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Oct 22

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SEC Wins with Tax Avoidance Approach to Disgorgement

The Securities and Exchange Commission (“SEC”) has been awarded a substantial win in its civil enforcement action against Samuel Wyly and Donald R. Miller, Jr. as the Independent Executor of the Will and Estate of Charles J. Wyly Jr. (the “Wylys”). The Court ordered the Wylys to pay a total of $188 million plus pre-judgment interest associated with (i) their use of offshore trusts and subsidiary entities to trade in shares of four public companies they had acquired or founded and on whose boards the Wylys sat (collectively described as the “Issuers” and including Michaels Stores), and (ii) their failure to properly disclose their beneficial ownership of that stock.

The SEC won liability in the bifurcated civil enforcement action and sought an order of disgorgement in an August bench trial.  Disgorgement is an equitable remedy to deprive a defendant of any ill-gotten gains, often called unjust enrichment.  It is an economic calculation which captures the incremental profits obtained through wrongful activity.  Although the avoidance of taxes is not usually a measure of damages, the SEC’s disgorgement calculation, largely accepted by the Court, included the following components:

1)    $194 million in unpaid taxes for gains on the sale of registered Issuer securities, plus $289 million in prejudgment interest, and

2)    $65 million in profits made on the sale of unregistered Michaels Stores stock, plus $71 million in prejudgment interest.

This is an interesting case since, as described by the Wylys, “no court has ever before approved the use of… any analogous indirect measure of unjust profits.”  This link provides additional information regarding the case particulars and the disgorgement calculation. 

About the author

Renee Howdeshell

Renee Howdeshell is a founding member of Fulcrum Inquiry, an accounting, finance and economic consulting firm that performs damage analyses for commercial litigation, forensic accountings, royalty & distribution audits, financial investigations, and business valuations. Ms. Howdeshell holds a degree in Finance and Marketing from the University of Virginia's McIntire School of Commerce and is a Certified Public Accountant (CPA) and a Certified Fraud Examiner (CFE). She has testified as an expert witness in federal court, CA state court and arbitration regarding the results of her work. She can be reached at (213) 787-4112 and her resume is available at www.fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2014/10/sec-wins-with-tax-avoidance-approach-to-disgorgement/

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