Wyly says ’80s bank failures paved way for offshore dealings

Dallas tycoon Samuel Wyly told a judge that his $2 billion battle with the Internal Revenue Service has its roots in the 1980s, when he lost faith in the U.S. banking system.

Wyly’s use of offshore trusts is central to the IRS claim that threatens to wipe out his fortune. He testified Thursday that the failure of Texas banks three decades ago was the reason that he opened a trust on the Isle of Man in 1992.

“The fragility of the big banks, it didn’t seem like a safe place,” Wyly, 81, said on the second day of a trial in U.S. Bankruptcy Court in Dallas. He said the Isle of Man, a U.K. dependency in the Irish Sea, “had been in operation for 1,000 years,” while the U.S. was just a quarter as old.

A federal jury in Manhattan found in 2014 that Wyly and his brother Charles, who together developed companies including arts and crafts retailer Michaels Stores, hid stock offshore and made illegal trades for 13 years, taking in $550 million in illegal profit. Charles Wyly died in a 2011 car crash, and the IRS is also going after his estate.

The case, a victory for the Securities and Exchange Commission, triggered demands for years’ worth of IRS back taxes and penalties, prompting Wyly and his brother’s widow, Caroline “Dee” Wyly, to file for bankruptcy.

The IRS is seeking $1 billion from Charles Wyly’s estate, putting a total of more than $3 billion at risk for the family in the Dallas trial. After the trial, a judge will determine the size of the agency’s claims in the Chapter 11 cases.

Wyly said he’d been a board member of the First National Bank of Dallas from 1968 until it was taken over by a North Carolina lender in 1986, during the savings-and-loan crisis. He said the out-of-state bank called a loan he had used to finance Michaels Stores.

“No more credit for Michaels. No more money and pay off the loan. I had to scramble to find some other way to capitalize and finance Michaels Stores,” Wyly said.

Because of his age and health, Wyly was excused after testifying for almost two hours Thursday. He is scheduled to continue Friday.

This story was originally published January 7, 2016 at 5:45 PM with the headline "Wyly says ’80s bank failures paved way for offshore dealings."