© 2015 The Texas Lawbook.
By Mark Curriden
(Jan. 6) – The widow of Charles Wyly testified Wednesday that she knew nothing about the business dealings of her deceased husband and his family, including any knowledge about the offshore trusts the Wylys brothers set up in the Isle of Man.
Carolyn “Dee” Wyly told U.S. Bankruptcy Judge Barbara Houser that she never asked any questions about the offshore trusts, even after she learned that the U.S. Securities and Exchange Commission was investigating her family’s trusts for possible fraud.
During four hours of testimony, Ms. Wyly said that she only learned last year that the offshore trusts and not her were the actual owners of tens-of-millions of dollars in furniture, jewelry and artwork in her house.
Ms. Wyly was the first key witness in the trial of the bankruptcy cases that she and her brother-in-law, Dallas entrepreneur Sam Wyly, filed a year ago after a New York judge hit the pair with a $299 million judgment for federal securities violations involving the offshore trusts.
The Internal Revenue Service has since accused the Wylys of tax evasion and fraud. The IRS seeks $1.4 billion in back taxes, fees and penalties from Sam Wyly and $800 million from Dee Wyly.
By filing for protection under Chapter 11 of the U.S. Bankruptcy Code, the Wylys force the IRS and SEC to become unsecured creditors who must prove their claims in order to collect.
The bankruptcy trial started Wednesday in Dallas and is expected to last three weeks or more.
“There is no fraud here,” Don Lan, a lawyer for the Wylys, told Judge Houser in opening statements. “We think this is just an honest disagreement on the law.”
Lan said the Wylys relied completely on their lawyers and tax advisers in believing that the trusts on the Isle of Man were legal.
But lawyers for the IRS said the Wylys knew the trusts were fraudulent and designed them to avoid paying taxes.
“This is a case about lies, deceit and fraud,” Assistant U.S. Attorney Cynthia Messersmith told Judge Houser. “[The Wylys’ defense] is a version of Monty Python’s nudge, nudge, wink, wink… we all know what’s going on here.”
On the witness stand, Dee Wyly admitted she signed dozens of financial documents and tax records without reading them and without asking any questions of her husband or the lawyers.
“We never discussed business issues,” she said.
Under cross examination, Ms. Wyly said she didn’t remember signing a 1998 document that deferred her annuity payments from age 65 to 70, but she admitted it was her signature.
“You never asked a single question?” Jon Blacker, a lawyer for the U.S. Department of Justice asked.
“I never asked any questions,” she responded. “I trusted my husband.”
“Do you know who presented this document to you for you to sign?” Blacker inquired.
“You expect me to remember?” Ms. Wyly, 82, answered. “I don’t.”
Blacker then presented Ms. Wyly with a series of invoices from when her husband purchased expensive jewelry for her, including a necklace that cost $759,000, a ring that cost $676,000 and a bracelet with 39 diamonds that priced at $298,000.
“I don’t know what piece of jewelry that is, but it sure sounds pretty,” Ms. Wyly said.
Asked about another set of earrings her husband purchase, she said, “I don’t remember any ruby hooped earrings. Maybe he gave them to someone else.”
“Let’s hope not,” Judge Houser responded, laughing.
If Ms. Wyly’s lawyers can show she had no knowledge of her husband’s fraud, then the IRS will have no claim against her for back taxes.
However, the IRS argues that Ms. Wyly’s lack of knowledge may not let her keep all the money.
“Even if she didn’t have specific knowledge of the offshore funds, she knew enough to ask questions about the legality of the trusts,” Messersmith told Judge Houser.
Sam Wyly testified for about 40 minutes Wednesday, basically providing his family’s history and growing up in Louisiana. He is expected to take the witness stand Thursday morning.
The Wylys founded University Computing Co. in 1963 with only $1,000 in the bank and grew it into a multimillion-dollar computer services company. In 1967, Sam and Charles purchased the Bonanza Steakhouse chain and expanded it to 600 stores before selling it in 1989. In 1982, the Wylys bought the controlling interest in Michaels, the craft store chain. It grew from a $10 million in revenue private company in 1982 to $1.2 billion public company in 2006.
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