Houston Software Executive Charged With Largest Tax Evasion Case In History Against An Individual
Case involves $2 billion in income hidden abroad, authorities say, making it largest tax case ever against an individual. Houston Software Executive Charged With Largest Tax Evasion Case In History Against An Individual
A Houston software executive was charged Thursday with hiding approximately $2 billion in income from U.S. tax authorities over 20 years, in what officials said was the largest criminal case ever brought against a person accused of evading U.S. taxes.
Robert T. Brockman, chief executive of automotive software-maker Reynolds & Reynolds Co., was indicted on charges including tax evasion, money laundering, failure to disclose assets held overseas and wire fraud. Mr. Brockman is the sole investor in the first private-equity fund managed by Vista Equity Partners, a firm founded by billionaire Robert Smith.
Authorities said Mr. Brockman concealed gains he made in Vista’s funds from the Internal Revenue Service.
Mr. Smith on Thursday admitted to willfully evading $43 million in federal taxes from 2005 to 2014 and agreed to cooperate with the continuing investigation. Under a settlement reached with the Justice Department, he will pay $139 million in fines and back taxes but won’t be prosecuted.
The charges against Mr. Brockman, 79 years old, were unsealed Thursday in San Francisco federal court. Mr. Brockman for years directed investments of tens of millions of dollars into Vista’s funds, according to the indictment. Prosecutors say he used secret bank accounts in Bermuda and Switzerland to hide income, but the indictment doesn’t specify how much tax Mr. Brockman skipped by hiding offshore the $2 billion he earned from Vista’s funds.
Mr. Brockman pleaded not guilty on all counts and was released on a $1 million bond after a hearing conducted remotely. “We look forward to defending him against these charges,” said his attorney, Kathryn Keneally of Jones Day.
A spokesman for Vista declined to comment. An attorney for Mr. Smith declined to comment.
A spokeswoman for Ohio-based Reynolds & Reynolds said: “The allegations made by the Department of Justice focus on activities Robert Brockman engaged in outside of his professional responsibilities with Reynolds & Reynolds. The company is not alleged to have engaged in any wrongdoing, and we are confident in the integrity and strength of our business.”
Mr. Brockman, a former Marine Corps reservist, started working at Ford Motor Co. upon graduation from college and later accepted a job at International Business Machines Corp. selling auto-parts-inventory and accounting data-processing services.
He founded Universal Computer Services Inc. in 1970 and became chairman and CEO of Reynolds & Reynolds when it acquired his company in 2006, according to a biography on the website of the Brockman Foundation, his family charity.
Closely held Reynolds & Reynolds, which makes software for auto dealerships, and its affiliated companies have roughly 5,000 employees and annual sales of about $1.4 billion, the foundation website says.
Messrs. Brockman’s and Smith’s alleged tax evasion was “brazen, intentional and significant,” said Jim Lee, chief of criminal investigations for the Internal Revenue Service. “These allegations should disgust every American taxpayer as well, because the law applies to all of us when it comes to tax and paying our fair share,” Mr. Lee said.
“I have not seen this pattern of greed or concealment and cover-up in my 25-plus years as a special agent,” Mr. Lee added.
Mr. Brockman set up a complex network of offshore companies and trusts designed to conceal $2 billion in gains earned from investments in Vista’s private-equity funds, according to the indictment. Vista wired money to bank accounts in Bermuda and Switzerland owned by an entity controlled by Mr. Brockman.
Mr. Brockman hid his control of the offshore entities by filing false tax returns, U.S. Attorney David L. Anderson said at a press conference Thursday in San Francisco. The misconduct lasted from 1999 to 2019, authorities said.
“Complexity will not hide crime from law enforcement,” Mr. Anderson said. “We will not hesitate to prosecute the smartest guys in the room.”
