When billionaire Robert Smith ended his 2019 Morehouse College commencement speech by vowing to pay off student debt for the entire graduating class, cheers of “MVP, MVP, MVP!” rose from students and faculty on the Atlanta campus.
What the audience didn’t know was that Smith was harboring a financial secret. He was being pursued by Justice Department prosecutors and Internal Revenue Service agents for potential tax crimes, according to four people familiar with the matter.
Federal authorities have spent four years examining whether Smith failed to pay U.S. taxes on about $200 million in assets that moved through offshore structures, some of those people said. Smith hasn’t been charged, and prosecutors may conclude he owes no taxes on those assets.
The matter hinges largely on whether Smith was actually the beneficial owner of Caribbean entities that received proceeds from his company’s first private equity fund, according to two of the people. A portion eventually flowed through the offshore entities into a U.S. charitable foundation where Smith is president and founding director.
U.S. citizens are required to pay taxes on income anywhere in the world. When the IRS catches mistakes on a return, taxpayers generally rectify the problem and reach a civil settlement. Prosecutors can bring criminal cases, however, against those who willfully fail to pay taxes or fail to declare their foreign assets.
Smith is trying to persuade the Justice Department to forgo criminal charges and resolve his case with a civil settlement, according to three of the people. A conviction could send him to prison and force him out of Vista Equity Partners, a money management firm with $65 billion in assets that has brought him fame and a luxe lifestyle.
Part of his defense rests on a reported pledge by the private equity fund to direct proceeds to charity. If prosecutors determine that the proceeds were designated for charity all along, it could bolster the argument that Smith was never the beneficial owner and not liable for taxes.
Recently, Smith has talked to prosecutors about possibly cooperating with their investigations in exchange for leniency, one of the people familiar with the matter said.
That’s because prosecutors are building what may be a larger tax case against a Smith associate — Robert T. Brockman, a Houston businessman — according to Bermuda court records and people familiar with the matter. The Brockman investigation was reported by the Sydney Morning Herald, though the inquiry into Smith hasn’t been disclosed previously. The two men’s business connections involve a jumble of offshore entities, trusts and foundations, much of it opaque to anyone without subpoena power.
In 2000, Brockman helped provide $1 billion for Smith to begin a private equity firm, a person familiar with the matter said. The funds came out of an entity held by a charitable trust based in Bermuda in which Brockman is a beneficiary, the person said.
The men met through business dealings at Goldman Sachs Group Inc. and shared a passion for the potential of software in business. Brockman made his name with software widely used by auto dealerships and is the chairman and chief executive officer of Reynolds and Reynolds, based in Dayton, Ohio. He didn’t respond to requests for comment sent by email or made through his company and its outside public relations firm.
Smith and Vista declined to comment for this article. A spokesman for the Justice Department declined to comment on whether an investigation exists. An IRS spokesman didn’t respond to emails seeking comment.
The Justice Department has discretion in deciding whom to charge, weighing factors such as the prosecution’s evidence, the strength of the defense and the way a jury would likely respond to the facts. Smith, a prominent Black businessman and philanthropist, may be viewed sympathetically by a jury in a time of protests for racial justice, lawyers said.
Subscribe to our YouTube channel: https://bit.ly/2TwO8Gm
QUICKTAKE ON SOCIAL:
Follow QuickTake on Twitter: twitter.com/quicktake
Like QuickTake on Facebook: facebook.com/quicktake
Follow QuickTake on Instagram: instagram.com/quicktake
Subscribe to our newsletter: https://bit.ly/2FJ0oQZ
Email us at firstname.lastname@example.org
QuickTake by Bloomberg is a global news network delivering up-to-the-minute analysis on the biggest news, trends and ideas for a new generation of leaders.