MANHATTAN (CN) - The Texas tycoons behind arts-and-crafts franchise Michaels Stores did not engage in insider trading on a $40 million off-shore deal, a federal judge ruled.
U.S. District Judge Shira Scheindlin's decision puts the final nail in the Securities and Exchange Commission's case against Samuel Wyly and the estate of his brother, Charles.
Samuel Wyly made Forbes' list as one of the richest Americans in 2012 with a net worth of $1 billion. His brother, Charles, died in a car crash in 2011, but his estate was swapped in as a co-defendant.
A jury found
the brothers liable on the SEC's first nine claims two months ago, saying that illegal trades brought the brothers $550 million. Scheindlin said she considered the trial testimony in nixing the inside-trading count Thursday.
The SEC had said that the Wylys formed a group of offshore trusts in the Isle of Man in the British Isles, used those offshore entities to trade in shares of four public companies on which they sat, and then failed to make necessary disclosures.
The four companies whose assets the brothers were convicted of hiding from 1992 to 2004 were Michaels, Sterling Software Inc., Sterling Commerce Inc., and Scottish Annuity & Life Holdings Ltd.
Scheindlin could level fines totaling hundreds of millions of dollars next month for those nine securities verdicts entered by the jury.
The inside-trading charges stemmed from discussions in late 1999 with Lehman Bros. for several offshore entities to take a long position in Sterling Software.
Wyly testified that he had recommended the investment on the belief that Sterling Software was undervalued.
He said he decided to sell Sterling Software and its spin-off, Sterling Commerce, because he believed the market's "valuation for the whole tech area [had reached] euphoric proportions," and that the electronic-commerce sector was overvalued, while Sterling Software was undervalued.
Judge Scheindlin disagreed with the SEC's claim that the Wylys and their former employee Sterling Williams discussed the sale of Sterling Software with Goldman Sachs before late November 1999.
"There is no evidence that the Wylys or Williams approached Goldman Sachs about Sterling Software before" then, Scheindlin wrote.
The SEC also argued that Sam Wyly approached Morgan Stanley to discuss the sale of the brothers' companies, including Sterling Software, in October 1999.
But the judge said a family friend - Richard Hanlon, director of Michaels - "approached Morgan Stanley to generally discuss Wyly's companies."
During that discussion in October 1999, in a presentation titled "Project Windfall," the parties discussed information using publicly available materials. Hanlon then faxed that presentation to Sam Wyly a few days later.
"There is no evidence that any concrete steps were taken as to the sale of Sterling Software by either Morgan Stanley or Goldman Sachs prior to mid to late November 1999," Scheindlin wrote.
The SEC also argued that on Oct. 8 and Oct. 20, 1999 - when the swaps were made - the Wylys "were in possession of material, non-public information concerning Sterling Software."
Scheindlin said the information in question, however, "is a not material as a matter of law and cannot be the basis for insider trading liability under Section 10(b) and Rule 10b-5."
"The SEC bears the burden of proving by a preponderance of the evidence that the Wylys' desire
to sell Sterling Software constituted material non-public information on October 8 and October 20, 1999," Scheindlin wrote [emphasis in original]. "But there is not enough in the record to justify that conclusion.
"The SEC is right that investors would probably 'want to know if the chairman and vice chairman ... of a company had agreed they were going to try to sell it.' But a fact is not material 'merely because a reasonable investor would very much like to know [it.]'"
Though a Sterling Software merger would undoubtedly create a significant impact, the probability of that event remains an important consideration, the court found.
The SEC argued that because the Wylys controlled at least five of nine seats on Sterling Software's board, its sale was inevitable.
"But there is no evidence that the Wylys acted to exert that control to pursue a sale
before November 1999," Scheindlin wrote (emphasis in original). "The Wylys did not approach the membefs of the board that they controlled ... to explore a sale."
The evidence is also insufficient "to find that the Wylys discussed the sale of the company before a retreat in mid-November," according to the ruling.
"Accepting the SEC's theory in this case would mean extending the definition of materiality to cover the thought process and personal desires of any director or shareholder with substantial control over a company," she wrote. "While it is difficult to draw the line between inchoate desire and something more material, that line must be drawn somewhere. Failing to do so would both impermissibly broaden civil and criminal insider trading liability and potentially extend the reach of other securities laws, which turn on materiality."
Stephen Susman, an attorney for Sam Wyly and the Charles Wyly estate, applauded the decision.
"While we understand that this trial process is not at an end and today's victory does not end the fight, our desire has always been to resolve this matter without burdening the judicial system further," Susman said in a statement. "We have tried in good faith to resolve this case, but the government, to date, has been unrealistic and unreasonable in what it can expect to extract from the Wyly family."
During the trial, the SEC accused the Wylys of playing a "global game of hopscotch" by hiding corporate assets in offshore accounts for 13 years.
The SEC claimed the brothers raked in hundreds of millions of dollars through more than 700 secret transactions in the Isle of Man trust, and shuffled money between the Cayman Islands and Dallas.