Vista chief Robert Smith, lauded for charitable and investment prowess, settles tax evasion case

By William Myers and Chris Witkowsky

Robert Smith, founder and CEO of Vista Equity Partners, has been on an impressive run in recent years, growing his firm by billions of dollars and giving millions in charitable donations.

But Thursday, the federal government announced that Smith agreed to cooperate with an ongoing federal probe into what authorities are calling the largest tax evasion case in American history.

At issue was a portion of carried interest Smith collected in his first fund formed in 2000 on which the government claimed, and Smith agreed, he should have paid taxes.

Smith signed a non-prosecution agreement admitting that he used two foreign funds to hide some $200 million in partnership income from tax authorities, federal authorities announced Oct. 15.

As part of Smith’s agreement with federal authorities, he’ll avoid prosecution but will pay $139 million in back taxes, interest and fines and cooperate in the tax evasion case against his friend and partner, Houston software tycoon Bob Brockman.

Separately, federal authorities announced Brockman’s indictment Oct. 15, accusing him of 39 counts including conspiracy, tax evasion, money laundering and wire fraud. Brockman, 79, chairman of Reynolds and Reynolds, hid some $2 billion from tax authorities, the largest single evasion case in US history, federal prosecutors claim.

‘Individual A’

In charging documents and the non-prosecution agreement, authorities allege that Smith set up Vista ($65.2 billion in AUM) to help Brockman hide his cash in a dizzying array of overseas funds and bank accounts.

Vista started with $1 billion in funds from Brockman’s overseas trusts. Smith’s agreement lists Brockman as “Individual A” and says that the pair met in 1997, when Smith was an investment banker at Goldman Sachs, where he worked from 1994 until 2000, when he formed Vista.

From 1997 to 1998, Smith worked with “Individual A” on a potential acquisition of an unidentified company. That deal fell through but during “that process, Smith learned that Company A was purportedly owned by a foreign holding company that, in turn, was purportedly owned by a foreign trust located in Bermuda. Individual A told Smith that the foreign trust was created by Individual A’s father in the 1980s. Individual A, and others who worked for Individual A, told Smith that because Company A was owned by the offshore trust, no US income tax would be owed on the profits gained from the sale of Company A’s stock,” the agreement states.

Using Brockman’s lawyer – identified only as “Individual B” in court papers – Smith set up two overseas trusts, the Excelsior Trust and Flash Holdings, to hide tens of millions of dollars from the IRS, authorities claim.

Smith paid taxes on the portion of carry distributed directly to him from the first fund, but not on proceeds that flowed into the offshore structure, according to a source familiar with the matter. With the settlement, Smith agreed with the government he should have paid taxes on the carry that flowed into the offshore structure.

Vista, the firm, its funds and its portfolio companies were not part of the investigation or settlement, the source said. “The DOJ has never suggested that any Vista investor money has ever been misapplied, misused, or diverted in any way,” the source said.

‘Never too late’

Smith used the untaxed money for various personal expenses, according to federal authorities.

“Smith admits that, in 2005, he used approximately $2.5 million in untaxed funds to purchase and renovate a vacation home in Sonoma, California,” federal prosecutors said in announcing Smith’s agreement.

“In 2010, Smith again used untaxed funds to purchase two ski properties and a piece of commercial property in France. In 2011 and 2012, Smith used approximately $13 million of untaxed funds to build and make improvements to a residence in Colorado and to fund charitable activities at the property.”

The agreement will keep Smith out of prison. For David Anderson, US Attorney for the Northern District of California, the lesson is straightforward: “It’s never too late to do the right thing,” Anderson said in a statement. “It is never too late to tell the truth.”