To keep the tax evasion secret, Mr. Brockman shredded documents and used code words over encrypted email accounts, calling himself “Permit” and referring to the IRS as “the house,” Mr. Anderson said. A computer program called “Evidence Eliminator” was purchased by a person who managed Mr. Brockman’s offshore entities, according to the indictment, which didn’t name the person.
Mr. Brockman was also charged with wire fraud over his alleged trading of debt issued by his own company, in violation of an agreement with investors who purchased the securities. The debt was syndicated in 2006 through banks including an arm of Deutsche Bank AG, which the indictment says was deceived about Mr. Brockman’s trading.
While little known on Wall Street, Mr. Brockman helped launch the career of Mr. Smith, who has become the wealthiest Black person in the U.S. and one of the private-equity industry’s most prominent figures, thanks to his firm’s high returns and unique strategy for turning around software companies—as well as his own splashy philanthropy.
Messrs. Brockman and Smith met in 1997 when Mr. Smith was an investment banker at Goldman Sachs Group Inc. working to help sell Mr. Brockman’s company, according to a statement of facts attached to Mr. Smith’s non-prosecution agreement. Mr. Brockman told Mr. Smith no taxes would be owed on the sale because the company was owned by a foreign trust located in Bermuda that had been set up by Mr. Brockman’s father in the 1980s, according to the statement.
The sale didn’t happen, but Mr. Brockman urged Mr. Smith to set up a private equity fund in which Mr. Brockman would be the sole outside investor, the document states. Mr. Smith left his banking job to start the private-equity firm and has been in charge of Vista ever since.
Mr. Smith last year pledged to pay all student debt incurred by the 2019 graduating class at Morehouse College and their parents. The historically Black institution in Atlanta said the donation amounted to $34 million.
The announcement of a non-prosecution agreement for Mr. Smith was unprecedented, said Jeffrey Neiman, a former federal tax prosecutor. The Justice Department doesn’t typically announce such leniency deals with individuals, Mr. Neiman said.
“In some ways, it does kind of conflate the message of whether bad deeds can go away with the payment of a lot of money and you can avoid the criminal justice system,” said Mr. Neiman, now a partner at Marcus, Neiman Rashbaum & Pineiro LLP.
Mr. Smith’s cooperation with the government “put him on a path away from indictment,” Mr. Anderson said. “It is never too late to tell the truth.”
Mr. Smith, 57, whose net worth Forbes has estimated at more than $5 billion, founded Vista in 2000 with $1 billion from a charitable trust established by Mr. Brockman’s family. The Vista chief put over $200 million of his own profits into one offshore entity and used another to conceal his ownership and control of the first entity, the government said Thursday.
While some of the money in the offshore entity ultimately went into Fund II Foundation, a charity Mr. Smith created in 2014, he withdrew untaxed funds for his personal benefit from 2005 to 2013, according to a statement he signed with prosecutors on Oct. 9.
He spent millions of it to buy and renovate a vacation home in Sonoma, Calif., to purchase two ski properties and a piece of commercial property in France and to make improvements to a residence in Colorado, the statement said.
Mr. Smith moved to Switzerland in 2010, when he used untaxed income to buy the winter homes in the French Alps.
Mr. Smith’s charitable donations and political connections didn’t play a role in the deal he got with the Justice Department, Mr. Anderson said.
“This non-prosecution agreement underscores the importance of cooperation with a federal criminal investigation,” Mr. Anderson said. “That’s the message we intend to send.”
The IRS Reels In A Whale Of An Offshore Tax Cheat—And Goes For Another
The U.S. pulls back the curtain on the shadowy world of wealthy American tax evaders.
U.S. tax officials have thrown a historic one-two punch at wealthy Americans hiding money offshore.
On Oct. 15, they announced that Robert Smith, the 57-year-old private-equity billionaire who founded Vista Equity Partners, admitted he criminally evaded taxes on more than $200 million of income from 2000 through 2015 by using secret foreign accounts in the Caribbean and Switzerland.
