After he was warned that an elaborate scheme of offshore trusts posed an “aggressive and risky” tax strategy, Dallas businessman Sam Wyly dismissed the concerns by saying “if the IRS ever challenged his position, he would litigate for years and settle for pennies on the dollar,” according to documents the government filed against him in court. It hasn’t quite worked out as he planned.
It wasn’t the Internal Revenue Service, but the Securities and Exchange Commission that challenged him – and won. Earlier this year, jurors found him liable for using the trusts to hide more than $550 million in profits from secret stock sales. Now, the judge overseeing the case has slapped Wyly and the estate of his late brother, Charles, with a judgment that requires them to pay a whopping $300 million in sanctions and interest.
The judgment is one of the biggest ever ordered against a single individual, and comprises 10 percent of all the penalties and disgorgements that the SEC ordered for all of last year. Even U.S. District Judge Shira Scheindlin called her decision “staggering.”
(One of the few that may eclipse it: the $5.9 billion penalty imposed in 2013 against another Texan, convicted Ponzi scheme swindler Allen Stanford.)
Scheindlin cited the “extensiveness” and “brazenness” of the Wylys’ scheme in justifying the amount of the sanctions.
Sam Wyly, who made his fortune in computer software and the Michael’s craft store chain, had claimed the offshore trusts were part of an estate planning effort, and that he was only following the advice of his accountants and attorneys. Had he known the offshore trusts violated SEC disclosure rules, he would have revealed them, he told jurors.
The tax scheme involving using trusts and other businesses in the Cayman Islands and the Isle of Man to sell stock in four companies the brothers controlled. The sales weren’t disclosed in regulatory filings. Because they controlled so much of the companies’ stock, news of the Wylys’ sales could have affected the companies’ share prices, the SEC claimed.
The SEC had a lot riding on the case. For years, it had allowed defendants to pay a fine in civil cases without admitting or denying wrongdoing. In fact, Wyly himself had tangled with the SEC in the late 1970s and settled the case without admitting guilt. Not this time. The “no admission” policy had been questioned twice by a federal judge in New York, and the SEC started to demand that defendants admit guilt as part of their settlements.
(AP Photo/Kathy Willens)
Instead, defendants began to fight back in court, armed with high-powered lawyers. Last year, the SEC suffered a major embarrassment after Dallas Mavericks owner Mark Cuban not only beat the commission in court, but then publicly criticized its tactics.
This time, though, the SEC prevailed, and the huge judgment against a high-profile defendant ought to cause others to think twice before trying a similar scheme, the judge said in her ruling.
Wyly may not have been able to settle for pennies on the dollar, but it’s likely he’ll keep his promise to litigate for years. He’s expected to appeal the judge’s decision.