Wyly brothers built an empire side-by-side
By Zachary A. Goldfarb and Philip Rucker
Saturday, Jul 31, 2010
Born during the Depression in a northeast Louisiana plantation town of 3,000, Charles Wyly and his younger brother Sam have been inseparable since childhood: numbers 3 and 13 on the state-championship high school football team, business partners who turned ideas into billion-dollar companies, philanthropic champions and benefactors of politicians, including the Bush political dynasty. Now the brothers are co-defendants in a far-reaching securities fraud suit.
The reclusive pair, who both settled in Dallas, amassed extraordinary wealth after starting a software company during the computer industry's infancy and investing their earnings in other technology firms, restaurant chains, clothing stores and energy companies. They showered money on environmental causes, public broadcasting, arts groups, charities and Republican and conservative causes in Texas and nationwide.
But their wealth -- and largess -- had a dark side, according to a fraud suit filed Thursday by the Securities and Exchange Commission. The charges, culminating a six-year probe, accuse the brothers of creating an elaborate network of overseas accounts and companies through which they made illegal trades, reaping more than a half-billion dollars in hidden profit. The Wylys deny the charges, according to a spokesman, who said they have always supported causes in which they believe and relied on their lawyers and accountants in structuring business arrangements.
The fallout of the SEC suit rippled through Washington and the country Friday, with Democrats using the opportunity to paint Republicans as indebted to shady contributors. The Democratic Congressional Campaign Committee called on Rep. Pete Sessions (Tex.), who leads the National Republican Congressional Committee, to return donations from the Wylys. The brothers have given more than $160,000 to the NRCC and $35,000 to Sessions over two decades.
"NRCC Chairman Pete Sessions's choice is simple: Stand up for what's right by returning this tainted campaign cash or let the Wylys' dirty money continue helping House Republicans, even though it came from a massive fraud of American taxpayers using foreign bank accounts," DCCC spokesman Ryan Rudominer said.
Republicans responded by pointing out that Democrats and their party committees have received donations from campaign accounts of Rep. Charles B. Rangel, the New York Democrat facing ethics charges. "The more important question is when does the DCCC plan to donate the $2.5 million they have received from ethically challenged Charlie Rangel, not to mention the nearly $1 million in campaign cash from him that vulnerable House Democrats are holding on to?" NRCC spokesman Paul Lindsay said.
The SEC probe was launched in 2004 after the agency was contacted by Bank of America, which sought to verify the Wylys' offshore assets, only to have the brothers refuse to comply. The Wylys fell under government scrutiny again in 2005 in a wide-ranging probe of offshore accounts by a Senate subcommittee.
Cash in computing
Now in their mid-70s, Charles and Sam Wyly started their careers at IBM. As recalled on the family Web site, the brothers quickly excelled. Together they founded University Computer Company, and only two years later it went public, its stock rising year after year. The brothers aggressively used their earnings to invest in more businesses.
In the early 1990s, the brothers began to look into how they could use tax shelters, according to a Senate probe, which concluded in 2006 and found that the Wylys used offshore accounts to hide their wealth. No charges were brought.
The brothers used an "armada" of lawyers, brokers and others to transfer $190 million worth of stock options and warrants to nearly 60 offshore trusts and shell companies, according to the Senate probe. Then they exercised those options and warrants, generating $600 million in untaxed offshore dollars. They used the money to make loans to themselves, finance business ventures and acquire real estate and art.
As their 10 children and 17 grandchildren have come of age, they've enjoyed the fruits of the offshore accounts, according to SEC and Senate investigators. The brothers used offshore funds, for example, to buy an $11 million ranch for the family near Aspen, Colo., and to buy 20 portraits of family members at a cost of nearly $1 million. The brothers named their offshore entities after Louisiana childhood locations: Lake Providence, where they were born; Delhi, where they went to high school; and Tensas, a bayou.
Role as shareholders
According to the SEC, the offshore accounts were used for more than shielding the Wylys' money from taxes. The brothers served together on the boards of four companies in which they owned large stakes: Michaels, a leading arts and crafts chain; technology firms Sterling Software and Sterling Commerce; and Scottish Annuity & Life Holdings.
Large shareholders are required under federal securities law to disclose trades, because other investors often use such trading as a gauge of a company's health. But by concealing their ownership of companies through their offshore accounts, the Wylys were able to trade shares in these companies without letting the public know, the SEC said.
Sometimes, the agency said, the Wylys used their secret ownership to trade based on insider information. In 1999, the Wylys resolved to sell Sterling Software, a data-management company they had founded nearly two decades earlier. Without filing the required disclosures, the brothers, through their offshore accounts, created a complex and hard-to-track financial instrument that would let them bet that Sterling's shares would rise, according to SEC.
Four months later, the behemoth Computer Associates bought Sterling for $4 billion, netting the Wylys more than $30 million in profit, the SEC said.
The Wylys, while allegedly hiding their money abroad, were not shy about using it to support causes at home. They have given to their alma mater, Louisiana Tech, as well as to Harvard Medical School, animal shelters, the Salvation Army, centers to combat family violence and others.
Some of the donations were tainted, according to the SEC. Sam Wyly gave $8 million of the offshore funds to his graduate school, the University of Michigan which named a building after him, according to the SEC. Charles Wyly gave $2.5 million in offshore funds to a church, the government says.
Ad campaign for Bush
The Wylys also have long been generous political donors, but reached national notice in 2000 as prominent supporters of then-Texas Gov. George W. Bush's presidential campaign. With Bush locked in a divisive GOP primary battle with Sen. John McCain (Ariz.), the Wyly brothers formed a third-party group, Republicans for Clean Air, which launched a $2 million television ad campaign on the eve of the primaries in New York, Ohio and California.
The ads attacked McCain for voting against a federal solar power bill and praised Bush for signing an electric deregulation bill in Texas that required the cleanup of power plants that burn coal. Texas political consultant Rob Allyn, who produced the Wyly commercials, told the Houston Chronicle that Sam Wyly was motivated by McCain's vote on the solar bill.
In 2004, the Wylys helped fund Swift Boat Veterans for Truth, another third-party organization that ran controversial television ads attacking the military record of Sen. John F. Kerry (Mass.), Bush's Democratic opponent.
The Wylys were active donors through the Bush years, giving generously to scores of Republican lawmakers and candidates, as well as to the Bush campaigns. But though they made appearances on the Republican donor circuit, the Wylys rarely jockeyed for face time with candidates.
"They avoid the limelight," said Jim Francis, another major Bush donor from Dallas. "They're not formal. Sam walks in the neighborhood every morning. Charles is quiet, is soft-spoken. Sam is soft-spoken also. They're very gentle human beings."
The Wylys live in North Dallas and were described as casual friends with the Bushes. They speak from time to time with the former president and first lady.
"They don't go to dinner together," Francis said. "They don't play golf together."
Staff writer Tim Farnam and research editor Alice Crites contributed to this report.
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