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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. WYLY, et al.
Debtors.

TORIE STEELE,
Plaintiff,

v.
SAMUEL E. WYLY
Defendant.

Case No. 14-35043-bjh11

Chapter 11
Jointly Administered

ADVERSARY NO. _ _ _ _ __

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.

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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.
SUMMARY 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 stock1 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."
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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

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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

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received all of the stock in Michael's and Sterling that were owned between them. In
particular, Wyly was awarded a total of 1,506,537 shares in Sterling a total of 1,086,765
shares in Michael's.

Other than 200,000 warrants in Sterling, all of this stock was

received by Wyly as community property allocations.

B.

The SEC Action

17.

On July 29, 2010, the SEC filed an action against Wyly and his brother

Charles Wyly in the United States District Court for the Southern District of New York
(the "SEC Action"). In its Complaint, the SEC alleged that the Wylys "engaged in a 13year fraudulent scheme to hold and trade tens of millions of securities of public
companies while they were members of boards of directors of those companies, without
disclosing their ownership and their trading of those securities."

The SEC further

alleged that: "The apparatus of the fraud was an elaborate sham system of trusts and
subsidiary companies located in the Isle of Man and the Cayman Islands ... created by
and at the direction of the Wylys."
18.

The SEC alleged that this sham system enabled the Wylys to hide their

ownership and control of various companies, primarily Michael's and Sterling.

In its

Complaint, the SEC alleged that in April of 1992 (seven months after the Divorce
Judgment), the Wylys collectively transferred 960,000 shares of Michael's and
1,983,588 shares of Sterling to these offshore companies.
19.

On March 7, 2014, Wyly and the SEC filed a Stipulation of Undisputed

Facts (the "Stipulation") which disclosed the specific transfers made by Wyly and his
brother. The Stipulation states that Wyly transferred 585,000 shares of Michaels and
1,311,725 shares of Sterling to offshore trusts in April of 1992.

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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 of 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.

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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.

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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

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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

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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 in 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

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CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the Complaint 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

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