By Law360 From LexisNexis

The U.S. Department of Justice on Wednesday asked a Texas bankruptcy judge overseeing the Chapter 11 bankruptcies of business tycoon Sam Wyly and his sister-in-law to bar a Cayman Island entity controlled by the Wylys from being considered a creditor

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Wyly Fortunes Hinge on $3 Billion ‘Difference of Opinion’

By Erik Larson and Tom Korosec, From Bloomberg News

Former billionaire entrepreneur Samuel Wyly’s “difference of opinion” with the Internal Revenue Service could turn an offshore fortune into an onshore fraud, if the agency gets its way.

Wyly, 81, and the estate of his late brother Charles Wyly joined forces for a trial Wednesday against the IRS in Dallas, seeking to wipe out the agency’s $3 billion claim for back taxes in their Chapter 11 bankruptcy cases.

The Wyly brothers, who developed companies including the arts and crafts retailer Michaels Stores Inc., hid stock offshore and made illegal trades for 13 years, taking in $550 million in illegal profit, a federal jury in Manhattan found in 2014. That case, a victory for the U.S. Securities and Exchange Commission, triggered demands for years’ worth of back taxes and penalties by the IRS and forced Wyly and his brother’s widow, Caroline “Dee” Wyly, into bankruptcy.

The dispute in the latest trial hinges on the validity of trusts set up on the Isle of Man by the Wylys starting in 1992. Lawyers for Sam Wyly and his sister-in-law claim the trusts were legitimate, while the IRS argues they were used to avoid taxes and finance lavish lifestyles for Wyly family members from Texas to Colorado.

“It’s not fraud,” the Wylys’ lawyer, Donald Lan, said in an opening statement at the trial. “We think there’s an honest difference of opinion over the law.” By contrast, IRS lawyer Cynthia Messersmith said the case was about lies and “deception” surrounding one of the biggest tax frauds in U.S. history.

Evade Taxes?

The offshore structure was specifically designed to evade taxes, Messersmith said in her opening statement. The profits were repatriated to the U.S. through a variety of schemes, she said, including the trusts’ purchasing of jewelry, art, furnishings and other luxury items for use by the Wylys. The trusts also financed loans to Wyly family members and gifts to the Wyly brothers’ children worth of millions of dollars, Messersmith said.

Lawyers for Caroline Wyly, who is also in her early 80s, have said the IRS lacks evidence that she systematically deceived the agency for 22 years.

Caroline Wyly, who was married to Charles Wyly for 56 years before his death in a 2011 car crash, has said she regularly signed tax documents without reviewing them because she trusted her husband and their advisers. Caroline Wyly has said she was left insolvent after husband’s Porsche was struck by another vehicle in western Colorado, killing him at the age of 77.

The bankruptcy is Samuel E. Wyly, 14-bk-35043, U.S. Bankruptcy Court, Northern District of Texas (Dallas).

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Ex-Billionaire Wyly Blasted by SEC Over Bid to Save Mansion (2)

By Erik Larson and Tom Korosec Bloomberg From GARP

(Bloomberg) — Former billionaire entrepreneur Samuel Wyly is “stiffing” his creditors by attempting to shield $249 million in offshore annuities and a $12 million Texas mansion in his bankruptcy, federal regulators told a judge.

“It is a request to enjoy a lifestyle of unfathomable wealth” while seeking the court’s protection from litigation, the U.S. Securities and Exchange Commission said in a filing Thursday in Dallas bankruptcy court.

The SEC is seeking hundreds of millions of dollars from Wyly and the estate of his late brother Charles Wyly after they lost a fraud trial in Manhattan. The Internal Revenue Service is seeking $2 billion in the same case.

Wyly’s lawyer, Josiah Daniel, said in an e-mail that the SEC’s objection to exempting some assets from the reach of creditors was “not newsworthy,” without elaborating.

‘Egregious Violations’

Wyly “has been found liable of numerous, egregious violations, has paid nothing as a result of his misconduct while indefinitely residing in a mansion worth 57 times the average cost of a single family home in Dallas,” the SEC said. The agency called his request for exemptions “astonishing.”

The entrepreneur and his brother’s widow, Caroline “Dee” Wyly, filed for bankruptcy after the SEC’s 2014 victory in the fraud case. Charles died in a car accident in 2011. The SEC also challenged Caroline Wyly’s exemptions in the bankruptcy case, including her $6.7 million Dallas mansion and annuities valued at almost $11 million.

Sam Wyly and his sister-in-law both argued that Texas law allows people who file for bankruptcy to shield their homes from creditors to ensure they aren’t left homeless. The SEC argues that Congress has limited the value of such homes to about $155,000 in cases where federal law has been violated, according to the filing.

As for the annuities, the agency says the Wyly brothers set up a web of offshore funds specifically to protect assets in situations like the bankruptcy.

Offshore System

A Wyly employee who met with the lawyer who created the offshore system said in a memo at the time that one of the goals was to “never let a creditor get your asset, no matter how bad your mistake,” according to the SEC’s filing. That lawyer was later convicted of an unrelated felony, the agency said.

The IRS is suing to recover unpaid taxes, interest and penalties on money held in offshore trusts from 1992 to 2013 by the brothers, who got rich building businesses including the Michaels Stores Inc. arts-and-crafts chain. U.S. Bankruptcy Judge Barbara Houser in Dallas is expected to rule soon on how much the IRS can claim.

The case is In re Samuel E. Wyly, 14-bk-35043, U.S. Bankruptcy Court, Northern District of Texas (Dallas).

(Update’s with second mansion in sixth paragraph.)

To contact the reporters on this story: Erik Larson in New York at [email protected], Tom Korosec in Dallas at [email protected]. To contact the editors responsible for this story: David Glovin at [email protected], Peter Blumberg

©2016 Bloomberg L.P.

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IMAGE: Samuel Wyly www.thestar.com