05 Oct 2020
Robert T. Brockman was just putting the finishing touches on a new private equity fund when worrisome news arrived. Law enforcement agents had raided the home of a tax lawyer in Texas who had worked for him.
A Houston businessman who had made his fortune selling software to auto dealers, Brockman grew nervous, according to an account filed in Bermudian court. Could the Internal Revenue Service be delving into his taxes and business interests?
Using an app called Silent Phone that makes calls untraceable, he spoke with an adviser in Bermuda about whether the Houston lawyer might ultimately reveal Brockman’s links to offshore trusts and spur an investigation, according to the filing.
The gravity of the matter became apparent two weeks after the August 2018 raid. That’s when IRS agents raided the home of the same Bermuda adviser in whom Brockman had confided. They seized a trove of encrypted devices that documented a web of Caribbean entities tied to a Brockman family charitable trust, which together held billions of dollars, according to Bermudian court records. Soon afterward, the Bermuda adviser began cooperating with U.S. prosecutors, the records show.
Thus began an investigation into what’s been described as one of the largest potential U.S. tax frauds, one that weaves together a cooperating witness, a prominent private equity billionaire and a wealthy Texan with a penchant for privacy, code names and offshore investments. The probe and Brockman’s efforts to maintain secrecy are described by several people familiar with the situation and in Bermudian and London court filings, as well as other securities filings and documents. The matter offers insight into the world of tax havens, which many rich people have been using for decades to protect their wealth through legitimate tax avoidance methods and, in some cases, illegal means.
Control of Trusts
Like many wealthy Americans, Brockman set up offshore trusts that on paper were overseen by independent directors, Bermudian court records show. Prosecutors are investigating whether he maintained control over the entities, according to the court records. They also want to know how the assets were used and whether Brockman should have paid taxes on them, according to people familiar with the matter. Investigators are trying to determine whether Brockman’s reliance on secrecy indicated criminal intent to conceal control of assets on which he may have owed taxes to the IRS, the people said.
“The reason to do trusts for tax purposes is to divest yourself of ownership or control, and thereby you’re not taxable on it,” said Bruce Zagaris, a tax attorney in Washington who isn’t involved in the Brockman case. “But if you violate those rules by actually controlling it, the IRS is going to say you’re taxable.”
Brockman, 79, hasn’t been charged and may not be. He declined to comment.
“Mr. Brockman is interested only in seeing that the trust is safeguarded by a trust protector and trustee who will use their independent judgment in its management,” said Kathryn Keneally, a lawyer representing him.
Keneally said that Brockman was a discretionary beneficiary of a trust set up by his father and that to his knowledge, it’s made distributions only to charities.
Prosecutors are investigating Brockman’s role in a potentially “major and very large tax fraud on the United States” that could “set a record for offshore tax fraud,” a lawyer representing the Justice Department told a Bermudian judge on Feb. 20. The lawyer said prosecutors believe $1.5 billion in revenue was concealed from the U.S. Investigators also are examining possible money-laundering violations, court records show.
Several lawyers in Brockman’s offshore financial empire sprang into action after the government won over the cooperating witness. In closed proceedings in a Bermudian court without the adviser present, they effectively stripped him of any remaining control over more than $1 billion in trust assets and shifted them to entities controlled by people whose appointment Brockman had supported.
U.S. authorities were livid, according to the people familiar with the matter. The prosecutor leading the Brockman investigation accused the lawyers of misleading the court to replace a trustee. That change in control could impede the investigation and complicate any U.S. efforts to seize the assets, the people said.
In sealed Bermudian litigation over the assets, a Brockman attorney submitted a letter in 2019 saying that Brockman and his family supported the change in control. In July, a Bermuda judge cited that support in backing the change. Keneally said neither Brockman nor his counsel had any role in Bermuda proceedings that the U.S. government has taken issue with, and can’t comment about them.
Brockman, a onetime IBM salesman who goes by Bob, founded his own software company, Universal Computer Services Inc., 50 years ago. It merged with a larger rival, Reynolds & Reynolds, and is now a $1 billion concern based in Dayton, Ohio. Although he’s the chief executive officer of Reynolds & Reynolds, it’s his offshore investments that are the primary focus of tax authorities, according to the people familiar with the matter.
Investigators are examining Brockman’s business ties going back two decades to Robert Smith, the private equity billionaire and philanthropist who Bloomberg News reported on Aug. 21 is under investigation by U.S. tax authorities in a related probe. A spokesman for Smith declined to comment.
Two years ago, Brockman took a page from Smith’s successful playbook, setting up a private equity firm called Falcata Capital. Much like Smith’s Vista Equity Partners, Falcata was started with a $1 billion commitment from outside the U.S. and with a mission to buy and fix up enterprise technology companies. Although little information about Falcata is publicly available, its funding came from an entity that court documents tie to the Brockman trust structure, according to people familiar with the matter.
By David Voreacos and Neil Weinberg, Bloomberg, 2 October 2020
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