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Ernest W. Leonard, Esq.
Texas State Bar No. 12208750
Friedman & Felger, L.L.P.
5301
Spring Valley Rd. Ste.
200
Dallas, Texas
75240
Telephone:
(972) 788-1400
Telecopier:
(972) 788-2667
ATTORNEYS FOR TORIE STEELE
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
In Re:
SAMUEL
E.
WYL
Y
et al.
Debtors.
TORIE STEELE,
Plaintiff,
Case No. 14-35043-bjh11
Chapter
11
Jointly
Administered
v
ADVERSARY NO.
SAMUEL
E.
WYLY
Defendant.
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO 11 U.S.C 523(a)(2) and (6)
COMES NOW Torie Steele, complaining of the actions of Samuel
E.
Wyly,
and
would respectfully show this Court as follows:
I.
PARTIES
1.
Plaintiff Torie Steele ( Steele )
is an
individual residing
in
Dallas County,
Texas.
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO 11 U.S.C. 523(a)(2) and 6)-
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2 Defendant Samuel E Wyly ( Wyly )
is
an individual Chapter 11 debtor.
Pursuant to
FED R BANKR P
7004(b)(9), Wyly may be served with process by serving
him via first class U.S. mail at 3905 Beverly Drive, Dallas, Texas 75205, the address
listed
in
his bankruptcy petition.
II.
JURISDICTION AND VENUE
3
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C.
1334. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2).
4
Venue over this adversary proceeding
is
proper
in
this Court pursuant to
28 U.S.C. 1409.
Ill.
SUMM RY OF RELIEF
SOUGHT
5 Steele
is
a former spouse of Wyly. During their marriage, Wyly served as
Chairman of the Board
of
Directors of Sterling Software, Inc. ( Sterling ) and Michael's
Stores,
Inc
( Michael's ).
In
connection with his employment and during their marriage,
Wyly was granted substantial stock
1
in
these companies as compensation.
6 Wyly and Steele were divorced in 1991. The divorce judgment entered on
September, 20
1991
awarded Wyly nearly all of their community interest
in
the stock of
Sterling and Michael's. This judgment further stated that any community property not
listed in the divorce judgment is owned equally between them.
7 In
a lawsuit filed
in
2010, the Securities and Exchange Commission (the
Wyly owned stock, options and warrants in Michael's and Sterling, which are
hereinafter, collectively referred to as stock or shares.
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO U.S.C. 523 a) 2) and 6)-
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SEC ) accused Wyly of engaging in a fraudulent scheme to hide his ownership
interests in Sterling and Michael's. In 2014, a jury agreed with the SEC, finding that
Wyly engaged
in
stock fraud.
8
Filings in this lawsuit reveal that in 1992, Wyly transferred to offshore
trusts a substantial majority of the amount of stock
in
Sterling and Michael's that he
received in the 1991 divorce. However, subsequent filings with the SEC by Sterling and
Michael's show that within two years of transferring what should have been the majority
of his stock offshore, Wyly owned substantially more stock than was even awarded to
him
in
the divorce.
9 The numbers do not add
up
Wyly received his stock
in
Michael's and
Sterling as compensation. He was not awarded cash
in
the divorce that would have
enabled him to purchase sizable amounts of shares in these companies. Thus, Wyly
either failed to disclose all of his stock
in
Michael's and Sterling, had others hold for the
stock for him, or had the companies delay issuing stock to him until after his divorce
with Steele was finalized.
10. An August 23, 2010 article in the online newsletter, F/Nalternatives
quoted Wyly as blaming his legal difficulties with the SEC on bad advice from lawyers
and accountants, tracing it back to the end of Samuel Wyly's marriage to ex-wife Torie
Steele in 1991. As
is
now apparent, the fraudulent scheme alleged and proven by the
SEC was not just to defraud the investing public, but also to defraud Steele, his ex-wife.
11. Accordingly, Steele brings this action pursuant to
11
U.S.C
523(a)(2)
and (6) seeking a determination of the amount of indebtedness owed to her
as
the
result of Wyly's fraudulent and tortious actions,
and
a further determination that such
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF
DEBT PURSUANT TO 11 U.S.C. 523(a)(2) and 6 -
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indebtedness is not dischargeable in his bankruptcy.
IV.
FACTUAL BACKGROUND
A. Property Allocations Under the Divorce Judgment
12. Steele, formerly known
as
Victoria Lee Wyly, was married to Wyly from
1978 through 1991.
13. During his marriage to Steele, Wyly co-founded Sterling Software, Inc.,
and served as the Chairman of its Board of Directors. Also during their marriage, Wyly
was named to the Board of Directors of Michael's Stores, Inc. and subsequently elected
its Chairman.
14. During their marriage, Wyly obtained a significant amount of stock in
Sterling and Michaels as part of his compensation. This stock
in
Michaels and Sterling
was the community property of Wyly and Steele.
