Attorneys for Samuel E. Wyly (“Sam Wyly”) and his late brother Charles J. Wyly (“Charles Wyly”) (jointly, the “Wylys”) presented arguments to a U.S. District Judge disputing the amount the Wylys are being ordered to pay for their role in a fraudulent offshore operation. The Securities and Exchange Commission (“SEC”) has requested $729 million in damages from the Wylys related to “a 13-year fraudulent scheme to hold and trade tens of millions of securities of public companies while they were members of the boards of directors of those companies, without disclosing their ownership and their trading of those securities.” The fraudulent activity used a system of trusts in the Isle of Man and the Cayman Islands to hide their ownership and control of the Issuers’ securities.

The Wylys attorney, Harry Susman (“Susman”), argued that the penalty would bankrupt the Wylys, whose combined net worth is $119 million. The penalty is made up of a $51 million civil penalty and up to $678 million disgorgement. Susman stated that “the demand was excessively punitive and unsupported by the law.” The SEC initially sought $1.4 billion in disgorgement.

Bridget Fitzpatrick (“Fitzpatrick”), a lawyer for the SEC, contends that the penalty is fair considering the $553 million in profits the Wylys gained as a result of the scheme. The damages the SEC is seeking are equivalent to unpaid taxes due to the Internal Revenue Service. Susman argues that the SEC “should be barred from doing so because federal law only permits the IRS to assess tax penalties.” Fitzpatrick responded by saying they are not seeking to recover the tax penalty, but rather, using it gauge the total amount of the penalties.

There is definitely a trend in seeing higher penalties in enforcement cases than ever before and with few checks and balances in place, this is likely to continue.

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