5 Things To Know About Largest Tax Avoidance Scheme In U.S. History

5 Things To Know About Largest Tax Avoidance Scheme In U.S. History

tax avoidance
5 Things To Know About Largest Tax Avoidance Scheme In U.S. History. Billionaire businessman Robert F. Smith speaks after receiving the W.E.B. Dubois Medal for contributions to Black history and culture, Harvard University, Oct. 22, 2019 (AP Photo/Elise Amendola, File) / Robert Brockman image: YouTube, https://www.youtube.com/watch?v=MF00vGiq65w

Robert Brockman, the Texas billionaire accused of masterminding the largest tax avoidance case in U.S. history, hid $2 billion in income from the Internal Revenue Service over 20 years and almost destroyed the country’s richest Black man. Charged in October 2020, Brockman is free on a $1 million bond and swears he didn’t do it.

According to the IRS, Brockman also defrauded investors in his software company’s debt securities to the tune of about $67.8 million.

Brockman sunk some of his money into Robert F. Smith, who, in May 2019, made the entire graduating class at Morehouse College very happy by committing to spend $34 million to pay off their student loan debt.

With an estimated net worth of $6 billion, Bockman, 79, made billions from his enterprise software company, Reynolds and Reynolds, which sells DocuPad. An interactive tech tool, DocuPad enables auto finance managers to upsell car buyers by at least $200 per transaction. That’s huge in a business where margins on every car sold or leased are typically razor-thin, Forbes reported.

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Brockman’s contracts with auto dealers were essentially a monopoly, Forbes reported. Insiders referred to the contract as “the Darth Vader contract” because those who tried to get out of it were sued.

Here are five things to know about the largest tax avoidance scheme in U.S. history.

Brockman helped hide profits in Robert Smith’s private equity firm

Brockman’s alleged scheme helped hide profits earned by one of the most successful U.S. private equity firms, Austin-based Vista Equity Partners in Texas, founded by the richest Black person in the U.S., Robert F. Smith.

Smith met Brockman in the late 1990s when he was a rising star in Goldman Sachs’ investment banking department, fresh out of Columbia Business School. Smith discussed with Brockman doing a buyout of his growing software business. Instead, Brockman agreed to seed Smith with $1 billion to create Vista Equity Partners in 2000. But one condition was that Smith had to cooperate with Brockman in creating a “conspiracy and scheme and artifice to defraud,” according to the Department of Justice indictment, Forbes reported.

It was a “take-it-or-leave-it” proposal, Smith said. Brockman insisted that Smith hold half his carried interest in the initial Vista Fund II in a “perfected foreign trust,” according to Smith’s statement.

“It became apparent to Smith that despite paperwork that indicated to the contrary, (Brockman) completely controlled (the) foreign trust and related foreign companies, and made all substantive decisions regarding all of its transactions and investments,” Forbes reported. “Including, of course, the decision not to disclose any of it to the IRS.”

In his statement, Smith said Brockman had the power to replace him by forcing Smith to sell him their general-partnership control interests in Vista Fund II at Brockman’s price. That incentivized Smith to deliver returns on Brockman’s $1 billion. Brockman controlled Smith the same way he controlled the car dealers.

With Brockman’s capital, Vista acquired and grew software companies

Vista Fund II would roll up software companies, including dealership software providers, into new companies and then sell them. It acquired SirsiDynix, Applied Systems, BigMachines, Brainware, Surgical Information Systems and SER Solutions. Brockman directed the Vista team on using his operating principles for cost reduction and product consolidation. “Everything that Vista knows about software came from Bob Brockman,” according to someone familiar with Vista’s early days, Forbes reported.

Smith’s first Vista fund had 20 percent+ annual returns

Smith’s first Vista fund, launched in 2000, went on to return more than 29 percent annually, according to Preqin, which provides financial data on hedge funds. If that is accurate, it means that Brockman and Smith multiplied the initial $1 billion more than tenfold, Forbes reported.

Smith ordered to get up to date on his taxes as part of a divorce settlement

In 2009, Smith moved to Switzerland with Suzanne McFayden, his wife of 22 years and moved more than $30 million of his untaxed capital gains into a Swiss bank account. The couple separated and in 2010, Smith began dating the Playboy Playmate of the Year, Hope Dworaczyk. Brockman became concerned about the effect a nasty divorce might have on business, according to emails uncovered by Department of Justice investigators.

In her divorce petition, McFayden asked for their homes, support for their children, and, among other things, she demanded that Smith get up to date with his taxes. Brockman was looking for a way out as the divorce was being settled, Forbes reported.

Smith married Dworaczyk in 2015 on Italy’s Amalfi Coast. Musicians Seal and John Legend performed.

Anticipating an IRS audit

In June 2016, anticipating a federal grand jury investigation, the alleged co-conspirators started destroying incriminating evidence. Brockman’s attorney, Evatt Tamine, “at the direction of Brockman,” had laundered approximately $57 million of proceeds through Brockman’s accounts and companies, “including several of Vista Equity Partners’ funds,” according to the affidavit of an IRS investigator.

Brockman used some of the untaxed profits from lucrative trades to allegedly fund his Frying Pan Canyon Ranch near Aspen, Colorado ($15 million) and a 209-foot luxury yacht with a helipad ($33 million) A hunter, Brockman like flying by private jet to Córdoba, Argentina, for dove shooting.  

Attorney Tamine saw a target on his back and wrote in a memo to Brockman, “Even if Robert Smith clears up his problems, the target is well fixed on me and we need to anticipate that we’ll be audited at some point.” In September 2018, agents in Bermuda raided Tamine’s home. 

After the IRS rejected a plea by Smith for amnesty, Smith set up a foundation with hundreds of millions of dollars of profits for charitable giving. In 2016, he and his foundation gave $20 million to the National Museum of African American History and Culture and $50 million to Cornell University’s engineering school. In May 2019, he promised to pay off the student loan debt for the entire graduating class at Morehouse College.

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On Oct. 15, 2020, U.S. attorneys dropped the bombshell about Smith and Brockman. Smith agreed to pay $56 million in taxes and penalties on unreported income plus another $82 million in penalties for concealing offshore accounts, according to Forbes. He gave up his claims for $182 million in refunds from his philanthropic giving and earlier payments to the IRS.

“It is never too late to do the right thing,” U.S. attorney David Anderson said in a statement. “Smith committed serious crimes, but he also agreed to cooperate” against Brockman, which “has put him on a path away from indictment.” 

Smith continues to lead at Vista, which recently secured $2.7 billion in commitments and now has $73 billion in assets under management. Brockman is suffering from early-stage dementia, according to his attorney.