Week 10 Assignment – Case on Taxes Overview Federal prosecutors have charged Texas billionaire, Robert Brockman, with a $2

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I. TAX ENFORCEMENT

CEO of Multibillion-Dollar

Software Company Indicted for

Largest-Ever Tax Evasion as

Private Equity CEO Makes NPA

to Cooperate in the Case

By Bruce Zagaris

On October 15, 2020, a federal

grand jury in San Francisco, California,

returned a 39 count indictment, 1 charging

Robert T. Brockman, the Chief Executive

Officer (CEO) of an Ohio-based software

company with hiding $2 billion dollars in

income in what the Internal Revenue

Service and U.S. Attorney David L.

Anderson characterized as the largest tax

evasion case in U.S. history. 2 On the same

day the Justice Department (DOJ)

announced that Robert F. Smith, the

Chairman and CEO of a San-Francisco

based private equity company, entered into

a Non-Prosecution Agreement (NPA) with

DOJ for his involvement from 2000

through 2015 in an illegal scheme to

conceal income and evade millions in taxes

by using an offshore trust structure and

1 United States v. Robert T. Brockman., U.S. Dist.

Court, N.D. Cal., CASE NO. 3:20-cr-00371

WHA

Indictment, Oct. 1, 2020 https://www.justice.gov/usao-ndca/press-

release/file/1327926/download.

2 U.S. Department of Justice, CEO of Multibillion-

Dollar Software Company Indicted for Decades-

Long Tax Evasion and Wire Fraud Schemes, Press Rel., Oct. 15, 2020; Michael Levenson,

U.S. Brings ‘Largest Ever Tax Charge’ Against

Tech Executive, N.Y. TIMES, Oct. 15, 2020.

offshore bank accounts. 3 Smith worked

with Brockman and will cooperate through

his NPA in the prosecution of Brockman.

Brockman Indictment

The indictment charges that

Brockman, a resident of Houston, Texas,

and Pitkin County, Colorado, used various

offshore entities based in Bermuda and

Nevis to hide from the IRS income earned

on his investments in private equity funds

that were managed by a San Francisco-

based investment firm. Brockman allegedly

directed untaxed capital gains income to

secret bank accounts in Bermuda and

Switzerland. In addition, the indictment

alleges that to execute the fraud, between

1999 and 2019, Brockman backdated

records and used encrypted and coded

communications to communicate with a co-

conspirator among other alleged actions.

The indictment alleges that, in

addition to the tax crimes, Brockman

engaged during 2008 and 2010 in a

fraudulent scheme to obtain approximately

$67.8 million in the software company’s

debt securities. Brockman’s CEO

agreement restricted him from buying any

of the software company’s debt securities

without prior notice, full disclosure, and

amendments to the associated credit

agreements. The indictment charges that

Brockman used a third-party to circumvent

those obligations, to acquire the debt

securities, and to hide from the sellers

3 U.S. Department of Justice, Private Equity CEO

Enters Into Non-Prosecution Agreement on

International Tax Fraud Scheme and Agrees to Pay $39 Million, to Abandon $182 Million in

Charitable Contribution Deductions, and to

Cooperate with Government Investigations, DOJ Press Rel. Tax 20-1102, Oct. 15, 2020.

important economic information. The

indictment also alleges that Brockman

employed material, non-public information

about the software company to decide

about buying the debt. Brockman also

allegedly convinced another person to alter,

destroy, and mutilate documents and

computer evidence with the intent to impair

the use of such evidence in a grand jury

investigation.

Brockman’s goal was to conceal

from the I.R.S. capital gains income that he

had earned as a result of his investments in

funds managed by Vista Equity Partners,

whose billionaire chief executive is Robert

F. Smith. 4

Brockman is chairman and CEO

of Reynolds and Reynolds, a 4,300-

employee company near Dayton, Ohio. It

sells accounting, sales, and management

software to auto dealerships. The software

assists in establishing websites, including

live chats with potential customers, finding

loans, calculating customer payments, and

managing payroll and pay bills. 5

The indictment charges Brockman

with conspiracy, in violation of 18 U.S.C. §

371; seven counts of tax evasion, in

violation of 26 U.S.C. § 7201; six counts of

failing to file foreign bank account reports,

in violation of 31 U.S.C. §§ 5314 and

5322(b); 0 counts of wire fraud affecting a

financial institution, in violation of 18

U.S.C. § 1343; two counts of concealment

4 Levenson, supra.

5 The Associated Press, Tech billionaire charged

in 'largest ever' tax fraud for hiding $2 billion

from IRS

NBC News, October 16, 2020.

