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.
How Billionaire Robert Smith Avoided Indictment In A Multimillion-Dollar Tax Case
How Vista Equity Partners’ boss parlayed connections, charity and cooperation to win a non-prosecution agreement from the Justice Department.
U.S. prosecutors and Internal Revenue Service agents spent four years piercing the veil of secrecy that billionaire money manager Robert F. Smith wove to hide more than $200 million in income. Last year, according to people familiar with the matter, a team led by the Justice Department’s top tax prosecutor argued to then-Attorney General William Barr that the evidence warranted indicting Smith, who had made headlines for pledging to pay the student debt of a Morehouse College graduating class.
But rather than expose a man worth about $7 billion to a possible prison term and potentially force him to give up control of his private equity firm, Vista Equity Partners, Barr signed off on a non-prosecution agreement. It required Smith to admit he had committed crimes, pay $139 million and cooperate against a close business associate indicted in the largest tax-evasion case in U.S. history—Texas software mogul Robert T. Brockman.
Smith, the richest Black person in the U.S. according to the Bloomberg Billionaires Index, agreed to cooperate after spending years raising his public profile as a philanthropist and advocate for racial justice. He praised the Trump administration’s efforts to provide economic assistance to minority business owners amid the Covid-19 pandemic. As his wealth tripled over the past five years, he also gave away more than he had hidden abroad. All that complicated the possible prosecution of a defendant whom jurors may have viewed sympathetically.
This account of what went on behind the scenes leading up to the non-prosecution agreement is based on interviews with a dozen people involved in the negotiations or briefed on them. All requested anonymity because they aren’t authorized to talk about the case. They tell a story about a man who spent freely on his defense and worked all the angles.
Smith began assembling a team of prominent attorneys after his tax problems surfaced in 2013. They included former Acting Attorney General Mark Filip and former Obama White House Counsel W. Neil Eggleston at Kirkland & Ellis, where Barr had worked before going to the Justice Department. Charles Rettig, then in private practice and now IRS commissioner, was engaged, as were former Commissioner Fred Goldberg and Mark Matthews, a former deputy commissioner.
As Justice Department tax prosecutors pushed closer to an indictment in late 2019, another issue came into play—Smith’s connection to a national security matter—according to people who heard about the discussions. The people, who don’t have security clearances, said they didn’t know the specifics, whether it involved Vista or how Smith might have been of assistance to the government.
A schism between tax prosecutors and national security officials led to months of wrangling. Twice the matter went up to Barr, once at the end of 2019 and again in July. Late in the game, facing an imminent indictment, Smith agreed to cooperate against Brockman, whose $1 billion investment launched his private equity career two decades earlier.
In the end, Barr intervened to settle the dispute, two of the people said. The decision to refrain from charging Smith was conveyed in a July 21 email to Filip from top tax prosecutor Richard Zuckerman reviewed by Bloomberg News. Smith’s team would get what they wanted: a stay-out-of-jail card.
It would take weeks to negotiate the details of the agreement, which allowed Smith, 58, to remain at the helm of a firm that manages more than $73 billion for public pension funds and other wealthy investors. He’s free to carry on with a lifestyle that has included homes in France, New York City, Colorado, California wine country, Austin, Texas, and North Palm Beach, Florida. And he can keep playing starring roles at institutions such as Cornell University, which named an engineering school after him in 2016, and Carnegie Hall, where he became chairman that year.
The agreement came at a cost. In a six-page statement of facts, Smith acknowledged evading more than $43 million in taxes over a decade and repeatedly filing false tax forms. He agreed to pay a penalty, forsake tax-deduction claims for $182 million of charitable contributions and cooperate for five years with prosecutors on investigations, including their case against Brockman, whose web of opaque Caribbean entities was allegedly used to hide $2 billion in income earned from Vista.
The Justice Department got an attention-grabbing fine and a cooperation agreement without having to risk losing at trial. But the decision to let Smith walk away unscathed by criminal charges doesn’t sit well with some former prosecutors, who said it illustrates how the richest Americans can maneuver the justice system in their favor. “This case sends a message that wealthy people will be treated differently than not-so-wealthy people,” said Paul Pelletier, a former Justice Department fraud section supervisor now in private practice who wasn’t involved in the case. “People of lesser economic means normally don’t avoid getting charged when they cooperate. The magnitude of the tax fraud here is enormous.”
