The Long and Winding Saga of the Wyly Brothers
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WOLF POPPER LLP 2014 Public Safety Employees Pension & Benefits Conference The Long and Winding Saga Of the Wyly Brothers New Orleans, LA. By Chet B. Waldman, Esq. October 27, 2014 Wolf Popper LLP The Wyly Brothers’ Quest To Violate Every White Collar Crime In The Book by: Chet B. Waldman 1 Who are the Wyly Brothers? • Brothers Sam and Charles Wyly: inseparable from childhood – Grew up in rural Lake Providence, in East Carroll parish, Louisiana – Played H.S. football for Delhi High School on team that won state championship, along the way beating their cross-town rivals from Tallulah H.S. – Moved to Texas where they spent 5 decades in business together – Lived in summer homes in Aspen, Colorado, Pitkin County, so they could vacation together 2 Southern Charm • Wylys were very proud of their southern heritage – Maternal great-great-grandfather - Edward Sparrow - was a Confederate Senator who fought with Louisiana regiments in the Civil War – In Sam Wyly’s home in Dallas he has a painting called Moonlight and Magnolias in which he and his wife #3 are dancing with him wearing the gray uniform of a Confederate General. • Republicans to the core 3 Wyly Business Acumen • Early pioneers in computer software - built Sterling Software into multi-billion-dollar+ company by buying up competitors, many through hostile tender offers • Founded Datran, a forerunner to the internet which, in the early 1970s, got computers talking to each other through a series of microwave towers • Bought Michaels, a craft-store chain, in 1983 and built it into a national chain • Opened the Maverick Capital hedge fund in early 1990s - $8 billion in assets • Founded power reseller Green Mountain Energy prior to power deregulation occurring in Texas 4 All This Success Makes The Wylys Rich: How Rich? • In 2010 Sam Wyly appeared on Forbes’ list of the 400 richest Americans with $1 billion net worth rd • In 2011 Forbes listed Sam as the 393 richest man in the world • Active philanthropists providing millions of dollars to arts groups, colleges, literary programs and animal shelters - Theater in Dallas Arts District bears the names of Charles and his wife 5 Political Contributions • The Wylys have contributed roughly $10 million to 192 Republican candidates and causes • Sam directed Richard Nixon’s election effort in the State of Texas • Personal friends of George H.W. Bush and among the bigger donors to George W. Bush during his presidency • Democrats particularly hated the Wylys for various attack ads: - Funded TV ads of “Swift Boat Veterans for Truth” Group that questioned John Kerry’s war record 6 The One Thing The Wylys Hated More Than Democrats From The North: Taxes! • According to a business acquaintance: “Sam Wyly is the most tax-averse bastard you’ve ever met” • “Protecting” the money they spent a lifetime earning became an obsession for the Wylys - In 1992 they enlisted the advice of tax attorney David Tedder to help them avoid paying taxes - Tedder later went to prison on unrelated tax and money-laundering convictions - Tedder introduced the Wylys to 2 key tax havens: The Cayman Islands and the Isle of Man 7 Tax Haven/Heaven? • Cayman Islands – Vacation resort hotspot – International tax haven ♦ Low taxes ♦ Secret bank accounts allowed • Isle of Man – Located in the middle of the Irish Sea – 100 square miles smaller than Dallas – Less than 80,000 people – International tax haven ♦ No estate tax ♦ Highest tax bracket is 20% ♦ 10% corporate tax rate • These tax havens cost the U.S. government hundreds of billions of dollars in tax revenue 8 Tax “Avoidance” or Tax “Evasion”? • How the Wylys got around paying taxes – Between 1992-1996 they created 17 offshore trusts in the Isle of Man, each of which owned several subsidiaries (41 dummy corporations) – The trusts were named after places in Louisiana where Wylys grew up (e.g. “East Carroll”) or related to their high-school days (e.g. “Delhi” and “Tallulah”) or their summer homes in Colorado (e.g. “Pitkin”) – A Wyly-related entity in the Cayman Islands (the “Family Office”) conveyed the Wylys’ investment recommenda- tions to the trustees who always made transactions based on these recommendations 9 Tax “Avoidance” or Tax “Evasion”? • The Wylys were directors of 4 public companies: Michael’s Stores Sterling Software Scottish Re Group Sterling Commerce Limited • As part of their compensation, Wylys received stock options and warrants from the 4 companies • Between 1992-1999, Wylys sold or transferred these stock options to their offshore entities in return for annuities that would pay out the value of the securities over time • Between 1995-2005, the 58 trusts and companies exercised these options, separately acquired options and stock in all 4 companies, and sold the shares for total profits calculated to be $487,780,099! 