Lessons from Michael’s store former-billionaire investor Sam Wyly settles $1.3 Billion tax bill for $500 million

 In tax fraud

An early investor who purchased a controlling interest in 1983 of the arts-and-crafts retail chain Michael’s Stores Inc, Sam Wyly, a Dallas entrepreneur who was once listed back in the year 2000 for making the Forbes’ list of the richest Americans with a net worth at the time of ¾ of billion dollars.  But now he has become more well known for being a convicted tax scheme cheat than a prominent investor businessman. Recently a Forbes staff writer Lauren Debter reported and wrote an interesting article titled ”Bankrupt Ex-Billionaire Sam Wyly Settles A $1.3 Billion Tax Bill—For Just $500 Million” which goes back to 2010 when IRS and SEC targeted Sam and his brother Charles (now deceased) for “in one of the largest tax evasion cases in history, accusing them of utilizing a tangled web of offshore trusts (in the Isle of Man and the Cayman Islands) to hide and shield stock sales that generated hundreds of millions in ill-gotten profits.” Mrs. Debter wrote. Eventually, he was convicted in 2016 by a Texas federal bankruptcy judge and ordered to pay a huge $1.3 billion bill from failure to pay back taxes, penalties and interest. It was divided up with $200 million being owed to the SEC and $1.1 billion ($135.5 million of taxes, $402.1 million of interest, and $570.1 million of penalties) to the IRS.  


The Forbes article reports that according to Sam’s son Evan Wyly and his lawyer Jim Lee, Mr. Wyly is all settled up. Mrs. Debter wrote that “he paid the SEC the full $198.1 million owed, and the IRS agreed in October to accept $300 million, which means he ultimately got away with paying just $500 million—a whopping $800 million reduction.”  According to his son Evan, he paid all of his back taxes but was unable to pay the full amount of interest and penalties. 

In October he got out of bankruptcy and now he suddenly has a new fresh start — but that comes with substantially reduced means for him and his children. Back in 2014 he and his brother Charles filed for Chapter 11 bankruptcy protection, which he was forced him to sell off his properties, and any assets he has not parted with, which includes the content of his children Evan and Lisa Wyly trust funds (wrangler trust), are being liquidated to finish repaying that $300 million settlement, and other creditors.  

He now at 85 years old lives in a very modest apartment in a retirement home. But how did he wind up here?  Sam Wyly started a few computer and software companies during the 60s and 80s including Universal Computing, Datran which competed against AT&T and challenged them as a monopoly in court helping to pave the way for a breakup of Ma Bell in 1984. He started to parlay profits from these companies into acquiring other businesses that he expanded and sold. He purchased a small 20 unit regional steakhouse in 1967, called Bonanza Steakhouse and expanded to 600 locations before selling it in 1989.  Mr. Wyly Sterling Software in 1981, which he managed to sell just before the dot-com crash sold for $4 billion in March 2000. And as I mentioned at the beginning of the article, in 1982 he purchased a controlling majority interest in Michael’s when it had just 11 locations and turned it into a nationwide arts-and-crafts retailer, which he sold to Bain and Blackstone for $6 billion in 2006.

Elaborate Sham System of Trusts and Subsidiary Companies

shell companies and trustsSo as Mrs. Debter’s Forbes article states all of Sam and Charles Wyly’s “tax fraud” issues began after the 1980’s savings and loan crisis when a bank suddenly pulled Michael’s line of credit and it caused Sam to lose faith in the U.S. banking system and started moving money offshore. This was told in Mr. Wyly’s testimony in a 2016 bankruptcy proceeding case. According to a 78-page complaint filed by the SEC in 2010, they began hiring several lawyers, accountants, and offshore trusts to set up dozens of accounts in the Cayman Islands and the Isle of Man, (a self-governed British dependency), during the years 1992 to 1995. According to a 2016 MarketWatch Op-Ed article by Elliot Blair Smith titled “Sam Wyly’s battle with IRS, SEC reveals games of the super-rich” stated that Wyly brothers once controlled four New York Stock Exchange-traded companies, and in 1992 created 10 Nevada corporations, and 10 identically named Isle of Man entities. Mr. Smith wrote “the brothers transferred into the Nevada corporations nearly three million options to buy stock in two companies they ran: the Michaels Stores chain of craft retailers, and a software development firm, Sterling Software Inc,  Sterling Commerce Inc., and Scottish Annuity & Life Holdings Ltd. (now Scottish Re Group Ltd.) In return, they received the right to private annuities paying out at some future date.”  

Those trusts and about 48 corporations from Nevada to the Cayman Islands were at the center of the brothers’ endeavor to transfer offshore in a “scheme of secrecy” more than 17 million stock options and warrants awarded to them (in publicly traded companies whose boards they sat on), as compensation as company officers and directors. According to the original SEC complaint, the securities yielded profits of more than $550 million through fraud and deception by secretly trading the securities of public companies they controlled, and attempting to never be taxed by U.S. authorities on that income. Lorin L. Reisner, Deputy Director of SEC Enforcement had stated “The Wyly brothers reaped more than $550 million in undisclosed gains while sitting on corporate boards by trading stock in those public companies through hidden entities located in foreign jurisdictions to conceal their ownership and trading of those securities.”  one of the other schemes that SEC took issue with was after the transactions, they forwarding the options—and annuity obligations—to the identically named Isle of Man corporations, with each transfer structured so that the offshore entity ended up holding less than 5% of the New York Stock Exchange-traded company’s stock. This avoided triggering ownership disclosure requirements to the Securities and Exchange Commission. By not disclosing these transactions to the government, it was violating a law that requires anyone who owns more than 5% of a publicly-traded company to do so. 