Mr. Smith, who is famous for announcing at Morehouse College’s graduation that he would pay off student loans for the class of 2019, will pay $139 million to the Internal Revenue Service in taxes and penalties. He will also forgo claims to $182 million in deductions for charitable donations, which could add more than $65 million to what he owes the IRS. But he won’t be prosecuted.
At the same time, the U.S. officials chargedRobert Brockman, a Houston-based billionaire and software CEO who was the sole investor in Mr. Smith’s first private-equity fund, with hiding about $2 billion of capital-gains income from the IRS in secret offshore accounts from 2000 through 2018. Mr. Brockman, 79 years old, pleaded not guilty and was released on $1 million bond.
The two cases are landmark events in a U.S. crackdown on undeclared offshore accounts that has been underway since 2009. Mr. Brockman’s alleged evasion of tax on $2 billion is the largest criminal tax prosecution ever brought, according to the Department of Justice, and Mr. Smith’s $139 million payment is among the largest made in connection with secret offshore accounts.
“These extraordinary cases show the reach of the IRS and Department of Justice in tracking hidden assets around the globe. High-net-worth individuals should get their houses in order before the IRS comes knocking,” says Caroline Ciraolo, a former top criminal tax attorney at the Department of Justice now with Kostelanetz & Fink.
The public documents in the Smith and Brockman cases offer a new window into the shadowy world of wealthy American tax evaders. They reveal both the large amounts of money involved and the lengths some people will go to in order to hide them—even at a time when tax rates were comparatively low.
Here’s a look at how it works, with a focus on Mr. Smith’s case because the facts aren’t in dispute. A spokesman for Mr. Smith and Vista Equity Partners declined to comment on his case. Mr. Brockman’s attorney did not respond to a request for comment.
Is There A Difference Between Tax Evasion And Planning To Minimize Taxes?
Yes, a big one. Tax avoidance can be legal, but tax evasion is the crime of willfully not paying taxes, and it must clearly be intentional. For example, Mr. Smith’s six-page confession uses the word “willfully” 25 times to describe his misdeeds.
How Do Offshore Accounts Enable Tax Evasion?
Secrecy is key. It often begins when an American puts assets into foreign trusts, companies, and other offshore accounts nominally owned by foreigners to make it look as though no tax is owed to the IRS. In reality, the assets are controlled by the American.
These offshore structures are hard for the IRS to investigate if they’re in countries without treaties or agreements easing the exchange of tax information.
Mr. Smith admitted that he controlled entities in Belize and the Caribbean island of Nevis that weren’t in his name.
Those entities received pretax profits from his private-equity funds. He also controlled undeclared bank accounts in the British Virgin Islands and Switzerland, and he withdrew millions of untaxed dollars from them to buy and improve luxury real estate in Sonoma, Calif., and Switzerland.
How Do Tax Evaders Keep Offshore Accounts Secret From The IRS?
They often employ go-betweens, and they frequently use encrypted communications and code names to cover their tracks.
For example, Mr. Smith said he paid an unnamed Houston lawyer who was a longtime adviser to Mr. Brockman more than $800,000 from 2000 to 2014 to set up and maintain false paper trails to hide his accounts.
Is Tax Evasion Using Offshore Accounts A New Trend?
No. It has existed for decades, but a sustained U.S. crackdown began in 2009 after Swiss banking giant UBS AG admitted it encouraged Americans to evade taxes and even sent bankers into the U.S. to market evasion schemes.
The crackdown, which had many facets, allowed the IRS to pierce the veil of bank secrecy in Switzerland and some other countries. As a result, more than 56,000 U.S. taxpayers at risk of criminal prosecution for undeclared offshore accounts entered an IRS limited-amnesty program and paid about $11 billion to resolve their issues. Foreign banks paid more than $6 billion.
How Did The Irs Detect Mr. Smith’s Tax Evasion?
