The widow of investor Charles Wyly filed for bankruptcy in Dallas, four days after a similar filing by her brother-in-law Samuel Wyly, following a court verdict that left the brothers facing a forfeiture of about $300 million.
Caroline Wyly, 81, owes $101.2 million to the Securities and Exchange Commission, which won the jury trial against the Wyly brothers in May over allegations that they ran a stock fraud that generated $550 million in illegal trading profits, according to a Chapter 11 petition filed in U.S. Bankruptcy Court in Dallas. Sam Wyly’s bankruptcy was filed in the same court, citing a need to preserve assets.
In New York, the federal judge who presided over the jury trial expressed frustration with the bankruptcy filings on Thursday, saying they won’t block the SEC’s case against the Wylys from going forward. U.S. District Judge Shira Scheindlin also said she will temporarily freeze the Wylys’ assets.
“I’m not very happy now, as you might suspect,” Scheindlin said during a hearing.
Scheindlin agreed to the SEC’s requests for the asset freeze and for expedited fact-finding and an accounting of the Wylys’ assets.
“An injunction must be issued that protects assets that might be depleted or dissipated before a final judgment” in the SEC case, Scheindlin told lawyers.
Scheindlin also rejected the Wylys’ argument that the $300 million forfeiture may violate a provision in the Constitution barring the imposition of excessive fines.
The brothers, who gained prominence developing companies including Bonanza Steakhouse and Michaels Stores, perpetrated the fraud for 13 years, according to the SEC. They also profited from using information gained from sitting on the board of Sterling Software and accumulating shares ahead of the company’s sale to Computer Associates International, the agency said.
The SEC has already challenged the legitimacy of Samuel Wyly’s bankruptcy, saying in a filing on Tuesday that the 80-year-old billionaire investor is using Chapter 11 to make an “end run” around the regulator’s enforcement action. The agency is still trying to determine whether his filing was made in good faith, according to court papers.
The SEC has also targeted Samuel Wyly’s personal spending, which it called “unnecessary and lavish.” His budget needs approval from a bankruptcy judge if he’s to spend the money. Caroline Wyly hasn’t filed a budget yet in her case.
Charles Wyly was killed in an auto accident in 2011, a year after the SEC sued the brothers and accused them of using offshore trusts in the Isle of Man to trade secretly in shares of four public companies on whose boards they sat.
Caroline Wyly’s lawyer, Eric Soderlund, declined to comment on the bankruptcy filing.