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Catch of the Week: Texas-Sized Indictment for $2 Billion Tax Fraud

Posted  October 16, 2020

Everything sure is bigger in Texas.  Bigger hair, bigger churches, bigger stadiums, bigger ranches, and bigger sky.  Oh, and as of this week, bigger billionaires committing bigger frauds!

On Thursday, federal prosecutors in California charged Robert T. Brockman, a Houston tech executive, with hiding $2 billion in income from the Internal Revenue Service.  True to Texas form, David L. Anderson, the U.S. attorney for the Northern District of California, said the tax-fraud allegation against Brockman is “the largest ever tax charge against an individual in the United States.”

In a 39-count indictment, prosecutors allege Brockman hid untaxed capital gains income he had earned on private equity investments over 20 years through a web of offshore entities in Bermuda and Nevis and secret bank accounts in Bermuda and Switzerland. Brockman allegedly used encrypted emails to coordinate with his offshore money handlers. Adept in assigning code names, prosecutors allege Brockman dubbed himself “Permit,” called the IRS “the house,” and gave his fishy bagmen monikers like “Bonefish” and “Snapper.”  Like many in his adopted state, Brockman went big, spending $30 million on Colorado properties called Mountain Queen and Frying Pan Canyon Ranch and $29 million on a yacht named Turmoil.

Prosecutors also charged Brockman for buying and selling debt securities in his own company, using inside information he possessed.

The unsealed indictment charges Brockman, the chief executive officer of Reynolds and Reynolds Co., an Ohio-based software company that makes management software for auto dealerships, with tax evasion, wire fraud, money laundering, and other offenses. Brockman pleaded not guilty on Thursday.

So how did prosecutors crack this nut?  Did they have help from a whistleblower?

Typically, we wouldn’t know.  But in this case, we do.  And the answer is that prosecutors did have some help. In a parallel action announced Thursday, prosecutors said that another Texas billionaire, Robert Smith, will pay about $140 million and abandon $182 million in refund claims to end a four-year U.S. tax investigation into an illegal scheme to conceal income and evade millions in taxes by using an offshore trust structure and offshore bank accounts. In addition to the monetary penalty, Smith entered into a Non-Prosecution Agreement with the Department of Justice in which he acknowledged his wrongdoing and—here’s the important part—“continue cooperating with the Department of Justice in other related investigations.”

Smith’s tax troubles arose from a $1 billion investment in his private equity fund two decades ago by an offshore foundation tied to . . . Robert T. Brockman. Smith failed to pay U.S. taxes on about $200 million in assets that moved through that and other offshore structures connected to Brockman.

Smith is a big fish by any standard. He’s the CEO of San Francisco-based private equity firm Vista Equity Partners. And with a net worth of $7 billion, Smith is also the wealthiest Black person in America.  (Smith made headlines in May 2019 when he pledged to pay off the student debt of the entire 2019 graduating class at Morehouse College in Georgia. A few months later, in September, Smith expanded his gift to include the student-loan debt amassed by the parents of all the students in Morehouse’s graduating class.)

Did the government go easy on Smith?  We’ll never know.  But we do know that big fish in Texas always have friends in high places.  And Smith is no exception.  According to press reports, while the IRS was closing in on Smith, he was busy befriending President Trump’s inner circle. Smith got close with Ivanka Trump, the President’s daughter, joining the White House advisory board on jobs, which she chairs. Smith “reconnected” with Treasury Secretary Steve Mnuchin, who oversees the IRS, participating in daily calls with the Secretary during the roll out of the first coronavirus stimulus package in May and June.  And Smith befriended CNN commentator Van Jones, a pal of President Trump’s longest-serving adviser and son-in-law, Jared Kushner.  (It’s not that Smith was so far removed from the Trump orbit before he got the Washington wheels moving this year. In 2015, Smith married former Playboy Playmate Hope Dworaczyk, who starred as a contestant on Celebrity Apprentice alongside Ivanka Trump in 2011.)

And that Texas-size tale is our Catch of the Week!  Although we’d be remiss not to mention that nearly anyone who has information about tax avoidance may be eligible for a whistleblower award.  As Robert Smith’s story shows, these kinds of schemes can be difficult for prosecutors to detect without information from insiders or others with non-public knowledge of wrongdoing.  Depending on the facts, a whistleblower may be eligible for an award under the IRS Whistleblower Reward Program.  Under that program, eligible whistleblowers can get an award of 10 percent to 30 percent of the monetary sanctions the government collects in enforcement actions brought or aided by a whistleblower’s information.