Tax evasion storm swirls around Reynolds CEO

Bob Brockman remained at the helm of dealership management system giant Reynolds and Reynolds Co. as he began his fight against federal charges that he hid $2 billion in income and defrauded investors in the company's debt in what prosecutors say was a complex offshore scheme lasting two decades.

Among those charges: an allegation that the Reynolds chairman and CEO misled investors by buying debt securities in his company without disclosing his involvement as required and using insider information to do so.

Brockman, 79, was indicted this month on what the federal government called the "largest-ever tax charge against an individual in the United States." Prosecutors who revealed the indictment late last week allege Brockman spent 20 years hiding income in Caribbean and other secret bank accounts to dodge U.S. income taxes.

It's a potentially dramatic downfall for the wealthy businessman, who faces a slew of federal charges from tax evasion and money laundering to wire fraud. Brockman last week appeared by videoconference in federal court in Houston, where he pleaded not guilty. He was released on a $1 million bond. A Reynolds spokesman last week said Brockman would stay in his company role for now.

The government painted a picture of greed and a complex web of cover-ups, as Brockman allegedly used hidden money on luxurious personal spending — including $15 million to buy a vacation home dubbed "Mountain Queen" and $15 million for "Frying Pan Canyon Ranch," both in Pitkin County, Colo., and some $32 million on a yacht known as Albula. Brockman lives in both Houston and Pitkin County, home to the ritzy ski town of Aspen.

"Mr. Brockman has pled not guilty and we look forward to defending him against these charges," Kathryn Keneally, a lawyer for Brockman and a partner in Jones Day law firm in New York, said in an email to Automotive News.

Brockman allegedly spent decades creating a "false paper trail regarding his offshore structure," using business representatives whom he directed to move money around to skirt taxes, according to the 39-count indictment against him dated Oct. 1 and unsealed last week. The government did not disclose the amount of taxes Brockman is alleged to have evaded.

The indictment said Brockman used offshore bank accounts to conceal income from investments in Vista Equity Partners private equity funds. Brockman is alleged to have directed untaxed capital gains to bank accounts in Bermuda and Switzerland. The government said the scheme lasted from Dec. 1, 1999, to Oct. 15, 2019.

Brockman also is alleged to have fraudulently obtained nearly $68 million in Reynolds and Reynolds debt securities between 2008 and 2010. As CEO of the company, he was prohibited from buying any of the debt securities without notice, disclosure and amending credit agreements.

But the government claims he used intermediaries to skirt those rules. The indictment also alleges Brockman used company insider and nonpublic information when deciding to purchase the debt.

For instance, according to the indictment, Brockman knew Reynolds would lose about $1 billion in 2008, which would reduce the debt's price.

To hide his actions, the government said, Brockman backdated records and used encrypted communications and code words such as permit, bonefish, snapper and steelhead. Brockman even had a code name for the IRS: the house, said David Anderson, the U.S. attorney for the Northern District of California, where the charges were filed.

"Brockman directed the destruction of paper documents and computer media using shredders and hammers," Anderson said last week during a news conference.

The government built its case against Brockman with the help of billionaire Robert Smith, chairman of Vista Equity Partners. Smith, 57, of Austin, Texas, is avoiding prosecution because he agreed to cooperate in the government's case against Brockman. Smith will pay $139 million in taxes and penalties and has agreed to abandon $182 million in refunds, plus interest, prosecutors said.

Smith met Brockman, referred to as Individual A in Smith's nonprosecution agreement, around 1997, when Smith was an investment banker. The two worked together on a potential sale of a Brockman company, according to that agreement.

Brockman didn't sell the company then, but he did ask Smith about creating a private equity fund in which Brockman "would be the sole limited partner investor, through his foreign trust structure," according to Smith's agreement with the government. Brockman invested $300 million in a fund and later boosted that to $1 billion.

Lawyers for Smith, at Kirkland & Ellis law firm, declined to comment.

Vista's website says its Vista Equity Fund II was involved as an equity sponsor in a buyout of Reynolds and Reynolds in October 2006. That's when publicly traded Reynolds went private by merging in a $2.8 billion deal with Brockman's Universal Computer Systems Inc. — a company Brockman founded in 1970 in his living room. Vista's website says it "exited Reynolds and Reynolds in December 2014."

Vista Equity Partners also is the majority owner of dealership technology company DealerSocket, which in February acquired DMS provider Auto/Mate. Vista declined to comment.

DealerSocket did not immediately respond last week to messages seeking comment. DealerSocket, a Reynolds competitor, is not part of the government's case against Brockman.

It's not immediately clear what impact Brockman's indictment will have on Reynolds and Reynolds, of Dayton, Ohio, a DMS provider to dealerships and manufacturers in the U.S., Canada and Europe. The firm has roughly 4,300 employees globally, with the majority in North America. Reynolds won't disclose its dealership client count.
A Reynolds spokesman, in a statement, said: "While the situation is evolving, Mr. Brockman will continue to serve as chairman and CEO of Reynolds and Reynolds at this time."

The company declined to comment on the size of Brockman's ownership stake in Reynolds or on the government's allegations regarding Reynolds' debt securities.

The spokesman also told Automotive News in an email that "the allegations made by the Department of Justice focus on activities Robert Brockman engaged in outside of his professional responsibilities with Reynolds and Reynolds. The company is not alleged to have engaged in any wrongdoing and we are confident in the integrity and strength of our business."

Sheehy Auto Stores, a Reynolds customer for about two decades with its software in all but two of its 29 stores, has no plans to drop the company anytime soon, CFO Joe Shine said.

The Springfield, Va., group has a contract with Reynolds until 2022, Shine said. Sheehy is currently working on an undisclosed store acquisition, Shine said, and he met with a Reynolds representative last week to install Reynolds' DMS at the newly added location.

Brockman is "kind of tough to deal with," Shine said, but the group doesn't intend to change DMS providers because of the indictment.

"Waiting to see what happens, basically, is where we are," he added.

John Darmento, director of the Gillrie Institute, a Florida-based dealership technology consultant, said last week that some Reynolds competitors already have made it known that they thought Brockman's troubles were something on which they could potentially capitalize.

The allegations against Brockman raise questions about the company's succession planning and its leadership structure should Brockman ultimately leave Reynolds, Darmento said.

"Brockman has been the only person really in charge at Reynolds forever," he said. "Even though other people have been in charge in name, anytime you wanted to get something done, it had to go past Brockman."

Suspicions about Brockman being investigated by the government have been stirring for months.

An Australian lawyer this year, in a civil case in Bermuda involving Brockman's trusts, cited that Brockman was the subject of a U.S. criminal investigation into tax evasion and money laundering.
And those are just some of the charges eventually filed. Brockman faces seven counts of tax evasion, six counts of failing to file foreign banking reports, 20 counts of wire fraud and counts for conspiracy, concealment money laundering, tax evasion money laundering, international concealment money laundering, evidence tampering and evidence destruction, Anderson said.

Brockman is next scheduled to appear in court Oct. 29 for a bail review hearing and Nov. 17 for a status hearing, a spokesman for the U.S. Attorney's Office said in an email to Automotive News.

Jim Lee, chief of the Internal Revenue Service's criminal division, said the allegations against Brockman and those laid out in Smith's nonprosecution agreement "should disgust every American taxpayer."

Said Lee: "Mr. Brockman seemingly spent as much time covering up his tracks as he did earning the money in the first place, a clear indication to me that he knew exactly what he was doing."

David Muller and Bloomberg contributed to this report.