Opinion ID: 3163898
Heading Depth: 2
Heading Rank: 2

Heading: Post‐Trial Procedural History

Text: Following the jury’s liability determination, the District Court entered a complex remedies phase to quantify the Wylys’ ill‐gotten gains and to determine whether and how much the Wylys should be required to disgorge. In the remedies phase, which was tried to the bench, the SEC proposed seven theories pursuant to which the Wyly Brothers should be required to pay disgorgement. Ultimately, the District Court accepted two alternative measures of the Wyly Brothers’ disgorgement liability in separate opinions of September 24, 2014 (the “September disgorgement opinion”) and December 19, 2014 (the “December disgorgement opinion”).3 In its September disgorgement opinion, the District Court treated as a reasonable measure of disgorgement the “amount equivalent to the taxes avoided on the profits the Wylys realized on The District Court rejected outright several other theories of 3 disgorgement as counterfactual or untimely, and the SEC voluntarily withdrew one disgorgement theory. 7 the sale of Issuer securities.”4 The District Court emphasized that the tax figure represented merely a “measure of disgorgement,” not an independent assessment of the Wyly Brothers’ tax liability, which the Court recognized would be determined in a separate “IRS civil proceeding.”5 The September disgorgement opinion also ordered disgorgement of a certain percentage on profits of trading unregistered securities. In total, it ordered disgorgement of $299,357,243.80.6 The December disgorgement opinion set forth an alternative calculation, to be used only if the September disgorgement measure later failed on appeal. This alternative calculation measured the unjust enrichment as the difference between the Wyly Brothers’ rate of return from their offshore trading and the average market rate of return for those stocks during the relevant period. In other words, this calculation “compare[d] the Wylys’ rate of return to that of an average buy‐and‐hold investor,” and thereby “reasonably approximate[d] the economic value of the Wylys’ securities violations—their ability to trade in secret while having an 4 SEC v. Wyly, 56 F. Supp. 3d 394, 431 (S.D.N.Y. 2014). Id. at 427, 431. The District Court explicitly indicated that “any amounts 5 disgorged in this case should be credited towards any subsequent tax liability determined in an IRS civil proceeding as a matter of equity.” Id. at 427. The September disgorgement opinion ordered disgorgement of 6 $187,233,693 in ill‐gotten gains, plus $112,123,550.80 in prejudgment interest, for a total of $299,357,243.80. Id. at 434; J.A. 1584. 8 informational advantage over the investing public.”7 The District Court made clear, however, that the measure of disgorgement imposed by the September opinion “represents the best measure of the Wylys’ ill‐gotten gains,” and thus held that the disgorgement described in the December opinion “may only be imposed in the event that a higher court disagrees with the measure of disgorgement imposed by the September 25 Order.”8 Meanwhile, on October 8, 2014—shortly after the issuance of the September disgorgement opinion—the SEC requested by pre‐ motion letter an order for a temporary asset freeze, expedited financial discovery, an accounting of the Wyly Brothers’ assets, and a freeze of those assets possessed by Wyly family members who had allegedly received ill‐gotten gains traceable to the Wyly Brothers’ fraud.9 In its pre‐motion letter, the SEC expressed “particular[] concern[] about the potential dissipation of assets” by “third parties, such as the Wylys’ family members and the offshore trustees.”10 Accordingly, the SEC requested an asset freeze applicable not only to Sam Wyly and the estate of Charles Wyly, but also extending to third parties, including family members, heirs, agents, and SEC v. Wyly, 71 F. Supp. 3d 399, 403‐04 (S.D.N.Y. 2014). The total 7 amount of disgorgement under this alternative measure was calculated to be $174,967,561. SEC v. Wyly, No. 10 Civ. 5760 (SAS), 2015 WL 427423, at  (S.D.N.Y. Feb. 2, 2015). 8 Wyly, 71 F. Supp. 3d at 404. 9 J.A. at 1554‐55. 10 Id. at 1554. 9 trustees.11 By letter of October 14, 2014, counsel representing the Wyly Brothers’ interests opposed any order binding upon Wyly family members on the ground that the family members had not yet been named as relief defendants.12 Counsel representing the Wyly family members submitted letters on the same date joining in the Wyly Brothers’ opposition to the SEC’s request.13 On October 19, 2014, while the SEC’s request for an asset freeze was still pending, Samuel Wyly filed a petition in Bankruptcy Court for Chapter 11 protection. On October 23, 2014, Caroline Wyly, the widow of Charles Wyly and principal heir of his estate, filed her own bankruptcy case. The Wylys immediately argued to the District Court that the SEC’s then‐pending motion for an asset freeze must be automatically stayed by operation of Bankruptcy Code § 362.14 Before adjudicating the SEC’s motion for an asset freeze, the District Court held multiple hearings and entertained written submissions from all parties that would be affected by the freeze, including non‐defendant family members not yet parties to this action. On October 24, 2014, at the suggestion of the District Court and after objections from defendants and their families, the SEC 11 Id. 12 Id. at 1569‐71. 