For someone who could easily rest on his laurels and look back on a legacy of building and turning around companies, Sam Wyly sure sounds like he still has something to prove. The one-time billionaire, who, along with his late brother Charles Jr., grew the Michaels chain of craft stores into a $1.2 billion public company, is now working on a book, The Immigrant Spirit: How Newcomers Enrich America. In it, he profiles a variety of successful immigrants, from inventors like Nikola Tesla and athletes like Martina Navratilova to artists and political figures who embody the American Dream. Wyly can relate to the tales he shares of starting over with almost nothing as he battles both the SEC, over a judgment against him of nearly $200 million, and the IRS, over a staggering $2 billion claim.
The Wyly brothers didn’t incur the wrath of the SEC by bilking investors à la Madoff or Stanford. People investing in a Wyly-owned venture tended to make money. In 1963, Sam Wyly started University Computing Co. with $1,000, and grew the computer services firm into a multimillion-dollar entity. In 1967, the brothers bought the Bonanza Steakhouse restaurant chain, building it up to 600 locations before selling in 1989. And in 1982, when the Wyly brothers acquired Michaels, the stock was trading at 67 cents a share. By the time they stepped away in 2006, it was worth $44 a share.
What put the Wylys on the SEC’s radar was a series of trusts they created on the Isle of Man in the Irish Sea between 1992 and 1996. The brothers placed securities in these offshore trusts, which in turn provided annuities that paid the Wylys tens of millions of dollars a year.
In 2010, following years of investigation (and a preceding investigation by the Senate Permanent Subcommittee on Investigations), the SEC filed a civil complaint in the U.S. District Court for the Southern District of New York against Sam and Charles Wyly. The agency made a number of claims against the brothers, including insider trading allegations that were ultimately dismissed. Charles died in a car accident in Aspen, Colorado, in 2011; his probate estate (represented by his widow, Dee) was substituted in as a defendant. When the case finally went to a jury trial in the spring of 2014, it was six weeks of hammering at the Wylys’ outsider status, according to Sam. “‘Rich guy’ and ‘Texan’ became bad labels to that New York crowd,” he recalls.
Sam Wyly maintains that he has already paid the IRS roughly $160 million in federal taxes.
And despite the Wylys’ having filed thousands of pages of financial documents with the SEC and the IRS in connection with the Isle of Man trusts, the jury decided against them on nine counts, all of which were essentially that the brothers had failed to file enough disclosures with the SEC. “They told us, ‘Your CPAs and your lawyers didn’t check the right boxes’,” Sam explains in disbelief. Still incredulous at the verdict over a year later (Sam maintains that dating back to the early 1990s he has provided more than 1.4 million pages of financial documents to the government), the entrepreneur believes a mix of sour grapes and political payback had much to do with what he sees as a vendetta by the government. The SEC made unsuccessful accusations of securities law violations against Wyly in the 1970s, and lost a $34 million insider trading case against him, he says. In addition, Sam maintains the government’s charges were “politically motivated,” given his longstanding support for George W. Bush and other prominent Republicans, including his help in financing anti-John Kerry ads during the 2004 presidential campaign.
Sam Wyly maintains that he has already paid the IRS roughly $160 million in federal taxes.
Based on the verdict, Manhattan federal judge Shira Scheindlin in August 2014 ordered Sam Wyly to pay $198.1 million and the probate estate to pay $136.4 million—amounts based on an unprecedented theory of estimating income taxes the brothers allegedly avoided by putting assets and securities into the Isle of Man trusts. But she also included a provision that the Wylys should get credit from the IRS for amounts paid to the SEC, and that the Wylys could pursue all available remedies. Additionally, Scheindlin entered a draconian freeze order against Sam’s six adult children and Dee Wyly’s four adult children, an order that they’ve appealed. Not surprisingly, Sam Wyly is also appealing the judgment, enlisting former Stanford Law School Dean Kathleen Sullivan.
Taking a Page from the Hunts
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. On April 15, the IRS filed a proof of claim for a staggering $2.03 billion against Sam Wyly, and $1.24 billion against Dee Wyly. The amounts of the claims are jaw-dropping, particularly because, Daniel points out, “Nobody ever assessed [the Wylys] for not paying taxes correctly. The IRS audited Sam for years, and never asked for additional monies beyond what Sam had paid. Now they’re seeking $2 billion.”
Sam Wyly, who maintains that he has already paid the IRS roughly $160 million in federal taxes for the years he received income through the Isle of Man trusts, had a more lighthearted reaction to the agency’s claim. “I just had a big belly laugh when I saw that,” he says. “I thought it was a billing error, and that it was supposed to go to Exxon.”
Bankruptcy specialist Judi Ross of Dallas’ Judith W. Ross PC represents Dee Wyly and is less sanguine about the claims. “This situation is doubly horrible for Mrs. Wyly, since she was not a party to the business decisions regarding the trusts,” Ross says. Professing bewilderment at the “IRS and SEC’s heavy-handed manner” and “attempts to drag the Wylys through the mud and attack them,” Ross asks, “How exactly is punishing an 81-year-old woman accomplishing the regulatory objectives of the United States government?” (The DOJ attorney representing the IRS, Grover Hartt, declined to comment, citing pending litigation. Angela Dodd, senior bankruptcy counsel with the SEC and that agency’s lead counsel in this matter, referred interview requests to the SEC’s Office of Public Affairs, which also declined to comment.)
The bankruptcy move has come with a price for Sam Wyly. He’s required to live on a court-approved budget of $15,000 per month. Wyly says that’s “not a great bother. What do I need anyway? One house, one car.” Of course, that “one house” happens to be his $12.5 million mansion on Beverly Drive, just across the street from the Dallas County Club. In the meantime, Wyly has been selling off other assets, including a New York City apartment, his 245-acre Colorado ranch, and his cherished Explore Booksellers, a well-known independent bookstore in Aspen. The legal fees continue to mount. Wyly estimated that he’s spent “about $6 million for the bankruptcy alone,” and that his decade-long battle with the SEC and IRS have cost “about $100 million.” As he puts it, “The biggest part of my money went to taxes, the second biggest to charities, and the third biggest to lawyers.”
Still, Wyly remains positive. “Nothing’s for sure, but we feel great about it,” he says. “I believe it can be reversed at the U.S. Supreme Court level, since our Constitution protects against excessive fines.” Attorney Daniel says if he prevails, then of course Wyly will walk away owing nothing: “At worst, we estimate that they might have a claim for several hundred million dollars.”
Bankruptcy Court Judge Barbara Houser has set aside the month of January 2016 for trial of the IRS claims and the objections to them by Sam Wyly and Dee Wyly. In the meantime, Wyly continues to work on his book, even as he worries about the repercussions that his struggles are having on entrepreneurs like him. Wyly views his battle with the government not only as a cautionary tale, but as a campaign that could have a chilling effect on those who might otherwise start businesses and create jobs. “It’s bad for America,” he laments.