(Adds details on the Wylys' net worth from afternoon court session)
By Joseph Ax
NEW YORK Aug 22 (Reuters) - A lawyer for Texas tycoon Sam Wyly and his late brother Charles' estate told a federal judge on Friday that a U.S. securities regulator's demand for $729 million in damages for a fraudulent offshore scheme would "bankrupt" them.
Harry Susman told U.S. District Judge Shira Scheindlin in Manhattan the U.S. Securities and Exchange Commission's request was excessively punitive, at the close of a nonjury trial to determine how much the Wylys should pay for their role in the scheme.
"The total amount will bankrupt the Wylys," Susman said, adding there was no evidence their conduct harmed a single investor.
But Bridget Fitzpatrick, a lawyer for the SEC, said the proposed award was appropriate given "egregious" violations that allowed the Wylys to accumulate hundreds of millions of dollars.
The trial comes three months after a jury found the Wylys liable for fraud and other civil charges, in what was the SEC's largest case to reach trial in years.
The agency accused the Wylys of creating a system of trusts in the Isle of Man that netted them $553 million in profits through more than a decade of hidden trades in four companies they controlled: Sterling Software Inc, Michaels Stores Inc , Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd, now Scottish Re Group Ltd.
Fitzpatrick said the Wylys should not profit from the scheme, which she said grew so sophisticated that it became a virtual business in itself.
"Since 1992, the Wylys have had what amounts to an interest-free loan from the government, and they have used it to accumulate staggering wealth," she said.
The SEC is seeking damages equivalent to unpaid taxes on the scheme's profits, arguing that failure to disclose the trades left the Internal Revenue Service with no clue as to what was happening offshore.
Susman said the SEC should be barred from doing so because only the IRS can level tax penalties. But Fitzpatrick said the agency is not attempting to collect actual taxes but merely using them as a measure of the Wylys' ill-gotten gains.
In addition to more than $540 million in taxes and interest, the SEC is seeking nearly $140 million in profits and a $51 million penalty for Sam Wyly, all amounts the Wylys dispute.
Sam Wyly, 79, appeared on Forbes' list of the 400 richest Americans in 2010 with a net worth of $1 billion. Charles Wyly died in a 2011 car crash.
Steven Shepard, another lawyer for the Wylys, told Scheindlin that Sam Wyly's net worth would be $99 million by 2017 after receiving several annuities, while Charles Wyly's estate has roughly $20 million in net assets.
The brothers' offshore trusts hold $380 million, but Shepard said they should not be included because the money is not controlled by the Wylys but by the trusts' beneficiaries.
Scheindlin, however, said ignoring those assets could effectively reward the Wylys for the offshore scheme.