Saturday, August 26, 2006

For the last year, brothers Charles and Sam Wyly have been scrutinized by a phalanx of federal and congressional investigators examining the network of complex, offshore trusts and shell corporations created to avoid paying federal taxes on large amounts of income. The question at the heart of the inquiries: Are the tax shelters a creative but legal way to reduce the brothers' tax burdens – by tens of millions of dollars over several years – or are they just a sophisticated form of income tax evasion?

Billionaire Wyly brothers under a microscope

Dallas Morning News
August 26, 2006

Charles and Sam Wyly have worked in tandem for years. Even their vacation homes outside Aspen, Colo., are near each other. "When we have done things separately ... we haven't done as well as when we've done it together," Charles said.

They're billionaires. They travel in the most rarefied circles of Dallas high society. They're potential kingmakers in Republican politics.

And, for the last year, brothers Charles and Sam Wyly have been scrutinized by a phalanx of federal and congressional investigators examining the network of complex, offshore trusts and shell corporations created to avoid paying federal taxes on large amounts of income.

The question at the heart of the inquiries: Are the tax shelters a creative but legal way to reduce the brothers' tax burdens – by tens of millions of dollars over several years – or are they just a sophisticated form of income tax evasion?

In their hometown of Dallas, a different question is asked: Will their current troubles affect their A-list status?

Over the decades, the Wyly brothers have accumulated eye-popping wealth.

They started, bought and built several successful businesses including Earth Resources, Sterling Software, Michaels Stores, the Bonanza restaurant chain and electricity supplier Green Mountain Energy.

They've also given away piles of that money, spending more than a hundred million dollars on a wide range of favorite charities and often controversial political projects.

The Wylys won't discuss in detail the offshore trust accounts or stock option grants under investigation, preferring to have their lawyer speak for them. They also declined to speak this month at a congressional hearing on sophisticated tax havens.

They maintain that their actions were legal and appropriate.

"I'd rather it not be going on," Sam Wyly said about the investigation in a rare interview. "But everything we've done is based on truth."

He talked as he led a tour of the 8,450-square-foot, $7.48 million Highland Park home he shares with his wife, Cheryl.

'It's just courteous'

In the society bubbles of Highland Park and Preston Hollow, where their brands of conservatism and financial acumen are not uncommon, public talk of the Wylys' problems would likely be considered unseemly.

"Friends wouldn't mention those things," said a longtime acquaintance of Sam's, who asked that her name not be used precisely because she did not want to be publicly linked to such talk. "It's just courteous."

And then there is the Wylys' prodigious fundraising ability.

The brothers and their wives are known as go-to givers, a beloved trait in a segment of society where fundraising can seem like a competitive sport.

At their 5,000-square-foot Preston Hollow home (valued at $7.9 million), Charles and his wife, Dee, regularly host spectacular parties for local charities, often in a backyard conservatory built to accommodate such large events. A chef who once served the British royal family prepares their buffets and sit-down dinners.

"If they believe in the cause, they'll entertain. They are truly the loveliest people in the world," said Yvonne Crum, a friend of the family for 30 years.

They also lavish their own money on their favorite causes. They gave $20 million to the planned downtown Dallas Center for the Performing Arts. As a result, the "Dee and Charles Wyly Theatre," designed by architects Rem Koolhaas and Joshua Prince-Ramus, is set to open in 2009.

Charles' brother Sam, the more casual of the two with his shaggy haircut and ubiquitous earmuffs in winter, is less likely to be seen on the party circuit.

"Each of us does what we like. We don't go to events, and they get a kick out of going to events," Sam Wyly said.

It's one of the few things that the brothers diverge on.

Same path

Charles, 72, and Sam, 71, have traveled the same path their entire lives.

"When we have done things separately, which hasn't been much, we haven't done as well as when we've done it together," Charles said.

They became Eagle Scouts together. They played high school football together in their hometown of Delhi, La., population 3,000.

Charles was a star halfback and delayed graduation and a college scholarship offer to play another season with Sam and the Delhi High team. Then as now, football was practically a form of religion in a tiny rural town, and all anybody talked about.

"They invented a math course for him to take," Sam said of his brother. "The ones we had to sell on the idea was our parents."

In the end, staying behind turned out to be a success for all involved. The team won the 1951 state championship.

With that goal accomplished, they headed to the same college, now known as Louisiana Tech University. Of course, they joined the same fraternity.

It was after graduation that they spent rare time apart. Charles joined International Business Machines Corp. and moved to Dallas with his young bride, Dee, in the spring of 1956. Sam headed to Michigan to get a graduate degree.

But soon, the brothers were back on the same track. Sam followed his brother's lead by taking a job at IBM in Dallas.

It was during Sam's initial training at the company that he came to know another billionaire-in-the-making, Ross Perot.

"We were both true blue IBMers," said Sam. "We had religion."