13 Id. at 1578‐82. 14 Id. at 1678‐83, 2011‐14. 10 filed an amended complaint adding sixteen Wyly family members— the wives, daughters, sons, and sons‐in‐law of Samuel and Charles Wyly—as Relief Defendants.15 The amended complaint principally alleged that the Relief Defendants are in possession of ill‐gotten gains stemming from the Wyly Brothers’ fraud.16 On November 3, 2014, the District Court granted the SEC’s requests for an asset freeze, expedited discovery, and an accounting of the Wyly Brothers’ assets.17 The freeze order extended to assets of the family‐member Relief Defendants “which were, at any time, the property of the IOM Trusts and Companies” and any other assets received from the Wyly Brothers after January 1, 2005.18 The asset freeze explicitly exempted any income or assets not derived or received from the IOM trusts or the Wylys.19 Additionally, the freeze carved out living expenses of $15,000 per month ($180,000 per annum) for each Relief Defendant except Caroline Wyly, in addition to all medical expenses, all tuition and education‐related expenses, all taxes, reasonable legal fees and expenses, and certain bankruptcy‐related expenses.20 The freeze order also indicated that the District Court would resolve on a case‐by‐case basis further 15 Id. at 1811‐28. 16 Id. 17 Special App’x at 1‐9. 18 Id. at 3. 19 Id. at 4‐5. 20 Id. at 5. 11 requests for exemptions regarding the Relief Defendants’ real estate holdings.21 Since the entry of the asset freeze order, the District Court has approved multiple further accommodations for the Relief Defendants without objection from the SEC. The District Court crafted the asset freeze order with an eye towards “working harmoniously and cooperatively with the bankruptcy court in Texas.”22 Accordingly, the Court ordered that the asset freeze remain in place only “until such time as . . . [the] assets have been scheduled and thereby are clearly under the control of the Bankruptcy Court.”23 By its terms, the asset freeze “will dissolve” as soon as the assets are under the Bankruptcy Court’s control.24 Also on November 3, 2014, the District Court issued an accompanying opinion explaining the legal basis for the asset freeze order.25 In that opinion, the District Court held that the Bankruptcy Code’s automatic stay provision did not preclude the entry of its 21 Id. 22 J.A. at 1792. 23 Special App’x at 4. Id. Ultimately, it will be the task of the Bankruptcy Court, not this one, 24 to determine the scope of the bankruptcy estate. The asset freeze order thus provides that, when the Bankruptcy Court establishes control over all the assets contained within the estate, the order at issue will dissolve, and the Bankruptcy Court will continue its work without the involvement of the District Court. Id. 25 SEC v. Wyly, 73 F. Supp. 3d 315 (S.D.N.Y. 2014). 12 asset freeze order, pursuant to this Court’s controlling precedent in SEC v. Brennan.26 The District Court reasoned that, in seeking the asset freeze order, the SEC was “acting in its police and regulatory capacity,” and thus the Bankruptcy Code’s automatic stay did not apply.27 Having found no legal bar to issuing the asset freeze, the District Court further concluded that the freeze was warranted because the bankruptcy proceedings, then in their infancy, had not yet established control over the Wyly Brothers’ assets, which remained at risk of transfer and dissipation, including by third parties offshore.28 Finally, the District Court determined that the SEC was likely to show that the family‐member Relief Defendants had received ill‐gotten gains without any legitimate claim to those assets, fulfilling the applicable standard set forth in SEC v. Cavanagh.29 This appeal was then taken by all of the Relief Defendants except Caroline Wyly, the widow of Charles Wyly and beneficiary of his estate. She sought relief in the Bankruptcy Court instead. On January 9, 2015, the Bankruptcy Court rejected Caroline Wyly’s argument that the automatic stay barred the SEC’s action against her as a relief defendant.30 Instead, the Bankruptcy Court ruled that, in 26 230 F.3d 65 (2d Cir. 2000). 27 Wyly, 73 F. Supp. 3d at 320. 28 Id. at 320‐21. 29 155 F.3d 129 (2d Cir. 1998). 30 In re Wyly, 526 B.R. 194 (Bankr. N.D. Tex. 2015). 13 seeking the asset freeze, the SEC was acting in its police and regulatory capacity, and it declined to enforce the automatic stay against the SEC.31