Scottish Re's former chairman and CEO Michael French has been accused by the US Securities and Exchange Commission (SEC) of allegedly helping billionaire brothers Samuel and Charles Wyly to hide their beneficial ownership of more than $750 million worth of shares in the company and three other publicly-listed firms.

A civil complaint filed by the SEC at the US District Court for the Southern District of New York on July 29, 2010 against French, 67, Samuel Wyly, 75, and Charles Wyly Jr, 76, and Louis Schaufele III, 55, all of Dallas, Texas, alleged that the Wyly brothers engaged in a 13-year fraudulent scheme to hold and trade tens of millions of securities of public companies as members of the boards of directors without disclosing their ownership and trading of those securities..

The story appeared in the latest edition of the Offshore Alert website's Inside Bermuda newsletter.

"The Wylys' scheme defrauded the investing public by materially misrepresenting the Wylys' ownership and trading of the securities at issue while enabling the Wylys to realise hundreds of millions of dollars of unlawful gain and other material benefits in violation of the federal securities laws governing the ownership and trading of securities by corporate insiders," the complaint read.

The public companies involved in the alleged Wylys' scheme included Scottish Annuity & Life Holdings Ltd. (now known as Scottish Re Group Ltd.), Michaels Stores Inc., Sterling Software Inc. and Sterling Commerce Inc. and the shares of the issuers were traded on the New York Stock Exchange during that period.

The SEC's complaint alleged that the scheme was an "elaborate sham system of trusts and subsidiary companies" based in the Isle of Man and the Cayman Islands created and directed by the Wylys, which enabled them to conceal their ownership and control of the issuers' securities through trust agreements that purported to vest complete discretion and control in the offshore trustees.

It claimed that the Wylys never relinquished control over the issuer securities and continued to vote and trade these securities at their sole discretion over this time, allowing them to sell without disclosing their beneficial ownership of more than $750 million worth of issuer securities and to commit an insider trading violation resulting in an unlawful gain of more than $31.7 million.

Furthermore the complaint accused the Wylys' attorney, French, and their stockbroker, Schaufele, of "substantially assisting" the Wylys' fraudulent scheme, with each reaping financial rewards for doing so, while also committing primary violations of the anti-fraud provisions of the securities laws.

French was accused of using his role as the Wylys' lawyer and fellow director on three of the four issuers' boards to cover up the scheme with a "false cloak of legality", and his assistance continued during his tenure as Scottish Re's chairman, when the Wylys, who had left the company's board, continued to covertly hold more than five percent of its outstanding stock.

He is also alleged to have set up offshore entities of his own, which he used to control and trade issuer securities without disclosing ownership or trading as required by law.

"By depriving existing shareholders and potential investors of information deemed material by the federal securities laws, the Wylys were able to sell, in large-block trades alone, more than 14 million shares of issuer securities over many years, realising gains in excess of $550 million," the complaint found.

"The sales generating most of these gains were made pursuant to materially false or misleading commission filings."

The complaint alleged that the Wylys further exploited their illegal non-disclosure of their offshore issuer securities to make a "massive and bullish transaction" in Sterling Software in October 1999 based on material and non-public information that they as chairman and vice-chairman of the company had jointly decided to sell the firm, yielding "ill-gotten gains" of more than $31.7 million when the sale was made public less than four months later.