'Staggering' Sanctions Slapped On Wyly Brothers In Offshore Case

Forbes.com is today reporting:

Staggering.

That’s how a Manhattan federal judge described the sanctions imposed against Texas businessman Sam Wyly and his deceased brother’s estate today.

The brother could expect pay nearly $400 million in civil tax-fraud penalties for their roles in using offshore trusts to evade reporting requirements. The judgment, together with interest, could be one of the largest sanctions ever imposed against individual taxpayers.

Prior to his legal troubles, Wyly was one of the richest people in America. He made the Forbes 400 in 2010, landing at #385, the same year that he made Forbes’ billionaires list.

The Texas businessman, together with his brother, Charles, made money from a number of businesses including the Bonanza chain of steakhouses. In the 1980s, Wyly made news for gobbling up shares of Michael’s Craft stores: he eventually sold his stake to Bain Capital (yes, of Mitt Romney fame) and Blackstone Group in 2006, netting milions. That same year, Wyly made an appearance on Forbes’ list of wealthiest Americans: the very next year, Wyly solidified his position as a billionaire.

But Wyly was attracting attention from more than just investors. The brothers were summoned to D.C. to testify about their business deals in 2006 following allegations of illegal tax practices. It was assumed that the Internal Revenue Service (IRS) was circling at the time and the Securities and Exchange Commission (SEC) was also sharpening its knives. It wasn’t a new feeling for Wyly. He had his first public run in with the SEC in 1979. At the time, Wyly was investigated over a bond issue. That case was ultimately settled and Wyly admitted no guilt.

Forbes.com

More than 25 years later, Wyly and his brother found themselves under the microscope of the SEC again – this time, the inquiries were directed towards the use of potentially illegal offshore tax shelters. In 2010, the SEC officially charged the pair with fraud (complaint downloads as a pdf). Four years later, a jury found the Wyly brothers guilty of making more than $500 million by hiding the proceeds of sales of companies in offshore entities.

But if this is all about offshore maneuvering, why is it an SEC matter and not, say, an IRS issue? Transparency. In its complaint (downloads as a pdf), the SEC alleged that the Wylys used a series of entities in garden spots like the Isle of Man and Cayman Islands (yes, both tax havens), to hide the sales of companies in order to avoid official SEC disclosures. That pattern of behavior, it had been alleged, went on for more than a decade.

Rather than hide from the tax issue, the defense embraced it, claiming that the offshore trusts were not part of a scheme to avoid SEC regulations but rather part of tax planning. Wyly’s defense attorney claimed that the brothers merely followed the advice of their legal and financial advisors and “were never given any reason to believe the financial transactions in question were anything other than legal.”

The courts did not agree. U.S. District Judge Shira Scheindlin hammered this point home, assessing $123.8 million against Sam Wyly and $63.9 million against the Estate of Charles Wyly (Charles died in 2011) – plus interest.

Additional charges were not filed against the pair for the potential tax omissions despite some chatter that it might be. The potentially illegal behavior dates back more than a decade. The statute of limitations for most tax matters is three years but that gets stretched to six years if there’s a significant income omission (usually 25%) or, in some cases, tax evasion. It’s been assumed that the IRS felt that the statute had likely run or was close to having run. With the death of Charles Wyly and the increasingly poor health of Sam Wyly, it may also have been a risky public relations move for the Department of Justice. This, despite a report from the U.S. Senate Permanent Subcommittee on Investigations Committee in 2006, where then Ranking Minority Member Sen. Carl Levin (D-MI) claimed that the Wylys avoided paying $300 million in federal taxes (be forewarned: it’s a 402 page download).

Whatever the reasons, the IRS hasn’t made noise about charges or investigations. Even without jail time and tax penalties, the Wylys are taking a hit from the most recent judgment – which the judge is hoping doesn’t go unnoticed. The fines against them are so huge, the judge noted, that they are “equivalent to approximately 10% of the total penalties and disgorgement ordered in SEC enforcement cases nationwide last year.” That will, it’s hoped, send a message to others engaging in similar behaviors.

As for Sam Wyly? He has, for years, remained unapologetic about his behavior. He’s admitted his role, claiming last year that it was indeed a plan to shave tax dollars from his return because, he says, “I pay a lot of taxes.”