By Joseph Ax

NEW YORK (Reuters) - Texas tycoons Sam and Charles Wyly employed a labyrinthine system of offshore trusts to conceal stock trades in four companies on whose boards they sat, netting themselves more than $550 million in undisclosed profits, a U.S. government lawyer told a federal jury on Thursday.

"This is a case about lies, deception and fraud," said Bridget Fitzpatrick, a lawyer for the U.S. Securities and Exchange Commission, at the start of a civil trial in New York against Sam Wyly and the estate of his late brother, Charles.

The SEC has accused the Wylys of concealing stock trading from 1992 to 2004 in Sterling Software Inc, Michaels Stores Inc, Sterling Commerce Inc, and Scottish Annuity & Life Holdings Ltd through the use of more than a dozen trusts and 40 different entities in the Isle of Man.

But Stephen Susman, a defense attorney for the Wylys, told the jury that the brothers relied on an "army of lawyers" to tell them what they were legally required to do and never intended to violate any securities law.

"The Wylys acted in complete good faith - the exact opposite of being a liar and fraudster, as charged by the SEC," he said during his opening statement.

The trial, which follows years of litigation and investigation of the Wylys by the SEC, is the latest test of the regulator's ability to win verdicts against individuals, following a recent series of losses in fraud and insider trading cases.

The jury of eight women and four men will be asked to decide whether the Wylys controlled the securities held in the offshore system, as the government claims, or whether trustees had sole power to sell the stock, as the Wylys contend.

In her opening statement to the jury, Fitzpatrick argued that every transaction in the offshore entities originated as a "recommendation" from the Wylys that was effectively a command.

"The Isle of Man trustees were not independent," she said. "They did everything the Wylys wanted."

Susman, however, pointed to language in the trust contracts that granted the trustees authority over stock sales.

According to the government, the brothers sold more than $750 million of stock in the four companies, while failing to disclose that such transactions had occurred. They used the proceeds to buy everything from jewelry for their wives to a horse ranch in Dallas, Fitzpatrick said.

Susman told the jury he did not dispute that the trades occurred and that they used the profits to buy various items. But, he said, the trusts were created to protect assets and reduce tax liabilities, not to hide anything from the SEC.

The trial will feature testimony from several people involved in operating the offshore system, including the Wylys' former lawyer, Michael French. French will appear as a government witness after reaching a deal this month to settle charges against him by paying $794,609 and admitting to aiding in the Wylys' alleged scheme.

The 79-year-old Wyly will also take the stand, though his lawyers have indicated he will only testify for up to two hours at a time due to unspecified medical issues. Charles Wyly died in a 2011 car crash.

The SEC has also accused the Wylys of earning $31.7 million from insider trading of Sterling Software.

The jury will not consider those charges. Once the jury phase is over, U.S. District Judge Shira Scheindlin will preside over a second proceeding on the insider trading claims.

The trial comes after several recent upsets for the SEC in other fraud and insider trading cases, most prominently in October when a jury cleared Mark Cuban, owner of the Dallas Mavericks basketball team, of insider trading.

The case is SEC v. Wyly et al, U.S. District Court, Southern District of New York, No. 10-05760.

(Corrects spelling of defense lawyer's name to Susman to in paragraphs 4, 9 and 11)

(Reporting by Joseph Ax; Additional reporting by Nate Raymond; Editing by Noeleen Walder and Steve Orlofsky)