15. Steele filed for divorce against Wyly in the Superior Court of California,
County of Los Angeles, Case No. D-226386 (the Divorce Proceeding ). On September
23,
1991, the court
in
the Divorce Proceeding entered a judgment (the Divorce
Judgment ) which, among other things, made determinations as to separate property
and allocations of community property. Section
10
of the Divorce Judgment provides
that:
In
the event that any community property
in
addition to those items listed
in
this
Judgment shall be discovered hereafter, such property or any interests therein shall be
divided equally between the parties.
16. At the time
of
their divorce, the most significant assets owned by them
were the stock
in
Michael's and Sterling. Except for 3,000 shares of Sterling, Wyly
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF
DEBT PURSUANT TO 11 U.S.C. 523(a)(2) and 6)-
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20. Neither the Complaint nor the Stipulation reveal the source of the stock
transferred offshore. Thus, whether this stock consisted of shares awarded Wyly
as
community property
in
the Divorce Judgment or consisted of shares which Wyly
had
held but not disclosed to Steele
is
not known.
21. The SEC Action was tried to a jury from March 31, 2014 to May
7,
2014.
On May 12, 2014, the jury returned a verdict finding on all counts that Wyly engaged in
securities fraud and violations of securities law. In its September 25, 2014 Order, the
Court in the SEC action held that, as found by the jury, Wyly remained the beneficial
owner of all o f the stock he transferred offshore.
2
C. Inconsistencies in Share
Ownership
Claims
22. According to the Stipulation,
in
April of 1992 Wyly transferred offshore
54% of the amount of shares
in
Michael's which he received through the Divorce
Judgment (585,000 of 1,086,765 shares). However, the Proxy Statement filed by
Michael's with the SEC on May 1, 1992 discloses that as of April 7, 1992, Wyly owned
1,995,962 shares
in
Michaels (84% more than was awarded to him
in
the divorce seven
months earlier) and that The Wyly Group owned 4,001,063 shares. A footnote to the
Proxy Statement states: The Wyly Group consists of Sam Wyly, Charles
J.
Wyly and
certain Wyly family trusts of which they are trustee.
23. According to the Stipulation,
in
April of 1992 Wyly transferred offshore
87% of the amount of shares
in
Sterling which he received through the Divorce
Judgment
1
,311,725 of 1,506,537 shares). However, the Proxy Statement filed by
Sterling with the SEC on January 23, 1992 discloses that as of January 10, 1992, Wyly
2
See, Order dated September 23, 2015 (page 24) in the SEC Action.
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO
11
U.S.C. 523(a)(2) and
6)-
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owned 1,695,822 shares
in
Sterling and that "The Wyly Group" owned 3,195,886
shares. A footnote to this Proxy Statement states: "The Wyly Group consists of
Sam
Wyly, Charles
J.
Wyly, Evan Wyly and Wyly family trusts of which they are trustee."
24.
Wyly's actual ownership
in
Michael's and Sterling
is
particularly confusing
when the SEC filings made in the years after the offshore transfers are considered.
According to the 10K filed for Sterling
in
1994, as of December 31 1993, Wyly owned
684,097 shares of stock and 2,416,172 options. According to the Proxy Statement filed
for Michaels
in
1994, as of April 6 1994 Wyly owned 1 627,628 shares of stock and
700,000 options.
No
mention
is
made of "The Wyly Group"
in
these filings.
25. The numbers do not add up. The Court in the SEC Action found that Wyly
received his stock interests
in
Sterling and Michael's as part of his compensation.
3
Wyly
was awarded a specific, defined sum of stock as a community property allocation in the
Divorce Judgment. The Stipulation states that Wyly transferred a substantial majority of
the amount of this stock
in April of 1992, seven months after the Divorce Judgment.
However, the 1994 SEC filings for Michaels and Sterling show that in 1993 and 1994
Wyly still owned stock
in
a significantly greater amount than what was awarded to him
'
the Divorce
Judgment-
notwithstanding the offshore transfers
26. Wyly was not awarded cash in the divorce that would have enabled him to
purchase sizable amounts of shares
in
these companies to account for these
differences. Upon
belief, Wyly either failed to disclose all of his stock in Michael's and
Sterling, had others hold for the stock for him, or delayed compensation that would have
been justly earned before the Divorce Judgment. Regardless of the explanation, Steele
3
See, Order dated September 23, 2015 (page 23)
in
the SEC Action.
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO 11 U.S.C. 523(a)(2) and 6)
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owned 50 of the stock that was not disclosed in the Divorce Judgment.
v
CAUSES OF ACTION
A 11 U.S.C. 523 a) 2) A)
27. Steele re-alleges the factual allegations stated above.
28.
