© 2016 The Texas Lawbook.
By Mark Curriden
(Oct. 3) – Dallas business entrepreneur and philanthropist Samuel Wyly and his family are in negotiations with federal officials to resolve claims that the Wylys hid from tax collectors more than $1 billion in income in offshore trusts in the Isle of Man and the Cayman Islands.
The U.S. Securities and Exchange Commission announced late Friday that Wyly agreed to pay $198 million to end the agency’s financial fraud case against the 83-year-old.
Now, lawyers for the Wylys are in negotiations to settle separate, even larger claims with the Internal Revenue Service.
While such a “global settlement agreement” is far from certain, lawyers familiar with the case say any such deal would likely cost the Wylys hundreds of millions of dollars or nearly all of their wealth but would end all litigation in the matter.
The SEC announced in documents filed in New York federal court Friday that it had reached the $198 million settlement – money that would be credited in favor of the Wylys in any final judgment or agreement with the IRS.
“Both sides are motivated to achieve a settlement agreement,” says Hunton & Williams bankruptcy partner Greg Hesse. “The federal government may have the upper hand, but the SEC and IRS realize their lower court victories have vulnerabilities on appeal.
“Meanwhile, the Wylys are bleeding money because the legal fees and other costs of this kind of litigation are extremely expensive,” Hesse says.
Lawyers for the Wylys did not respond to phone calls or emails, but they made it clear in previous interviews that their ultimate objective has been to reach a “global settlement agreement” with all the federal agencies pursuing the Wylys.
“Our primary goal from the start has been to work with the IRS to figure out how much Mr. Wyly owes in back taxes and come to a reasonable agreement,” Vinson & Elkins partner Josiah Daniel, who is Sam Wyly’s lead lawyer, said in an interview earlier this year.
The Wylys, who made billions of dollars growing and then selling Michaels Stores and Bonanza steakhouses, said they created the offshore trusts in the early 1990s for the purpose of converting equity wealth the brothers earned from their various business interests into a fixed annual income stream.
The SEC and IRS claimed they were a scam designed to avoid paying taxes.
In 2014, a federal jury in New York sided with the SEC that the Wylys violated federal securities laws. The judge ordered Sam Wyly to pay $198 million and Charlie Wyly’s estate to pay $101 million.
The IRS used the evidence in the SEC case to charge the Wylys with tax fraud and demanded $3.2 billion in unpaid taxes, fines, penalties and interest – an amount the Wylys strongly disputed.
“The IRS figures are baloney,” Sam Wyly told The Texas Lawbook in an interview in 2015. “I paid $160 million in taxes in the last 22 years, and my brother, Charles, paid $80 million. We firmly believe we have paid all the taxes we owe.”
In response, Sam Wyly and the estate of Charles Wyly, including his widow Dee, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The legal maneuver forced the IRS to prosecute its allegations of tax fraud and evasion before U.S. Bankruptcy Chief Judge Barbara Houser in Dallas, instead of a federal district judge in New York.
On the eve of trial, the IRS reduced the amount it demanded to $1.4 billion from Sam Wyly and $800 million from Charles Wyly’s estate.
Judge Houser heard more than three weeks of testimony and then issued a 459-page opinion in May that found Sam Wyly had committed tax evasion and fraud – a ruling that she based in part on the findings in the SEC case in New York. The judge awarded the IRS $1.1 billion in back taxes and penalties.
The Wylys are appealing the SEC verdict and the IRS judgment.
Lawyers for the Wylys believe that the SEC’s courtroom victory in New York was vulnerable to being reversed on appeal. If the federal appeals court in New York threw out the SEC’s win, Judge Houser’s decision in the bankruptcy case might also be reversed.
The decision by the Wylys to drop their appeal in the SEC case and thus give away one of their biggest bargaining chips is a strong indication that lawyers for the Wylys are betting heavily on a global settlement agreement.
Lawyers familiar with the case say the key to the negotiations is money.
“The IRS wants to find out how much money the Wylys have left and where the money from trusts went,” says Sid Scheinberg, a bankruptcy partner at Godwin Bowman & Martinez. “They probably need Sam’s cooperation for that and he’s not getting any younger.”
Federal court records filed last year show the trusts are worth about $382 million and pay Wyly about $16 million a year.
The IRS argues that the offshore trusts should have a net value closer to $1 billion. They point out that the Wyly family improperly used the trusts to fund their lavish lifestyles, but that hundreds of millions of dollars more are missing.
“Where’s the money? Where did it go?” Judge Houser asked during the trial. “No one seems to be able to answer that question.”
Hesse and others say that the IRS will almost certainly require the Wylys, as part of the settlement agreement, fully cooperate in tracking down the money.
“The IRS will want the settlement to send a message,” Scheinberg says. “The final dollar figure is going to be huge – maybe the largest ever against a single individual.”
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