Smith, his lawyers and his company all declined to comment. So did Barr and a spokesperson for the Justice Department. An IRS spokesperson said of Rettig: “Without acknowledging whether the commissioner represented any particular client in any particular matter while he was in private practice, the commissioner recused himself from all such matters upon taking office.” Brockman has pleaded not guilty and denies wrongdoing in his case.
In the months leading up to the agreement, as his legal fate hung in the balance, Smith told Vista insiders his tax dispute was strictly a personal matter, people familiar with the conversations said. He hosted lavish holiday celebrations in December 2019 for clients and employees, including a New York-themed party celebrating his firm’s 20th anniversary at an airport hangar in Smith’s hometown of Austin.
But things weren’t looking good. Around that time, prosecutors told Smith’s lawyers they had enough evidence to bring criminal tax charges, two people with knowledge of the discussions said.
It’s also when some people close to Vista say they first heard talk of a national security matter that might help Smith avoid tax charges. Smith’s legal team, which had been working its way up the tax division hierarchy, swung into high gear, arguing for a civil settlement.
Vista had long counted on Kirkland, one of the world’s largest law practices, as its main legal adviser. The private equity firm, which buys and sells enterprise software companies, generates annual billings for Kirkland of about $80 million, according to people with knowledge of the matter. Its chief operating officer, David Breach, who’s also the firm’s top lawyer, had been a partner at Kirkland. The firm represents some of the biggest corporations and private equity companies, including Blackstone, Carlyle Group and KKR. Filip, who works out of the Chicago office, has helped negotiate settlements for BP and Boeing. Another partner, Norm Champ, a former head of the Securities and Exchange Commission’s investment management division, was involved in discussions about whether Smith could remain at Vista given the serious nature of the findings, two people familiar with the matter said.
In addition to attorneys from Kirkland, there were lawyers from Caplin & Drysdale, a leading U.S. tax shop, and Skadden, Arps, Slate, Meagher & Flom. Smith also retained Kenneth Wainstein, who previously led the Justice Department’s national security division. Reid Weingarten, one of the country’s top white-collar trial attorneys, was prepared to try the case if Smith were indicted.
By the end of 2019, Smith’s lawyers secured a meeting with the department’s top tax officials to make their case. It then went to Barr, who also considered the national security matter, people familiar with the discussions said. Assistant Attorney General for National Security John Demers got involved, and Barr eventually weighed in, telling tax and national security officials to resolve the dispute between their divisions, according to the people. Barr also made it clear that for Smith to avoid indictment, he would have to cooperate against Brockman and pay a hefty penalty.
Over the next few months, as the Covid-19 pandemic swept across the U.S., Smith raised his public profile. He joined President Donald Trump and Vice President Mike Pence in March to discuss the economy with fellow billionaire financiers Ken Griffin, Dan Loeb and Stephen Schwarzman. And he praised White House efforts to get Cares Act assistance to minority communities.
In a May 10 appearance on Meet the Press, Smith said Treasury Secretary Steven Mnuchin and Ivanka Trump were “very engaged” in the effort. He started having daily calls with Mnuchin and weekly ones with the president’s daughter, the Washington Post reported in June, quoting her saying she’d had “very substantive discussions” with Smith about supporting businesses in minority communities. Smith “didn’t have a particular agenda” and was “legitimately interested in helping the program,” Mnuchin told the paper. “You know, the dynamic I’ve been focused on is working with the administration, with Ivanka and Secretary Mnuchin in particular, as well as on both sides of the aisle,” Smith said on Fox Business on June 17.
Smith’s open support of the Trump administration didn’t seem to influence the Justice Department. In June, prosecutors told his lawyers they were still planning to indict Smith on charges of conspiracy and filing false tax returns, three of the people familiar with the discussions said.
Smith’s lawyers continued to push for a non-prosecution agreement, and the case went to Barr a second time, people with knowledge of the matter said. Again, the attorney general drew a line: He told Zuckerman, the top tax prosecutor, that he would green-light an indictment if Smith didn’t agree to cooperate fully against Brockman and pay a sizable penalty, one person said.
