Updates to our Terms of Use

We are updating our Terms of Use. Please carefully review the updated Terms before proceeding to our website.

Wednesday, June 12, 2024 | Back issues
Courthouse News Service Courthouse News Service

Fraud Trial of Michaels Billionaire Kicks Off

MANHATTAN (CN) - Two Texas tycoons played a "global game of hopscotch" by hiding corporate assets in offshore accounts for 13 years, federal regulators told a jury Thursday.

The Securities and Exchange Commission claims that Sam and Charles Wyly, brothers who owned the arts-and-crafts franchise Michaels Stores, raked in $550 million with more than 700 undisclosed transactions in Isle of Man trusts that shuffled money between the Cayman Islands and Dallas, Texas.

The Wylys also owned Sterling Software, Sterling Commerce, and Scottish Annuity & Life Holdings.

Though Charles Wyly died in a car accident three years ago, 79-year-old Sam Wyly sat in court Thursday wearing a dark suit, his wavy hair tousled and falling at his ears.

A lawyer for the brothers said they are defending their reputation and legacy rather than their freedom in this civil case.

Trying to convince the 10-person jury otherwise, SEC attorney Bridget Fitzpatrick said the "two brothers" established "secret off-shore trusts" to file "false public reports" for more than a decade.

"This is a case about lies, deception and fraud," Fitzpatrick said.

She said the scheme originated from a seminar on overseas trusts delivered by lawyer David Tedder, who later served five years in prison for defrauding the government.

A Wyly employee who attended a seminar Tedder gave in 1991 wrote a memo advising listeners to "never let a creditor get your assets ... no matter how bad your mistake," Fitzpatrick said.

Jurors saw this memo during a slideshow presentation the SEC displayed.

Fitzpatrick said the Wyly brothers put this advice into practice through an elaborate system of 40 companies operated by Isle of Man trusts.

Every time these offshore trusts made a transaction, the Wylys would make a "recommendation" to their "loyalist" protectors, who in turn passed on "recommendations" to the trustees, according to the SEC lawsuit.

With heavy irony, Fitzpatrick said that the system of "recommendations" had a "100 percent success rate." She flashed emails of a screen showing that the word "recommend" appeared five times in a paragraph of one email, and added that each suggestion was "followed to a T ... as if it were an order."

The trustees approved personal items for the brothers such as artwork, self-portraits, a horse farm in Dallas, and jewelry for Sam Wyly's wife, she said.

This jeweler will testify at trial, Fitzpatrick promised.

One trustee experienced retaliation for questioning the wife's purchase of British realist John William Godward's painting "Noonday Rest" for "222 percent of the pre-auction price," she added.

The offshore trusts also allegedly helped the Wylys escape the "5 percent rule" that kicks in when a CEO owns that amount or more of a company.

Displaying a graph, Fitzpatrick said the Wylys once used this method to disclose less than a tenth of the 16.2 percent that they actually owned in the corporate parent of Scottish Annuity & Life Holdings.

Houston-based defense attorney Stephen Susman spent little time of his opening arguments disputing the SEC's presentation of the facts of the case, but he denied that "a shred of evidence" pointed for a bad-faith motive to break the law.

Prepared with a slideshow of his own, Susman humanized his clients with a picture of the brothers smiling at their ranch. He spoke about Charles Wyly's death and Sam's retirement and new career as a writer in his "twilight" years.

Susman gestured to his client and called him the "most important person in the courtroom."

Born in rural Louisana, Wyly studied at the University of Michigan on a scholarship and went on to sell three of the companies in this case for a combined total of $14 billion, Susman said.

Emphasizing that most of that money went to the investors, Susman added that none of these investors sued his clients for mismanagement, complained about their stewardship or agreed to testify against them at trial.

As for the offshore trusts, Susman acknowledged, "Absolutely they were tax-motivated."

Denying that they were secret, Susman pointed to a Wall Street Journal article from 1996, reporting that Michaels Stores sold 2 million shares to CEO family trusts. He added that Wyly relied upon the advice of an "army of lawyers" to interpret the "confusing rules" governing these practice written in SEC "legalese."

"You will not see a shred of evidence that the Wylys didn't believe that they were complying with the law," he said.

One key witness for the government, Wyly's former attorney Mike French, plans to testify otherwise.

Fitzpatrick said that French belonged to the Wyly's "inner circle of trust" with knowledge of their scheme.

Susman agreed that French was at the "hub of the wheel" coordinating between the general counsels at the Wylys' companies and the outside counsel at major firms like Jones Day and Jackson Walker.

In 2001, however, French sued the Wylys regarding a payment dispute that ended their relationship on bad terms, Susman said.

French never accused the Wylys of wrongdoing until he "cut a deal" with the SEC this year, he added.

Court recessed for the week at the end of opening arguments, and witness testimony will begin on Monday for a trial expected to stretch until the end of May.

Categories / Uncategorized

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.