10 Tax “Avoidance” or Tax “Evasion”? • For many years, on paper, the Wylys were paupers with the off- shore trusts “owning their assets,” which the Wylys were able to use on loan. The trusts owned: – 4 properties in Aspen, Colorado – 100-acre horse farm outside Dallas – $1 million painting of Ben Franklin – $750,000 emerald necklace – $622,000 ruby – Norman Rockwell’s original “Rosie the Riveter” painting purchased for $4.96 million – highest price ever paid for a Rockwell • When Wylys needed cash it usually came in the form of tax- exempt loans from the trusts • Such an arrangement would be legal if the trusts were operated “independently” of the Wylys. However, if the Wylys directed all of the investment activity of the trusts and transferred proceeds into their own bank accounts, that would be illegal 11 The U.S. Government Learns of the Wylys’ Offshore Holdings • The offshore entities’ securities were held in U.S. brokerage accounts including at Bank of America (“BofA”) • In early 2004, BofA’s clearing firm flagged the Wylys’ offshore accounts. In seeking to comply with “anti- money laundering provisions” of the PATRIOT ACT (i.e. “know your customer laws”), BofA attempted to learn the underlying beneficiaries of the trusts • The offshore trusts refused to comply, seeking to keep hidden the Wylys’ beneficial interest • BofA closed the accounts and reported the offshore entities to the SEC in November 2004 12 The SEC Files a Lawsuit • For 6 years, mostly while Republicans were in the White House and controlled the SEC, the government steered clear of the Wylys. However, 18 months after Barack Obama was elected and then installed his own SEC Commissioner, the SEC brought an action against the Wylys • On July 29, 2010, the SEC filed a 78-page Complaint in the U.S. District Court in Manhattan against the Wylys, their personal attorney, and their stockbroker – Perhaps an artful and legitimate attempt to avoid a Texas Court since Washington regulators historically are not embraced there • Sam Wyly had a previous history with the SEC – In 1979 he was sued by SEC in connection with a bond deal which was settled without admitting or denying wrongdoing 13 Insider-Transaction Reporting Requirements • Holdings and every trade in a public company’s securities by an officer or director of that company has to be disclosed on a Form 4 filing with the SEC • Holdings and every trade by a beneficial owner of greater than 5% of a public company’s stock has to be disclosed by that owner on a Schedule 13D with the SEC • Purpose: The disclosure scheme requiring insiders to report beneficial ownership and any changes in that ownership reflects Congress’s judgment that public disclosures of insiders’ ownership of, and trading in, company stock provides valuable information to investors – “The very purpose of insider-transaction reporting requirements . is to give investors an idea of the purchases and sales by insiders which may in turn indicate their private opinion as to prospects of the company.” [SEC v. Wyly, 788 F. Supp. 2d 92, 123 (S.D.N.Y. 2011)] 14 The SEC Files a Lawsuit • Crux of SEC’s Allegations: Wylys engaged in a “13- year fraudulent scheme to hold and trade tens of millions of securities of public companies while they were the members of the boards of directors of those companies, without disclosing their ownership and their trading of those securities.” [SEC v. Wyly, 950 F. Supp. 2d 547, 550-51 (S.D.N.Y. 2013)] • 2 primary allegations: 1) The Wylys traded 14 million shares via the offshore vehicles in violation of rules requiring corporate insiders owning 5% or more of a company to disclose their holdings and trades (i.e. failed to file Form 4s and 13Ds) 2) Insider Trading 15 Failure to File Form 4s and Schedule 13Ds • The SEC alleged that the Wylys spread their stock holdings in Sterling Software, Sterling Commerce, Michaels Stores and Scottish Re among their 50+ offshore entities. While each entity held a small percentage of shares in these companies, all the trusts combined held a significant portion of the companies’ outstanding shares – E.g. – At their peak, the trusts held 36.7% of Michaels and 33.7% of Sterling Software – Because they did not file 13Ds or Form 4s, the public did not know of the Wylys’ significant ownership interests in these companies 16 The Insider Trading Claim • In September 1999, the Wylys, who led the Boards of Sterling Software and Sterling Commerce, decided that they would pursue selling both companies and they retained Goldman Sachs to evaluate potential buyers • In October 1999, the Wylys engaged in a large stock swap allowing them, in essence, to buy up millions of shares in Sterling Software through the offshore trusts. They also had Sterling Software change