Lessons Learned the Hard Way: The Wyly Brothers

It doesn’t look like the shockwaves of the Wyly case will fade any time soon. Just this past month, Dallas Morning News reported that Caroline Wyly, the elderly widow of the late Charles Wyly, is still fighting for absolution from $386 million in tax fraud penalties sought by the IRS. She, as well as the surviving Wyly brother, Sam, filed for bankruptcy last year in the wake of a court decision to seek over $3 billion in back taxes from the Wylys. The once-remarkable fortune accrued by the Wylys has all but dissolved, leaving the rest of us to ponder what we can learn from such a debacle.

A Brief History of the Wylys

In short, the Wyly brothers found their fortune by developing, acquiring, or selling several successful businesses. Their success began in 1963 with the start of University Computing Company(UCC), which had grown to $125 million in sales by 1971. One of their highest-profile undertakings was Sterling Software, which they built into a billion-dollar player in the tech industry. Sterling Software even labored as an early pioneer of the internet in the 1970s.

Recognizable steakhouse brand Bonanza went through a renaissance when the Wylys took over in 1967; by the late 1980’s, Bonanza was 600 stores strong.

Sam and Charles also acquired controlling interest in the arts and craft store Michaels in the 1980s, and the brand’s value grew exponentially under their guidance.

The Wyly brothers regularly appeared in Forbes’ “400 Wealthiest People” list until 2011.

What Went Wrong

In 2006, the Securities and Exchange Commission began investigating the Wylys for sheltering taxable income in overseas havens. Although no indictments came in a timely manner, charges were brought to the table by the NEC in 2010.

The Wyly brothers allegedly bought up shares of Sterling Software stock under the cover off-shore trust funds several months before they sold Sterling. They claimed that they had not yet decided to sell Sterling when their trusts made the purchases, but the New York-based jury decided otherwise in 2014 and charged them with insider trading.

“The Senate subcommitte’s chairman, Carl Levin, a Democrat from Michigan, says the Wylys’ offshore system helped them avoid paying $300 million in federal taxes over 13 years.”
-Joseph Guinto, D Magazine

All profits being accounted for, the Wyly brothers brothers allegedly earned $550 million in fraudulent stocks gained from insider trading.

While the elder brother, Charles, was killed in a vehicle accident in 2011, his widow and brother were left to handle the mess; the penalties instituted by the IRS totaled over $3 billion (the largest ever sought from an individual), and both Sam Wyly and Caroline,
Charles’ widow, filed bankruptcy in 2014.

The Wylys’ foreign trusts ranged from the Cayman Islands to the Isle of Mann off the English Coast

What Does This Mean for the Rest of Us?

Unfortunately, the case against the Wylys represents an unprecedented shift towards aggression on the part of the SEC. There are, however, a few take-aways worth heeding.

“Tax havens” are few and far between, as the IRS is now demanding compliance from foreign governments and banks when it comes to harboring American bank accounts. The Foreign Account Tax Compliance Act (FATCA) is the primary vehicle for this scrutiny.

The SEC and the IRS are dialing up their efforts to reel in tax evasion–whether that tax evasion was achieved legitimately or illegitimately is a different matter–and individuals seeking to protect their hard-won estate wealth should be careful to comply with the boundaries of the FATCA. Ask the Wyly family; a $3 billion back-tax charge hurts.

The risk-reward balance seems to be shifting. In an era where the IRS has the green light to wiretap suspects in high-profile white collar crimes, taking legal risks and exploring grey areas no longer looks as appealing as it did to the Wyly brothers when they began creating their diverse overseas network in 1992.

While the tenacity with which the SEC attacked the Wyly brothers has often been linked to political motives (the Wylys donated generously to several political campaigns), government financial agencies will behave in kind: they will fight for money that they believe should have been paid. The Wylys spent nearly $20 million to fight this court decision and still lost.

Securing the services of a reliable tax firm is more important than ever–leave your estate security in trusted hands that will protect your assets and provide safe legal counsel.

Facebook Comments