INTERNATIONAL ENFORCEMENT LAW REPORTER – Volume 36, Issue 10

373

of money laundering, in violation of 18

U.S.C. § 1956(a)(1)(A)(ii); and one count

of international concealment money

laundering, in violation of 18 U.S.C. §

1956(a)(2)(BB)(i); evidence tampering, in

violation of 18 U.S.C. § 1512(b)(2)(B); and

destruction of evidence, in violation of 18

U.S.C. §1512(c)(1).

Brockman pleaded not guilty on

Thursday in an appearance via Zoom in

federal court. 6

Smith NPA

Robert F. Smith, the Chairman

and CEO of San Francisco-based Vista

Equity Partners, signed a NPA with the

DOJ, for his involvement from 2000

through 2015 in an illegal scheme to hide

income and evade millions in taxes by

using an offshore trust structure and

offshore bank accounts.

Starting in approximately 1997,

while working as an investment banker at a

leading global investment bank and

securities firm, Smith developed a business

relationship with Brockman. On behalf of

Brockman, Smith left his employment with

the investment bank. In 2000, he started

Vista Equity Partners, a private equity

fund. Brockman allegedly dictated the

structure of the fund. 7

The agreement indicates that

Smith, a resident of Austin, Texas, formed

6 Id.

7 Exhibit A to Robert F. Smith NPA, Statement of

Facts, paragr. 2 and 4

https://www.justice.gov/opa/press-

release/file/1327911/download. The Statement of Facts does not actually mention Brockman or

Vista Equity Partners. For additional

background see David Voreacos and Neil Weinberg, Tech Mogul’s Secrecy Crumbles in

IRS Chase of ‘Record’ Trove, BLOOMBERG.COM,

Oct. 2, 2020.

the Excelsior Trust in Belize, and a shell

company, Flash Holdings, in Nevis in

2000. Smith utilized third-parties to hide

his beneficial ownership and control of the

Excelsior Trust and Flash Holdings. In

actuality, Smith controlled both offshore

structures and made all substantive

decisions concerning Flash Holdings’

operations, transactions, income,

investments and assets. Smith used the

Excelsior Trust to hide his ultimate

beneficial ownership and control over

Flash Holdings. Additionally, he used

Flash Holdings to conceal his interest in

private equity investments. Smith admits

that he formed these foreign entities in

order to use them to avoid the payment of

U.S. taxes. 8

Smith has also admitted that he

knowingly and intentionally utilized the

Excelsior Trust and Flash Holding and

their associated foreign bank accounts in

the British Virgin Islands and Switzerland

to hide from the IRS and the U.S. Treasury

Department income earned and distributed

to Flash Holdings from private equity

funds. Smith used the scheme to willfully

fail to report to the IRS over $200 million

on partnership income. Smith also failed to

report his ownership of his foreign bank

accounts in the BVI and Switzerland as

U.S. law required.

Smith has used millions of the

unreported income to acquire and make

improvements to real estate used for his

personal benefit. Smith admits that, in

2005, he used approximately $2.5 million

in untaxed funds to buy and renovate a

vacation home in Sonoma, California. In

8 U.S. Department of Justice, Private Equity CEO

Enters into Non-Prosecution Agreement, supra.

2010, Smith used untaxed funds to buy two

ski properties and a piece of commercial

property in France. In 2011 and 2012,

Smith utilized approximately $13 million

of untaxed funds to build and improve a

residence in Colorado and to fund

charitable activities at the property.

The NPA requires Smith to

continue to cooperate with the DOJ in other

related investigations for a period of five

years. 9 Smith has agreed to pay

approximately $56 million in taxes and

penalties arising from the unreported

income and another $82 million in

penalties arising from the concealment of

his offshore bank accounts. Altogether,

Smith will pay more than $139 million in

taxes and penalties.

Smith also agrees to abandon his

protective claims for a refund amounting to

approximately $182 million that were filed

with the IRS. The protective refund claims

included, in part, claims filed with the IRS

for charitable contribution deductions on

September 21, 2018, and October 11, 2019.

Smith agrees to the imposition of

the civil fraud penalty. Smith agrees to pay

FBAR penalties of $82,930,165.

Smith surprised a senior class last

year when he promised to pay the entire

student loan debt of the entire graduating

class at Morehouse, a historically black all-

male college. 10

Analysis

9 Letter from Richard Zuckerman et al to Mark

Filip, re Robert F. Smith – Non-Prosecution

Agreement, Oct. 9, 2020 https://www.justice.gov/opa/press-

release/file/1327906/download.

