A bankruptcy-court judge yesterday found that Dallas former-billionaire Sam Wyly and his late brother Charles committed tax fraud by putting more than $1 billion in trusts in the Isle of Man in the 1990s.
Wyly filed for bankruptcy protection in 2014, after he and Charles were found liable for $299 million in damages for federal securities violations involving the same trusts. Joseph Guinto wrote in D Magazine about the potential problems for the Wylys ahead of the SEC trial in 2013.
In the October 2015 issue of D CEO, John Browning described what was unusual about the Wylys’ bankruptcy strategy:
Facing the prospect of surrendering nearly $200 million to the SEC and anticipating inevitable action by the IRS, Sam Wyly turned to Josiah Daniel III, a longtime partner at Vinson & Elkins LLP. Daniel, a veteran of numerous high-stakes business bankruptcies and reorganizations, decided to borrow a page from the playbook of two other wealthy Dallas brothers besieged by the government: Nelson Bunker Hunt and William Herbert Hunt, who filed for bankruptcy in 1988 in the wake of massive fines and penalties after the brothers’ ill-fated attempt to corner the silver market. Last October, using the Hunt brothers’ bankruptcy as a blueprint, Daniel and his legal team took the novel approach of filing for Chapter 11 bankruptcy protection for Sam Wyly. (Chapter 11 is not typically used for individuals, but for businesses attempting to eliminate debt and restructure their finances.) Not only did Daniel’s tactic keep the SEC and IRS at bay from seizing Wyly’s assets, it also provided another weapon. As part of the bankruptcy, Daniel filed a request for a determination by the bankruptcy court of Sam Wyly’s tax liability to the IRS, using a little-known and seldom-invoked provision of the bankruptcy code: Section 505. This provision allows the court to “determine the amount or the legality of any tax,” a potential checkmate to the Manhattan federal court’s onerous order.
The move is a calculated risk, and one that has been met by resistance by the IRS.
It appears, so far, that the risk may not have worked. The only good news for the family yesterday came in the judge’s determination that there’s no evidence that Charles’ widow, Dee, was aware of the scheme.
The Wylys’ lawyer, Stewart Thomas, issued this statement in response:
“The Wylys and their counsel are still reviewing and evaluating the court’s 459-page opinion. While Sam and Dee Wyly are pleased that the court rejected the IRS’s gift tax claim and found Dee Wyly to be an innocent spouse, they are surprised and disagree with the court’s fraud finding as to Sam and his brother Charles.”
It’s yet to be determined how much in back taxes Sam Wyly will be required to pay. Wyly told Browning last fall, regarding the earlier SEC judgment, that is is a victim of “sour grapes” and political payback on the part of the government, due to his political and financial support of President George W. Bush.
Wyly said then that judgments like those he’s facing could have a “chilling effect” on those looking to start businesses and create jobs. “It’s bad for America,” he said.
Certainly none of it looks good for Sam Wyly, anyway.