Bush backers engulfed in $550m scandal

The billionaire Wyly brothers are Texas royalty and high-profile Republican donors, but the SEC claims they made millions from insider trading, reports James Moore
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The Independent Online

America's liberals must be thinking that Christmas has come early this year: two ultra-conservative Texan billionaires who played key roles in the re-election of President George W Bush now stand accused of perpetuating a massive $550m (£350m) insider-trading scam through a string of offshore trusts based in the Cayman Islands and the Isle of Man.

Charles and Sam Wyly deny the charges. The brothers appear to be the living embodiment of the American dream. Brought up in Texas by their cotton farmer father, they were high school American football stars who entered the business world after paying their way through college and duly made fortunes for themselves.

The pair, who are in their mid-70s, are now Texas A- listers who mix in the highest echelons of Dallas society, spending their spare time as "go-to giver" philanthropists in a circle where bestowing one's largesse has been described by the Dallas Morning News as a new form of "competitive sport".

They are also hardcore Conservative activists who were two of the biggest donors to George W Bush during his time in politics. That is when they were not busily adding to their fortunes through wide-ranging business interests that include software, energy, hedge fund , restaurants and reinsurance investments.

Sam, the younger of the two, who boasts a more tousled look, has even written a book, 1000 Dollars and an Idea, Entrepreneur to Billionaire filled with trite homilies such as how he learned business at his father's knee in the local barber's shop.

While there's much mention of God in it, he says he that while he hadn't intended to get rich ("it just happened") he "never bought into the verse about a rich man not being able to get into heaven".

Their political activities have seen them donating millions of dollars to Republican candidates and causes, having first become involved with the party during the Nixon era. Sam notably contributed $2.5m to a group called "Republicans for Clean Air" (he personally drives a hybrid car) during President Bush's bitter primaries battle with Senator John McCain. It ran ads praising George W. Bush's environmental record while criticising McCain's. It was at first rather unclear who was behind the group and who paid for the ads until Mr Wyly stepped forward to claim the credit.

He also donated $20,000 to the "Swift Boat Veterans for Truth" campaign devoted to trashing Senator John Kerry's military record in Vietnam (his opponent avoided the conflict as part of the Texas National Guard) during the President's successful bid for a second term in 2004.

These sort of controversies are all part of the rough and tumble of American politics, but the financial scandal will be another matter.

The billionaires' offshore trusts have been under investigation for years, not so much for insider-trading but for the taxation implications.

John Aspden, the chief executive of the Isle of Man's Financial Supervision Commission, confirms that authorities on the island have been co-operating with US investigators since the early 1990s. "We have been aware of these investigations for years. This is not the sort of thing you would expect under any circumstances to take place on the Isle of Man and for us it is very much a historical issue. It would not be possible to do what is alleged today," he says.

The investigations, headed by Senator Carl Levin, saw the brothers named in a Senate report into the use of offshore havens to evade tax by the super rich. However, they said they would take the famous US fifth amendment against self-incrimination so were not called to testify at Levin's sub-committee hearings.

The insider-trading allegation is more serious still. According to the Securities and Exchange Commission (SEC), the trusts were used not just as a means for minimising tax liabilities. They were in fact used to conceal share trades on behalf of the brothers in public companies in which they were directors.

The SEC alleges these trades netted profits of $550m. The regulator said: "The SEC alleges that the brothers created an elaborate sham system of trusts and subsidiary companies in the Isle of Man and the Cayman Islands to sell more than $750m [£480m] worth of stock in four public companies for which they were corporate directors. They also committed an insider-trading violation in one of the companies for an unlawful gain of more than $31.7m [£20m]."

Lorin Reisner, the deputy director, SEC enforcement, added: "The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws." The 78-page complaint, filed in the Southern District of New York, also names one of their lawyers, Michael French, together with stockbroker Louis Schaufele.

The brothers' attorney, William Brewer, has called the charges "without merit". If the SEC wins, there may be Schadenfreude and celebration among Democrats. And a few Republicans too.

Other big insider trading cases

Martha Stewart

The US celebrity homemaker sits at the top of a media empire. To Americans, it might seem like she'd never been away but she spent five months at Alderson women's prison camp in West Virginia after being prosecuted for selling stock in ImClone Systems, a biotech company run by a friend of hers, after she was tipped off about bad news. She was also found guilty of obstructing justice and lying to investigators.

Ivan Boesky

Gordon Gecko, the reptilian white collar crook portrayed by Michael Douglas in Wall Street, was partly modelled on him. Amassed a $200m fortune by betting on takeovers and mergers in the 1980s, but came unstuck after the Securities & Exchange Commission began to take the problem seriously. He was jailed for three and a half years and paid more than $100m in fines for making millions from investments based on tips from insiders.

Matthew Devlin

The former Lehman Brothers trader whose wife worked for the London-based public relations firm Brunswick, he was charged with running a $4.8m insider trading ring using information about the merger and acquisition deals that his wife was working on. Eight of his friends were also named in lawsuits. He is, apparently, co-operating.

Raj Rajaratnam

Prosecutors in the US allege that his hedge fund, Galleon, was at the centre of a huge insider trading ring. Traders, fund managers and lawyers have been arrested and charged by the FBI in what could yet prove to be one of the biggest of the lot.

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