10

The Associated Press, Tech billionaire charged

in 'largest ever' tax fraud for hiding $2 billion

from IRS, supra.

INTERNATIONAL ENFORCEMENT LAW REPORTER – Volume 36, Issue 10

374

Some of the money laundering

charges against Brockman stem from his

tax crimes. While the DOJ does not use tax

evasion as a predicate crime for a money

laundering crime, the DOJ uses mail and

wire fraud charges connected to tax crimes

to charge money laundering.

In 2004, the DOJ issued Directive

No. 128 about the use of tax offenses as a

predicate for money laundering. The

Directive observed that the Tax Division’s

approval is needed before prosecution if the

conduct arises under the Internal Revenue

laws. It gives direction on charging mail

fraud, wire fraud, or bank fraud, alone or as

a predicate for a RICO or money

laundering charge. The Tax Division would

approve mail fraud, wire fraud, or bank

fraud charges if there is “large loss or

substantial pattern of conduct and there is

significant benefit to bringing charges

instead of or in addition to Title 26

violations” or “if there is a significant

benefit at the charging stage…at trial…or

at sentencing.” 11

The Directive warns that

these types of charges should not be

employed “to convert routine tax

prosecutions into RICO or money

laundering cases.” 12

In the Brockman case

arguably the DOJ can meet the

requirements of “large loss or substantial

pattern of conduct.”

The indictment illustrates that,

despite its resource constraints, the DOJ

Tax Division is able to prosecute complex

cases. The Smith cooperation may well be

11 Tax Division Directive No. 128 (Oct. 2004)

(superseding Directive No. 99).

12

Id. See also Ian M. Comisky, May Tax Evasion

Be Charged as a Money Laundering Offense?

The Times Are A-Changing, 39 TAX TIMES (No. 4 Aug. 2020)

instrumental in the DOJ’s efforts to

prosecute Brockman.

Strachans and Egglishaw Plead

Guilty to Tax Crimes But

Egglishaw Is Released Despite

Australian Charges

By Bruce Zagaris

On October 5, 2020, Strachans SA

in Liquidation pleaded guilty to conspiring

with U.S. taxpayers and others to hide

income and assets in offshore entities and

bank accounts from the IRS. The court

sentenced Strachans. 113

Since 2008,

Australia sought to arrest Philip Jepson

Egglishaw, former owner of Strachans SA,

for tax evasion and money laundering.

Although he signed a plea deal on behalf of

Strachans on August 14 and was named as

a co-conspirator, he was not arrested by the

U.S. on the Australian charges. 214

Plea of Strachans SA in Liquidation

Documents filed in U.S. District

Court for Central District of California

(Los Angeles) indicate Strachans was a

firm servicing international financial

structures for clients residing in a variety of

countries, including U.S.-based clients.

Strahans formed trusts and offshore

113 U.S. Department of Justice, Jersey/Swiss Financial Services Firm Admits to Conspiring

with U.S. Taxpayers to Hide Assets and Income

in Offshore Accounts, Press Rel. 20-1057, Oct. 6, 2020.

214

Kate McClymont, Bowler Hat English an’: hunt for alleged mastermind of Australia’s largest tax

evasion scheme, THE SYDNEY MORNING

HERALD, Sept. 28, 2020.

companies, administration, bookkeeping,

and accounting.

For U.S.-based clients, Strachans

assisted in concealing assets from the IRS

and evading taxes through: managing

undeclared assets for U.S.-based clients

held by nominee sham entities belonging to

the U.S.-based clients; facilitating frequent

cash collections by U.S.-based clients

while understanding they did not intend to

declare the funds to the IRS; and providing

mechanisms for U.S.-based clients to

access their undeclared offshore funds in a

confidential way, including fake loans, fake

consultancy agreements, and false

invoices. 315

In pleading guilty, Strachans

stipulated to the comprehensive Statements

of Facts and paid a fine of $500,000. In

May 2014, Strachans voluntarily disclosed

its criminal conduct and agreed to fully

cooperate with the DOJ in connection with

its criminal investigations. Strachans made

an internal review to identify and collect

data and information concerning its U.S.-

taxpayer accounts. Strachans reported its

findings to the DOJ and transmitted

documentation in support of its findings.

Strachans also helped the DOJ to prepare

treaty requests for information concerning

undeclared account holders. 416

Egglishaw

According to an Interpol Red

Notice, Egglishaw, 67 and a native of

Jersey, is wanted on the following criminal

charges: (1) two conspiracies to defraud the

315 DOJ, supra.

416

Id.

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