What will Brockman charges do to Reynolds?

Federal prosecutors' allegations that Reynolds and Reynolds Co. CEO Bob Brockman evaded taxes on $2 billion in income raise questions about whether the company he has led for more than a decade will have to navigate any fallout.

Reynolds is not accused of wrongdoing in a 39-count federal indictment unsealed this month that charges Brockman, 79, with tax evasion and wire fraud. Representatives for the Dayton, Ohio, dealership management system giant say company leaders remain focused on operating the business and supporting customers.

Yet the industry will be closely watching as the government's case unfolds against Brockman, who last week continued in his roles as Reynolds' chairman and chief executive. Key questions about Reynolds' future touch on how Brockman's leadership — perhaps even his ownership — of the company will evolve and how customers and competitors will react to the criminal case.

The U.S. Department of Justice alleges Brockman built an elaborate scheme over two decades to dodge income taxes by hiding income from private equity investments and using business representatives to move money and create a "false paper trail regarding his offshore structure." The government says Brockman also fraudulently obtained close to $68 million in Reynolds and Reynolds debt securities between 2008 and 2010 through entities he controlled without providing required notice and disclosure.

The company has said the government's case involves "activities Robert Brockman engaged in outside of his professional responsibilities with Reynolds and Reynolds" and that it is "confident in the integrity and strength of our business."

Brockman was released on a $1 million bond.

Here are four questions about the future of Reynolds.

Any discussion of forfeiture of Brockman's ownership interest in Reynolds and Reynolds is a long way off, four tax and financial crimes law experts told Automotive News.

Federal prosecutors filed two forfeiture allegations related to wire fraud and money laundering proceeds in their case against Brockman. If convicted on those counts, Brockman could be required to forfeit any property obtained from the alleged offenses. That could include $67.8 million allegedly improperly obtained from his purchase of Reynolds' debt securities, according to the indictment.

If the property at issue can't be recovered, the government said in the indictment that it can seek forfeiture of other property.

Reynolds has not shared its ownership structure or the size of Brockman's stake. Reynolds merged with Brockman's Universal Computer Systems Inc. in 2006, bringing then-publicly traded Reynolds private.

Property the government can seek as a substitute in such cases could include ownership stakes in companies, but other assets — such as real estate, vehicles or bank accounts — generally are easier to forfeit than an ongoing business, said Brian Hayes, a partner at Holland & Knight law firm in Chicago who formerly was chief of the criminal division for the U.S. Attorney's Office for the Northern District of Illinois.

Reynolds being subject to government forfeiture is possible, but the chance is remote, said Lawrence Feld, a New York City lawyer and former assistant U.S. attorney in the Southern District of New York who co-authored the treatise Tax Fraud and Evasion.

"It seems to me that Mr. Brockman is a very wealthy man, and he would have other assets that would be available to cover the forfeiture allegations here," Feld said.

A spokesman for the U.S. Attorney's Office for the Northern District of California, where the charges against Brockman were filed, declined to say whether the government could seek to take control of Reynolds, telling Automotive News via email that "answering this question would require a complex legal analysis and inquiry into aspects of the government's case that is not public."

John Darmento, director of the Gillrie Institute, a Lehi, Utah, dealership technology consultancy that works on DMS conversions, said several dealers have asked about switching from Reynolds to another provider following news of the indictment. Darmento said he advises retailers that waiting until the end of a contract with Reynolds is the easiest approach to avoid having to pay off any balance owed under the agreement.

Joe Shine, CFO of Sheehy Auto Stores in Springfield, Va., said this month the group did not plan to change providers because of the indictment against Brockman and was "waiting to see what happens."

Joe Serra, president of Serra Automotive of Fenton, Mich., with 50 stores in seven states, said several of his group's dealerships switched from Reynolds three or four years ago as contracts came open. Serra said his store-level leaders "didn't feel they had the partnership with Reynolds back then."

Serra, who personally invested in rival startup Tekion, said his company since has acquired stores that use Reynolds' system.

"It's a long-standing company with some good people inside of it," Serra added. "It's the partnership piece that needs to be improved upon, in my opinion."

Reynolds is one of two U.S. DMS giants, along with publicly traded CDK Global Inc. Smaller players, such as Cox Automotive's Dealertrack and DealerSocket's Auto/Mate, also have a chunk of the franchised dealership market.

New companies are looking to shake up the segment. Tekion, which touts what it describes as a cloud-native DMS platform, last week said it raised $150 million in its latest funding round and has signed dealerships in 28 states as customers since late 2019.

Darmento recently said some competitors have made it known that they thought the case against Brockman could be something on which they could potentially capitalize.

"It's a very competitive market, and the last thing Reynolds needs is this right now," Darmento said.

Other DMS companies did not directly weigh in on how the Brockman indictment could affect the market.

Reynolds has said Brockman remains chairman and CEO. It did not provide a detailed response as to whether it has or is developing a succession plan.

In June, Reynolds promoted Tommy Barras, who was executive vice president of software development, to a new role of president and COO reporting directly to Brockman.

"Reynolds and Reynolds is led by a highly experienced management team whose complete focus remains on successfully operating our business. We continue to provide the same level of superior support that our customers across the country have come to expect," a company spokesman said via email last week.

A succession plan should include identifying a candidate who can learn the business alongside a CEO to ensure a smooth transition and avoid having all of a company's institutional knowledge housed within one person, said Jeffrey Sonnenfeld, senior associate dean and professor of leadership practice at the Yale School of Management.

It could be difficult for Brockman to execute in his leadership role while simultaneously mounting his best criminal defense, Sonnenfeld said. "This also creates a shadow in the eyes of its customers," he said of the company.

David Muller and Melissa Burden contributed to this report.