Ultimately, the brothers decided they didn't want to stay. IBM was like the Army in those days, with employees regularly sent to new assignments with little choice in the matter.

"IBM used to stand for 'I've Been Moved'," said Charles.

Sam left IBM first, working briefly at Honeywell and then, in 1963, founding University Computing Co.

While he loved IBM, Charles decided to leave and join his brother at UCC six months later. Charles and his wife had recently lost a young child, and that played into his decision.

"I thought it was important to be with family," he said.

Over the next 40 years, the brothers always worked in tandem, and their lives remain close today. Their homes are separated by only 2.5 miles. Even their vacation homes – outside the Colorado resort town of Aspen – are near each other.

"They're not twins. They're not side-by-side. But they're together. It's that way for everything," said their attorney, William Brewer. "All these years later, these two brothers support each other."

While the brothers say they've never fought, together they've endured – and won – plenty of corporate battles, the fallout with Bonanza franchisees after the brothers sold the restaurant chain to a rival, a very public effort by the brothers to oust the management of Computer Associates, which was created by a combination of companies including Sterling Software and UCC; and a territorial dispute with the namesake and son of the founder of Michaels Stores, the Irving-based arts and crafts retail chain.

During all of the corporate disputes, Sam, who can break out in an impromptu, disarming giggle, is usually on the front line, but there's no doubt that more-traditional Charles is solidly by his side.

"Sam is the driving force behind the business, but Charles is an integral part of it," said Sterling Williams, for whom Sterling Software was once named. "I've never seen them fight. I've never seen them argue with each other."

GOP 'lightning rods'

Staunch Republicans, the Wylys have been big party donors since the Nixon presidency, personally giving about $10 million to Republican causes and candidates since the early 1970s, they say.

"They've been lightning rods with regards to politics," said Craig McDonald, director of Texans for Public Justice, a nonprofit public interest organization that tracks the flow of political money in Texas. "They spend their money aggressively in the political arena."

They're invited to the most elite Christmas parties at the White House. They've spent time at Camp David. Sam used to motorboat on the Potomac with former President George Bush.

"George the younger kind of inherited us," Sam said.

In 1999, the nonpartisan Center for Public Integrity found that the family had contributed $200,000 to George W. Bush's various campaigns, making them No. 9 on a list of the president's career patrons.

And that was before the Wylys helped pay for some of the most damaging attack ads against his opponents.

During Mr. Bush's 2000 primary fight with John McCain, the brothers backed a $2.5 million television ad campaign praising Mr. Bush's environmental record in Texas and attacking Mr. McCain's Senate votes. Until that point, it was Mr. Bush whose record had come under fire from environmental groups.

The ad's sponsor was identified only as "Republicans for Clean Air," a new group at the time. After the ad grabbed national news attention, Sam Wyly stepped up to claim credit.

In response, Mr. McCain called the Wyly brothers "sleazy," "Wyly coyotes" and "Texas cronies of George W. Bush."

"They should be ashamed," he told a Boston audience on a campaign stop. "Tell 'em to keep their dirty money in the state of Texas."

It became one of the primary's nastiest fights, and inspired Mr. McCain to push for new campaign finance rules to create more transparency.

"Their playing so aggressive actually changed the disclosure laws," Mr. McDonald said.

Two years ago, the brothers' political activity again attracted notice when they contributed to Swiftboat Veterans for Truth, which sought to discredit Sen. John Kerry's military service in Vietnam. Each contributed $10,000 to the controversial campaign that became one of the most acrimonious elements of the 2004 presidential race.

Sam says they decided to pay for the attack ads because, ultimately, they back their friends.

"It's a kind of clan loyalty," said Sam, who is proud of his Scottish-Irish roots.

Earlier this year, the Wylys' relationship with Mr. McCain took a surprising turn. They each sent $10,000 checks to his political action committee and were set to co-sponsor a Dallas fundraiser on his behalf.

Mr. McCain said he bears no ill will toward the Wylys.

"I didn't like what happened, but I've moved on," he said. "I've put all that behind me."

Still, after publicity about the Wylys' newfound support, Mr. McCain's campaign returned the contributions in May, citing a policy not to take funds from people under investigation. Republican Sen. Bill Frist of Tennessee also returned a Wyly contribution as the brothers came under increasing attention for their offshore trusts.

Complex finances

Federal prosecutors in Dallas and New York, working with at least one grand jury, are investigating the Wylys. The Internal Revenue Service, the New York district attorney, Securities and Exchange Commission regulators and congressional investigators also have examined the brothers' complex financial dealings from their time at Michaels, where Charles was chairman and Sam vice chairman.

The company has since been sold. In the spring, the Wylys proposed a settlement to the SEC without admitting or denying any wrongdoing.

A report released this month by the Senate's Permanent Subcommittee on Investigations alleged that the Wylys established the offshore trusts in the Irish Sea's Isle of Man, a commonly used tax haven, to get around their U.S. tax obligations.