They also went as far as to hide their ownership.  Mrs. Debter’s article stated that “brothers owned as much as 37% of Michael’s, 34% of Sterling Software and 16% of Scottish RE, yet company filings at the time showed that they owned as little as a quarter of those amounts, according to court documents.” By doing so it allowed the Wyly brothers to unload large amounts of stock without attracting attention from media journalists or investors, which normally can often prompt a “sell-off” that could cause the stock to drop. The cover-up began when the Wylys persuaded the options-issuing companies to not file tax forms on their behalf; nor, apparently, did the companies take the corresponding deductions they were entitled to. They were eventually cleared of the insider trading charges, and according to Mr. Smith’s opinion “the complex scheme might have been all or mostly legal had the Wylys not secretly retained control of the offshore trusts.” 

They used the proceeds from the stock sales to finance a fancy high-flying lifestyle, which included the purchase of acquiring luxury mansion homes, expensive art (John James Audubon, Maxfield Parrish, Pablo Picasso, Peter Paul Rubens), collectibles and jewelry. Mrs. Debter mentions that they purchased upscale multi-million dollar condos and ranches in Aspen, 100-acre horse farm near Dallas and an $8 million oceanside property located in Malibu. They gave quite expensive jewelry gifts to their wives, such as a $622,000 ruby and a $759,000 emerald necklace. Sam is an apparent history fanatic, who reportedly spent $721,000 acquiring official documents from the presidency of Abraham Lincoln and $937,500 on a portrait of Benjamin Franklin. According to official court documents, they were accused of funneling $300 million into hedge funds and other types of investments and almost $120 million into bank accounts. 

Claims ignorance and blames the lawyers

lawyersFrom the get-go, the Wyly brothers have taken the defense of denying any wrongdoing, instead, he described the trusts as just a type of 401(k) that was simply meant to defer taxes and facilitate long term estate planning. The pointed blame at the lawyers and accountants, saying they only followed the advice was given to them, and if there was any illegal activity, they had no knowledge of it. 

Mr. Wyly stated in court “ I set up what was essentially a big 401(k),” he went on to add “the basic tradeoff for what I did, like with all these private plans done by big insurance companies, is you get to defer transactions and capital gains taxes.” Unfortunately for him, the jury did not agree.  And after a grueling 4 year trial in NYC, the Wyly brothers, Sam and Charles were portrayed as uber-wealthy Texan “fat cats” who boastfully disregarded the law, they were convicted of fraud in 2014. Sam was ordered by the judge to pay $198.1 million to the SEC, and his brother Charles who happened to pass away in a freak car accident in Aspen in 2011, was made to hand over $101.2 million through his estate.  Next, it was the IRS’s turn to demand its pound of flesh, by declaring in 2015 that it would seek to recover a whopping $2.03 billion in unpaid taxes, interest and penalties from Sam and $1.1 billion from Charles’ estate. Sam spoke to a local reporter at the time that the numbers were “so absurd as to undermine the credibility of the IRS.” They would end up in the end only paying a small fraction of the original amounts. Back in 2016, a federal bankruptcy judge ordered Sam to pay the IRS $1.1 billion.  Then recently in 2019, Mr. Wyly reached a settlement with the Internal Revenue Service to pay just $300.  

Conclusion and Takeaways

What is interesting about this story is that two successful entrepreneurs who found and grew many companies over several decades went from building up massive amounts of wealth and through a series of greedy or ignorant offshore tax avoidance strategies are now bankrupt.  The SEC claimed they either knew or were reckless in not knowing their legal obligations as public company directors and greater-than-five-percent beneficial owners. This article is only a summarization of all the details, read the SEC complaint about more details. No wants to give Uncle Sam more money than they legally have to, and here at Thomas Huckabee CPA, we advise our business clients on a variety of legal tax saving strategies to minimize and defer income and capital gains for example. But you must be informed of the rules especially when it comes to disclosing financial transactions, to shareholders and the required SEC filings.  Many wealthy families, presidents, prime ministers of nations and celebrities use secretive offshore strategies and set up anonymous shell companies to hide money, the bombshell report called the “Panama Papers” originally posted by the International Consortium of Investigative Journalists (ICIJ). Another lesson from this, according to Tony Nasser of Barnes Law, is if you do happen to get on radar of the IRS, they will sometimes search far back into your past to build a case against you, the penalties often surpass what was not paid, and a good lawyer is crucial to navigating the intricacies of a claim from the IRS.   Consulting with an ethical, reputable CPA and tax advisory firm is the first step and if a strategy seems to good to be true it might be useful to get a second opinion. If you have any questions contact us for a free consultation on your specific situations.  


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