary Jo White.

But Samuel Wyly, 79, and his brother's estate decided instead to go to trial, despite facing what their lawyer Stephen Susman in court in February called a "huge" demand for money running into the hundreds of millions of dollars. Susman declined to comment.

WEALTHY BROTHERS

Long before the case was filed, the Wyly brothers made a name for themselves as large donors to charitable and conservative causes after striking it rich with a series of business and investment ventures.

In his 2008 autobiography, Samuel Wyly said he became a millionaire at age 30, and by 35, "I had more money, power and fame than most ever wish for." He last appeared on Forbes' list of the 400 richest Americans in 2010 with a net worth of $1 billion.

Among the companies behind the brothers' fortunes was Sterling Software, which they co-founded in 1981 and which was sold to Computer Associates Inc for $4 billion in 2000.

Michaels Stores, which the Wylys bought in 1983 and where both served as chairman at various points, was taken private by Blackstone Group LP and Bain Capital LP in 2006 for $6 billion.

The Wyly family was also involved in the 1993 launch of Maverick Capital, a $9 billion hedge fund headed by Lee Ainsilie.

But the reputations of the Wylys became tainted starting in 2005, when Michaels Stores disclosed that the Manhattan district attorney's office and the SEC had opened probes related to offshore trusts that held shares of the company. Allegations later emerged regarding shares of other companies.

The trusts also became the subject of a federal grand jury probe, regulatory filings state, and was the focus of a 2006 report by the U.S. Senate Permanent Subcommittee on Investigations about tax havens.

No criminal case emerged. But the SEC finally sued the Wylys in 2010 in what became one of the bigger cases it pursued in the wake of criticism of lax enforcement and its failure to discover Bernard Madoff's Ponzi scheme.

CO-DEFENDANTS' SETTLEMENTS

The case marked a second run-in between the SEC and Samuel Wyly, who in 1979 agreed to settle charges he made undisclosed payments to encourage the buying of bonds of computer services company Wyly Corp.

Until earlier this year, the Wylys were also going to trial in a more recent case alongside Louis Schaufele, their former stockbroker, and Michael French, their former attorney who served as a director and consultant on several of their companies.

Both recently settled charges stemming from their roles in the alleged fraud. Schaufele, who worked for the Wylys while at Credit Suisse First Boston, Lehman Brothers Holdings Inc and Bank of America Corp, agreed in January to pay $498,693.

French, a former partner at the law firm Jackson Walker and onetime chief executive of Scottish Re Group Ltd, agreed on March 20 to pay $794,609 and admit wrongdoing.

Both French and Schaufele are listed as possible witnesses, as is Wyly himself. Wyly's attorneys, though, have indicated he would testify only up to two hours at a time due to medical issues. His exact condition is unclear from the court record.

The case is SEC v. Wyly et al, U.S. District Court, Southern District of New York, No. 10-05760.

(The story was refiled to add dropped words "be the" in second paragraph)

(Reporting by Nate Raymond; Editing by Dan Grebler and Cynthia Osterman)

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