In
connection with the Divorce Proceeding, Wyly represented that all
community property owned by he and Steele were listed
in
the Divorce Judgment. As
set forth above, Wyly did not disclose all of his ownership rights in Michael's and
Sterling. According to the Stipulation, Wyly transferred offshore 54 of the amount of
shares
in
Michael's awarded to him
in
the Divorce Judgment and 87 of the amount of
shares in Sterling awarded to him in the Divorce Judgment. However, according to
SEC filings of Sterling and Michael's within two years
of
transferring his shares offshore,
Wyly owned substantially more stock than he was awarded in the divorce -
notwithstanding the offshore transfers.
29
Steele reasonably relied upon Wyly's representations concerning the
community's interests in the shares
of
Sterling and Michael's in accepting the property
allocations in the Divorce Judgment. As a result, Steele suffered injury in the amount of
the value of 50 of the undisclosed shares.
30 By the actions described above, Wyly obtained property from Steele by
false pretenses, false representations and actual fraud. Accordingly, Steele requests
judgment against Wyly
in
the amount of all damages suffered as a result of Wyly's false
pretenses, false representations and actual fraud and further requests that, pursuant to
FED. R
BANKR
P
4007, this debt be determined nondischargeable pursuant to 11
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO
11
U.S.C.
523(a)(2)
and 6)-
688484
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U.S.C 523(a)(2).
B. 11 U.S.C. 523(a)(6)
31. Steele re-al leges the factual allegations stated above.
32
The actions of Wyly described above amount to a conversion of Steele's
interest
in
the undisclosed stock of Michael's and Sterling. Pursuant to the Divorce
Judgment, Steele owned 50 of any undisclosed community property. As set forth
above, Wyly did not disclose all of his ownership rights
in
Michael's and Sterling.
According to the Stipulation, Wyly transferred offshore 54 of the amount of shares in
Michael's awarded to him
in
the Divorce Judgment and 87 of the amount of shares
in
Sterling awarded to him
in
the Divorce Judgment. However, according to SEC filings of
Sterling and Michael's within two years
of
transferring his shares offshore, Wyly owned
substantially more stock than he was awarded
in
the divorce - notwithstanding the
offshore transfers.
33. Accordingly, Steele requests judgment against Wyly
in
the amount of all
damages suffered
as
a result of Wyly's conversion and further requests that, pursuant
to FED. R BANKR. P 4007, this debt be determined nondischargeable pursuant to 11
U.S.C 523(a)(6).
C
Request
to
Determine
Extent
of Interest in
Property
34
Steele re-alleges the factual allegations stated above.
35
Pursuant to the Divorce Judgment, Steele owned 50 of any undisclosed
community property. As set forth above, Wyly did not disclose all of his ownership
rights
in
Michael's and Sterling. According to the Stipulation, Wyly transferred offshore
54 of the amount of the shares
in
Michael's awarded to him
in
the Divorce Judgment
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO 11 U.S.C. 523(a)(2) and 6)-
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and 87 of the amount of the shares in Sterling awarded to him in the Divorce
Judgment. However, according to SEC filings of Sterling and Michael's within two years
of transferring his shares offshore, Wyly owned substantially more stock than he was
awarded
in
the divorce notwithstanding the offshore transfers.
36. Pursuant to FED
R
BANKR P 7001 (2), Steele requests this Court
determine that she has a 50 ownership interest n all stock that
is
currently held by or
on behalf of Wyly that was not disclosed
in
the Divorce Judgment, and to proceeds
thereof to the extent traceable.
WHEREFORE, PREMISES CONSIDERED, Torie Steele respectfully requests
this
Court cite Samuel E Wyly to appear and answer herein, and upon final trial, grant
judgment
in
favor of Torie Steele, as requested herein, and for all such other relief
as
to
which she may be justly entitled.
DATED: January 26, 2015.
Respectfully submitted,
Is Ernest W Leonard
Ernest W. Leonard, Esq.
State Bar No. 12208750
FRIEDMAN
&
FElGER, L.L.P.
5301 Spring Valley Road, Suite 200
Dallas, Texas 75254
(972) 788-1400 (Telephone)
(972) 788-2667 (Telecopier)
ATTORNEYS FOR TORIE
STEELE
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO 11 U.S.C. 523 a) 2) and 6 -
688484
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CERTIFICATE
OF
SERVICE
I
hereby certify that a true and correct copy of the omplaint to Determine
Dischargeability of Debt Pursuant to 11
U.S.C 523(a)(2)(4)
and 6)
has been
electronically filed with the Clerk of the Court for the United States Bankruptcy Court,
Northern District of Texas, Dallas Division, using the electronic case filing system of the
court. The electronic case filing system sent a Notice of Electronic Filing to the
attorneys of record who have consented
in
writing to accept this Notice
as
service of
this document by electronic means.
Is Ernest
W.
Leonard
Ernest W. Leonard
COMPLAINT TO DETERMINE DISCHARGEABILITY
OF DEBT PURSUANT TO U.S.C. 523(a)(2) and
6)-
688484
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