In July, Smith’s team made a direct appeal to Barr, according to people with knowledge of the matter. It isn’t known what was said in that meeting, or whether the national security matter came into play. But on July 21, Zuckerman reached out to Filip to set up a conference call, saying the Justice Department’s tax division “will not be presenting the indictment of Mr. Smith to a grand jury at this time,” according to an email reviewed by Bloomberg.
The call two days later was the first step in negotiations that would lead to the agreement Smith signed in early October and that the Justice Department announced later that month, along with Brockman’s indictment. Barr approved the deal after tax prosecutors assured him they were satisfied with Smith’s offer, according to a person familiar with the discussions. The agreement also had the advantage of keeping the national security matter under wraps.
In the weeks leading up to the announcement, Smith had pressed his legal team to obtain an assurance that the government wouldn’t publicly disclose his misconduct, people familiar with the matter said. The request was denied.
“Smith committed serious crimes, but he also agreed to cooperate,” David Anderson, the U.S. attorney in San Francisco, said at an Oct. 15 press conference. “Smith’s agreement to cooperate has put him on a path away from indictment.” Jim Lee, chief of criminal investigation for the IRS, made it clear that the alleged tax evasion by Smith and Brockman was a serious matter. “I have not seen this pattern of greed or concealment and cover-up in my 25-plus years as a special agent,” he said.
The son of two Denver educators, Smith earned a degree in chemical engineering at Cornell and an MBA at Columbia University. He went to work as an investment banker at Goldman Sachs Group Inc. in 1994 and moved to Silicon Valley as part of its push into tech. A few years later he tried to arrange a buyout for Brockman, whose company, now known as Reynolds & Reynolds, was emerging as a leading provider of software used to manage auto dealerships.
On the surface, the men had little in common. Brockman, a generation older than Smith, is a former Marine Corps reservist who early in his career sold software for IBM. But both men live in Texas, have homes in Colorado and brought an engineer’s eye to technology. They saw an opportunity in what became Vista’s trademark—buying business software ventures and increasing their value by managing them more efficiently.
A few years after they met, Brockman offered to put up $300 million to launch Smith into the private equity business. There would be at least $700 million more. But the money came with some take-it-or-leave-it conditions. Smith had to locate his first fund in the Cayman Islands, agree to settle any disputes outside U.S. courts and set aside some of the carried interest he earned from it to protect Brockman against losses, according to the statement of facts Smith signed as part of the settlement.
Smith concluded that Brockman was structuring the deal to prevent the IRS from learning about his investment. But he saw the proposal as a unique opportunity and went along, according to the statement. He even worked with one of Brockman’s lawyers to set up entities to help him dodge his own U.S. tax bill, he admitted.
Smith proved to be a private equity wizard. Vista’s first fund earned a net internal rate of return of 29% over its lifetime, according to Bloomberg data. Starting around 2005, some of Smith’s earnings from that fund went to a bank account in the name of Flash Holdings that Brockman’s lawyer had advised him to set up in the British Virgin Islands and that Smith controlled, according to the statement. He paid the lawyer $800,000 over 15 years to create a false paper trail, Smith admitted.
Also in 2005, Smith and his wife, Suzanne McFayden, whom he met at Cornell, purchased a $2.5 million home in California’s Sonoma County with untaxed income from a Caribbean bank account. A few years later they bought two ski properties and a commercial one in Megeve, France, with Smith directing that they be paid for with 13 million euros ($16 million) of untaxed funds from a Swiss bank account.
Smith filed a Report of Foreign Bank and Financial Accounts, or FBAR, for that year which didn’t disclose his financial interest in accounts in the British Virgin Islands and Switzerland. Although American citizens with foreign holdings are required to file such reports annually, Smith failed to do so in 2011, and his 2012 submission again didn’t list his interest in the Caribbean and Swiss accounts.
The following year McFayden filed for divorce, listing several homes and a private jet among the marital assets. Except for her original petition, the filings in that case are sealed. But during the contentious proceedings that followed, McFayden asserted that Smith’s assets included substantial foreign holdings, according to a person familiar with the matter. It was the divorce that piqued the government’s interest in Smith, two people said.
The prospect that Smith’s divorce could stir up unwanted scrutiny doesn’t appear to have surprised Brockman. Two years earlier Evatt Tamine, a Bermuda-based lawyer managing his offshore entities, received an email from a colleague. It said Brockman had “called concerned about the Robert Smith situation and what effect a nasty divorce might have on us,” according to a 2011 email the government filed in court. Tamine, who wasn’t charged with a crime and is cooperating with prosecutors, declined to comment.
