I noticed that older growths get really wrinkly and thats normal.
With smaller pots you would have to water more often than with big pots.... If you are watering enough and the bulbs are shrinking a lot (As wrinkly as a prune), then most likely there's something wrong with the roots. I would check the root system then. Typically a small pots are preferred, as long as the new growths are not hanging out of the pots. They don't take up as much room this way and the media doesn't stay soggy for a long time, especially for sphag moss. Smaller pots help prevent over watering, which is usually worse than underwatering. Overwatering can cause root rot, which will cause shrivelled prune-like pseudobulbs.
I find Cattleyas don't mind big pots with open bark mix and clay pots. Its harder to overwater with clay pots and open bark mix. My mom tends to make me pot them in larger pots than they should be, she doesn't like tiny pots because thats the way she's been growing them since her first plant. They don't tip over this way and look more like a normal houseplant in clay pots. My mom's plants are over potted but it works for her. I can't convince her to use the smaller pot, oh well.
Sheaths do get blackened, but don't worry about them I tear them off when they are dead. I think its mold that makes them turn black when they get wet. Tearing them off will allow photosynthesis to occur on the pseudobulbs, and I think they look nicer that way. In nature the winds and rain would clear away those sheaths from the plant. Sheaths are only useful when the growths are still young and need the added protection.
What media are they potted in? Show us some pics