The Senate report found that Wyly-related interests moved hundreds of millions of dollars from the offshore trusts into their Dallas hedge funds, Maverick Capital and Ranger Capital, and other businesses they directed, such as the electricity provider Green Mountain Energy.

Under U.S. law, it is generally legal to transfer income into such offshore trusts to reduce the amount of taxes owed – so long as the trusts are not controlled by the individual who transferred the money. According to the law, a person who effectively controls a trust's assets is required to pay taxes on its income.

Senate investigators allege that the Wylys used the offshore trusts to buy $30 million worth of artwork, jewelry, furniture and other items for their personal use. Among the purchases: a $937,500 portrait of Ben Franklin; a $13,000 French bronze chandelier; $721,000 in official documents from Abraham Lincoln's presidency; and a $759,000 emerald necklace.

Lawmakers assailed the transactions, identifying them as prime examples of abusing U.S. lax laws.

Sen. Carl Levin, the Michigan Democrat who launched the investigation, said the Wylys "participated in a 13-year scam and scheme to circumvent U.S. tax, securities and anti-money laundering requirements."

How the items came into the hands of Wyly family members was at the center of the Senate investigation.

The Wylys transferred millions of dollars worth of stock options from Michaels and two other companies to the overseas trusts, which were run day to day by a set of trustees. The Wylys appointed "trust protectors," who influence how the trust is managed, can fire the trustees and generally are supposed to operate independently.

The problem for the Wylys is that Senate investigators didn't believe that the trusts were truly independent.

Almost all of the Wylys' wishes – including the tens of millions of dollars in purchases of artwork, jewelry, memorabilia and the other items – were carried out without objection, according to documents in the Senate report.

The Wylys maintain that the trustees did not have to act on these suggestions and were responsible for making their own decisions. The purchases were appropriate even if the items ended up with the Wyly family, according to their attorney. And the trusts were an acceptable way to shelter their income from U.S. taxes.

"Any beneficiary can make any manner of recommendations, but it's the trustees that have the responsibility and power to make those decisions," said Mr. Brewer, their attorney.

Some of the artwork was delivered directly to Wyly addresses in Dallas. Other items went to family members in Colorado.

The Wylys also spent at least $85 million in untaxed, offshore funds to buy, build or maintain residential or commercial real estate in the U.S., the Senate report said. Offshore trust dollars were used to meet 90 percent or more of the costs involved in the real estate purchases.

High-cost horse farm

In 2001, Charles Wyly established Stargate Horse Farm, a 95-acre state-of-the-art training and equestrian facility in rural Denton County north of Dallas/Fort Worth International Airport.

Charles' daughter, Emily Wyly Lopez, designed the facility in a style "keeping with the old world tradition of dressage," according to the farm's Web site.

Horses have long been a Wyly family hobby.

"My place up here in the country is so Emily can have a horse," Charles said in a telephone interview with The News from his home near Aspen, where he recently recuperated from minor surgery. "We do love horses."

Stargate Horse Farm started with an initial $2.2 million purchase but soon grew into a much larger enterprise, with climate-controlled tack rooms, kitchen and lounge areas and commercial washers and dryers.

In January 2001, one overseas Wyly trust wired $2.5 million and directed that it go to the horse farm, the Senate report said. In the first eight months of 2002, another $4.75 million was sent over.

Funding for the ranch came from several offshore Wyly family entities, along with a handful of U.S. partnerships and corporations directed by the Wylys, the Senate investigation found.

From the start, a key Wyly family staff member raised questions about what had just been purchased. Another one later complained about the amount of money going into the project.

"This thing is getting out of hand and just growing and growing," the staffer wrote in an e-mail about the construction costs, according to the Senate report.

A 2005 memo said the horse farm was generating $24,000 per month for services such as boarding and horse training that actually cost the ranch $37,000 a month. The offshore trusts ultimately sent $10.1 million to construct and operate the farm, on top of the original $2.2 million purchase price.

Earlier this year, Stargate Horse Farm was put up for sale for $12.5 million.

Senate investigators concluded that because Stargate Horse Farm continued to receive funding despite a history of losing money, it proves that the Wylys could direct the use of the offshore assets.

Mr. Brewer disputes that. He said the family made its decisions "surrounded by a virtual army of lawyers and advisers" and ultimately the trustees were responsible.

"All the evidence points to the fact that Sam and Charles didn't do anything that they did not think was appropriate," Mr. Brewer said. "Sure, they employed strategies that they believed allowed them to defer income taxes and plan for succession of whatever assets would remain in these trusts for other family beneficiaries."

Back in Highland Park, the Wylys' friends say they can't conceive of either brother participating in anything illegal or even questionable.

"I have never known them to do anything illegal or unethical," said Mr. Williams, who has known them for more than 30 years. "I've always seen Sam go out of his way to try and make sure what he was doing was legal."