Texas Billionaire Files for Bankruptcy

DALLAS (CN) – Former Texas billionaire Sam Wyly filed for bankruptcy protection after a federal jury ordered him to pay as much as $400 million for using offshore trusts to hide stock trades.
     A noted philanthropist and contributor to Republican causes, Wyly, 77, of Dallas, made his fortune co-founding Sterling Software in 1981 and buying an interest in arts-and-crafts retailer Michaels in 1982.
     Sterling was sold for $4 billion in 2000 and Michaels Stores for $6 billion in 2006.
     A Manhattan federal jury in May found Wyly and the estate of his deceased brother, Charles, guilty of making the illegal trades.
     The SEC sued the brothers in 2010, accusing them of playing a “ global game of hopscotch ” by hiding assets in their four companies – Sterling, Michaels, Sterling Commerce, and Scottish Annuity & Life Holdings Ltd. – from 1992 to 2004.
      During trial , the SEC accused the brothers of making $550 million from more than 700 undisclosed transactions in 40 companies operated by Isle of Man trusts that shuffled money between the Cayman Islands and Dallas.
     Filed Sunday, Wyly’s petition for Chapter 11 bankruptcy protection lists $100 million and $500 million in assets and $100 million and $500 million in liabilities.
     It lists the Internal Revenue Service as his largest creditor, with an unspecified amount of taxes owed. The petition lists the SEC as his second largest creditor, with $198 million owed under an interlocutory disgorgement ruling.
     U.S. District Judge Shira A. Scheindlin in Manhattan had ordered forfeiture of that amount plus interest and penalties.
     Scheindlin said in September that depending on how interest and penalties are calculated, the total could be as high as $400 million.
     Wyly also owes the Dallas-based Wrangler Trust and Cayman Islands-based Security Capital Ltd. $19 million and $25 million in loans, respectively.
     The petition lists grant commitments to the Third Church of Christ, Scientist, Dallas and Thanks-Giving Square in downtown Dallas.
     During trial, SEC attorney Bridget Fitzpatrick told jurors the scheme originated from a seminar on overseas trusts delivered by attorney David Tedder, who later served 5 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.
     Fitzpatrick said every time one of the offshore trusts made a transaction, the Wylys would make a “recommendation” to their “loyalist” protectors, who in turn passed on “recommendations” to the trustees.
     Fitzpatrick said the system of “recommendations” had a “100 percent success rate,” while showing jurors screenshots 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, Fitzpatrick said.
     One trustee suffered 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,” Fitzpatrick 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. 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.
     Wyly is represented by Josiah Daniel with Vinson & Elkins in Dallas.

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