US judge orders Texas brothers to give up as much as $400M for brazen fraud spanning years

NEW YORK, N.Y. – A Texas businessman and the estate of his brother must give up as much as $400 million after a civil jury found that they engaged in a massive fraud to evade taxes, a judge said in a ruling released Thursday.

“By any reasonable measure, the disgorgement and prejudgment interest awarded in this proceeding will be staggering and among the largest awards ever imposed against individual defendants,” U.S. District Judge Shira Scheindlin wrote of her order against Sam Wyly and the estate of his brother, Charles. The case was brought by the Securities and Exchange Commission.

In a ruling dated Wednesday, Scheindlin said the brothers engaged in a 13-year fraud, created 17 trusts and 40 subsidiary companies, amassed an army of lawyers and hired an offshore accountant to hold records outside the United States.

“Reasonable and savvy businessmen do not engage in such activity unless it is profitable,” the judge wrote of the onetime owners of the arts and crafts retail chain Michael Stores Inc. “Of course it was profitable … the Wylys were able to accumulate tremendous tax-free wealth.”

She ordered Sam Wyly and the estate of his brother, Charles, to surrender more than $187 million. Charles Wyly was 77 when he died in a 2011 car accident in Aspen, Colo.

Defence attorney Stephen D. Susman has said Charles Wyly’s estate has about $30 million in the United States while Sam Wyly has about $70 million plus a $12 million annuity. He said more than $380 million remained offshore.

Susman, who did not immediately return messages Thursday seeking comment, had urged a disgorgement of no more than $24 million. Over the years, the brothers were prominent in Dallas, where they donated millions of dollars to mostly conservative Republican candidates and causes and $20 million to help build Dallas’ performing arts centre.

Sales of companies including Michael Stores and two technology companies generated more than $14 billion. After the sales, Sam Wyly was on the Forbes list of billionaires for a while.

SEC lawyer Bridget Fitzpatrick said the brothers invested $600 million in U.S. business, $85 million in real estate and $40 million in furniture, art and jewelry.

Fitzpatrick had said a large penalty would deter others from thinking fraud can be profitable, even if discovered. She had no immediate comment Thursday.

The judge said Sam Wyly must disgorge $123 million while Charles Wyly’s estate must give up $63 million. Scheindlin said prejudgment interest would likely bring total disgorgement to between $300 million and $400 million, equivalent to about 10 per cent of total penalties and disgorgement ordered in SEC enforcement cases nationwide last year.

She also barred Sam Wyly from future securities violations, though she noted he was subject to a similar 1979 order before he “engaged in a large securities fraud spanning 13 years, involving multiple trusts and entities and hundreds, if not thousands, of misstatements.”

“The extensiveness of this scheme, the brazenness of Wyly’s conduct, and his position of wealth and importance in the community warrants the imposition of a permanent injunction,” Scheindlin wrote.