Soon, pressure was building on Smith’s Swiss bank, Banque Bonhote & Cie SA. It was one of dozens of Swiss banks the U.S cracked down on over accounts hidden from the IRS. Banks could reduce their financial penalties if they convinced American clients to enter an IRS amnesty program that let taxpayers avoid prosecution.
Smith applied for the amnesty program but was rejected. Typically, the IRS turns down taxpayers if it already knows about their undeclared assets. Later, Smith filed a false FBAR for 2013, again not disclosing his financial interest in the BVI and Swiss accounts.
In 2014, the same year his divorce was finalized, Smith turned to Brockman for a $75 million loan, according to prosecutors. The following year he married Hope Dworaczyk, Playboy’s 2010 Playmate of the Year and a Celebrity Apprentice participant. The couple’s seven-month-old son floated down the aisle on an artificial cloud created for their wedding at a hotel on Italy’s Amalfi Coast. John Legend entertained.
Around that time, Smith directed a Belize-based entity he controlled to transfer $182 million in assets to a new charitable foundation. One of its first donations was $15 million for a music education program operated by the Carnegie Hall Society. In its 2015 tax year, the foundation gave at least $149 million to the United Negro College Fund, the National Park Foundation, Cornell and other organizations, according to an IRS filing.
Smith tried to get right with tax authorities by amending past returns, but prosecutors were undeterred. In 2016, a San Francisco grand jury began investigating. It issued subpoenas to some Vista limited partners, according to a person familiar with the matter. In 2018, Brian Sheth, Vista’s co-founder and president, and Tamine were asked to testify. Sheth, who wasn’t a target of the investigation, declined to comment.
That August, federal authorities raided the home in Texas of the attorney who’d set up offshore entities for Smith and Brockman. A few weeks later, IRS agents and Bermudian police seized documents and encrypted electronic devices from Tamine’s home.
In a letter to Vista investors after the settlement was announced, Smith wrote that “the essence of this case involves an offshore structure I created twenty years ago at the insistence of my only investor in my first private equity fund.” It was, he said, a “personal tax matter,” and “the Department of Justice never claimed that Vista or any Vista funds were involved or under investigation.”
Justice Department legal filings tell a more complicated story. The Brockman indictment mentions Vista more than 80 times. In one filing, the government wrote that his scheme included “a machine built of two components.” One, it said, involved the offshore entities Brockman had used to conceal his income and assets. The other was “an investment vehicle through which Defendant secretly funded his offshore structure. That vehicle was Vista Equity Partners.”
The two components were intertwined and “involved continuous contacts with Vista employees,” the government alleges. In one 2010 transaction, Brockman directed that a $799 million distribution from Vista be deposited in a Swiss bank account in the name of Point Investments, the entity he’d set up in the British Virgin Islands a decade earlier to invest in Vista. Two years after that transfer, Tamine, Brockman’s trust manager, wrote to his boss: “My relationship with Robert and his team at Vista is going very well,” according to a court filing.
Smith has continued to put a positive spin on events, carrying on much as before. Shortly after the settlement was announced, he pledged $50 million to programs at historically Black colleges and universities. He also bought a pair of North Palm Beach mansions for $48 million, the Wall Street Journal reported. In December, Vista closed on $2.7 billion in capital commitments, according to a company presentation reviewed by Bloomberg. But Smith will have to move forward without his co-founder, Sheth, whose resignation was announced on Thanksgiving Day.
In his letter to Vista investors, Smith said the government’s criminal investigation into his finances left him humbled but unbowed. “I am as committed as ever to moving forward as a CEO, an investor, a community leader, and a philanthropist—in order to continue to be a productive person trying to leave the world better than I found it,” Smith wrote.
That effort may not include taking the witness stand against Brockman, who stepped down as chief executive officer of Reynolds & Reynolds in November. His lawyers said in court that the 79-year-old is suffering from dementia. They said the case should be dismissed because he’s unable to assist in his own defense.
Prosecutors characterized the timing of the claim as suspicious and urged the court to regard it with “healthy skepticism.” A federal judge in Houston will decide if he’s competent to stand trial in the coming months.
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