University donor accused of hundreds of millions of dollars in fraud

Michael Zamora/AP
Samuel Wyly and his brother, Charles, have been accused of insider trading and securities fraud by the SEC. Buy this photo

By Kyle Swanson, Daily News Editor
Published August 1, 2010

A prominent University donor is facing serious scrutiny from the Securities and Exchange Commission after questions have surfaced about the legality of several of his investment practices and transactions.

According to documents filed with the Federal District Court in Manhattan, University alum Samuel Wyly and his brother, Charles, are at the center of an SEC investigation. The SEC’s complaint filed with the court alleges insider trading and securities fraud at companies where the Wylys served on the boards of directors.

Samuel Wyly is a notable figure on the University’s campus, having donated $10 million in 1997 to help build the Business School’s Sam Wyly Hall — a facility that cost approximately $20 million to construct. At the time, the gift was the largest ever given by a donor to the school for facility construction.

The SEC is alleging that, through an extensive financial network in the Caymen Islands and Isle of Man, the Wyly brothers were able to sell more than $750 million in stocks from four publicly traded corporations where they sat on the companies’ boards of directors. Additionally, SEC officials say the two brothers engaged in insider trading that led to over $30 million in illegal profits.

In a statement released to media outlets through their attorney, the Wylys have classified the charges as “a misapplication of the law.”

“They have never been given any reason to believe the financial transactions in question were anything other than legal and fully appropriate,” said William Brewer, III, a partner at Bickel & Brewer — the firm representing the Wylys. “It will come as little surprise to those who know them that the Wylys intend to vigorously defend themselves ... and expect to be fully vindicated.”

In an e-mail interview with The Michigan Daily, University spokeswoman Kelly Cunningham said it’s unfortunate the Wyly brothers are currently experiencing such hardships.

“Mr. Wyly is a longtime supporter of the University,” Cunningham wrote in her e-mail. “We’re sorry to hear he is facing these difficult circumstances.”

The charges come after nearly two decades of investigations into the Wyly brothers’ investment practices, which led to a Senate investigation in 2006. At the culmination of the investigation, the Senate Permanent Subcommittee on Investigations, which at the time included ranking minority member Sen. Carl Levin (D–Mich.), released a report highlighting the Wyly brothers’ investment practices as one of six elaborate abuses of tax laws.

At the time, Jerry May, the University’s vice president for development, said Wyly was innocent until proven guilty.

“Sam Wyly is a highly reputable and successful business person,” May said in an interview with the Daily at the time. “He has done a lot for a lot of organizations and people.”

A spokesperson at the Business School echoed May’s comments at the time, saying the Senate’s investigations were unlikely to impact Wyly’s relationship with the Business School.

Though comment on the University’s process for screening donors was not immediately available last weekend, the University’s past actions suggest the University may continue to stand by Wyly by leaving his name on the building he helped finance with allegedly illegal funds.

In 2001, then-University President Lee Bollinger stood by University alum and donor Alfred Taubman, who was found guilty of price-fixing — a conviction that landed Taubman a one-year federal prison sentence and a $7.5-million fine.

Bollinger said he would not change the name of the A. Alfred Taubman College of Architecture and Urban Planning, the Taubman Medical Library or the then-Taubman Center of University Hospitals, now called the A. Alfred Taubman Health Care Center.

At the time, some individuals — including former LSA Dean Edie Goldenberg, who is now a political science and public policy professor — said Taubman’s name should have been removed from campus facilities.

“I don't think that sets a wonderful example for students,” Goldenberg said at the time of the University’s decision to stand by Taubman. “The University really ought to give the money back and find other sources.”

In addition to charges brought against the Wyly brothers, Michael French, the Wyly’s attorney, and Louis Schaufele, III, the pair’s stockbroker, have also been accused of wrongdoing.

“The Wylys’ attorney, French, and their stockbroker, Schaufele, substantially assisted the Wylys’ fraudulent scheme, each reaping financial rewards for doing so. Each also committed primary violations of the antifraud provisions of the securities laws,” allege the charges filed with the court.