It’s unclear. But in late 2013 or early 2014, Mr. Smith’s Swiss bank told him it was poised to turn over information about his account to the IRS. Many Swiss banks did this to reduce their own penalties arising from the U.S. crackdown.
Mr. Smith then applied to enter the IRS’s limited-amnesty program but was rejected in April, 2014—meaning that he was likely in the agency’s sights already.
Mr. Smith Is A Noted Philanthropist, Even Beyond His Paying Off The Morehouse Graduates’ Debt. Did His Offshore Accounts Benefit Charities?
Mr. Smith’s trust had charitable recipients, but he wasn’t required to make donations. At the end of 2014, he contributed a substantial amount of offshore assets to the Fund II Foundation, his U.S.-approved charity.
While under IRS investigation, Mr. Smith made waves as a donor. For 2016 and 2019 he was named one of the top 50 U.S. donors by the Chronicle of Philanthropy.
Charitable endeavors, such as Mr. Smith’s creation of a guide to help other colleges and donors replicate his Morehouse program, can burnish a defendant’s image in the eyes of prosecutors and judges. Neither he nor the government has said why he is giving up $182 million of charitable-donation deductions as part of his settlement.
Why Wasn’t Mr. Smith Indicted, If He Evaded Taxes On $200 Million?
David Anderson, the U.S. Attorney for the Northern District of California, which handled the case, said Mr. Smith’s agreement to cooperate with the government—presumably in Mr. Brockman’s case—”put him on a path away from indictment.”
DOJ procedures don’t allow defendants to buy their way out of prosecutions, but cooperation can be grounds for leniency. Still, some tax specialists find Mr. Smith’s agreement unusual.
Jack Townsend, a lawyer who publishes the Federal Tax Crimes blog, says, “He got a hell of a deal, considering what he did.”
Swiss Freeze More Than $1 Billion Held by Tech Mogul Robert Brockman
Swiss prosecutors froze more than $1 billion held in bank accounts belonging to Houston software tycoon Robert Brockman, who’s been charged in the U.S. for alleged tax evasion and money laundering.
A spokeswoman at the Geneva prosecutor’s office said that accounts were frozen but didn’t specify what banks held the funds.
Brockman was indicted in October by U.S. federal prosecutors for allegedly using a network of secret Caribbean entities to evade taxes on $2 billion in investment income in what may be the largest prosecution of its kind in U.S. history. Brockman is accused of using a Bermuda-based family charitable trust and other offshore entities to hide assets from the Internal Revenue Service while failing to pay taxes. He was also charged with money laundering and other crimes.
The case is “the largest-ever tax charge against an individual in the United States,” David Anderson, the U.S. prosecutor in San Francisco, said last month.
A message left with Brockman’s lawyer asking about his Swiss bank accounts wasn’t immediately returned. The U.S. Department of Justice didn’t immediately reply to a request for comment.
About $950 million is held at Mirabaud & Cie., according to local blog Gotham City, which first reported on the asset freeze.
A spokesman for Mirabaud declined to comment.
Prosecutors were helped by Robert Smith, the CEO of Vista Equity Partners, who set up his private equity fund 20 years ago with a $1 billion injection from Brockman’s trust. Smith avoided prosecution by agreeing to cooperate against Brockman. He also admitted he failed to pay $30 million in taxes, and will pay $140 million in back taxes, fines, and penalties, according to people familiar with the matter.
Brockman faces a 39-count indictment returned by a San Francisco grand jury and unsealed on October 15. Appearing by video conference from Houston the same day, Brockman pleaded not-guilty to the charges and denied the government’s allegations that he should forfeit proceeds from wire fraud.
The court agreed to allow Brockman to post $1 million bond, remain out of custody and to travel to several parts of the U.S. to meet with his lawyers and conduct business. Brockman is the chief executive officer of Reynolds & Reynolds, a leading vendor of software used to manage auto dealerships.
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