Summary
The epic story of Sam Wyly spans over three decades, involves the accumulation of billions of dollars that was inevitably vaporized in a jury trial, and has the ingredients to be adapted into a hit Netflix series. In 1961, Wyly founded his first successful company, which eventually went public in the early 1980s. Then, he invested hundreds of millions of dollars in energy, real estate, and retail, which helped him fund the creation of Michaels Stores, Inc. As time would tell, Michaels Stores would end up becoming one of the largest retailers in North America.
However, during the late 2000s, the SEC accused Wyly of engaging in a fraudulent scheme involving the distribution of unrecorded shares of his companies to an offshore trust that he controlled. He then allegedly manipulated the prices of these shares and immediately sold them without reporting the transactions to avoid paying taxes. A jury found Wyly guilty on all counts, and he was ordered to pay over half a billion dollars to the United States, which forced him into bankruptcy in a particularly brutal fashion.
Critical Details and Longer Analysis
Creation of Offshore Trusts
During the 1990s, Wyly created multiple Isle of Man trusts, each of which owned several subsidiary companies. As part of his compensation, Wyly received stock options and distributed them to the offshore trusts. While this type of conduct is generally legal, his fatal mistake was the decision to intentionally not report any of these transactions to the SEC or IRS, to avoid having to pay taxes on them.
Manipulation of Stock Prices
On one occasion, Michaels Stores sold 2 million shares at $12.50 per share to one of Wyly’s offshore trusts. He staged this event as a result of the company’s favorable financial position, so the Wall Street Journal published a story theorizing a positive outlook for the company. In turn, the stock price rose substantially, and the trust sold the shares at a massive profit. At no point was any of this recorded, so the entire transaction was (illegally) tax-free.
Ignoring Legal Warnings
Wyly was informed by competent counsel on plenty of occasions that his conduct was almost certainly illegal and could end up landing him in jail. Despite this, he chose to continue violating various securities and tax laws on a grand scale. Eventually, the SEC investigated these transactions and discovered that he was also conducting them without any involvement from the trustee, which clearly indicated that he had total control over his multiple trusts.
Misreporting and Fraudulent Documents
Moreover, he persuaded several employees at his companies to not file any reports about his fraudulent transactions, so his company was also misreporting its taxable income paid to Wyly. When the IRS finally audited his companies, he cunningly provided hundreds of false documents misrepresenting decades of fraudulent transactions. What a mess!
The Jury’s Verdict
Ultimately, a jury found Wyly liable for securities fraud and tax fraud, partly because he had total control over the offshore trusts that owned hundreds of millions of dollars of his assets. Wyly was ordered to disgorge almost a billion dollars—at the time of the court’s decision, this was a record! He entered into a deal with the SEC and IRS, agreeing to both file for bankruptcy and to give up all of his assets. In exchange, his children’s trust account, which held a small amount of their wealth, remained untouched.
What We Would Have Done to Prevent This
Had Wyly not masterminded and conducted this massive fraudulent scheme, he would likely still be a billionaire many times over. His scheme only saved him a couple hundred million in tax bills, which is merely a fraction of the billions that he owned in assets.
In fact, he likely would have been a perfect candidate for a legitimate offshore trust structure. He had multiple businesses exposing him to multiple risks and had amassed so much wealth that a proper asset protection system would have been absolutely necessary.
