In the weeks leading up to the announcement, Smith had pressed his legal team to obtain an assurance that the government wouldn’t publicly disclose his misconduct, people familiar with the matter said. The request was denied.
“Smith committed serious crimes, but he also agreed to cooperate,” David Anderson, the U.S. attorney in San Francisco, said at an Oct. 15 press conference. “Smith’s agreement to cooperate has put him on a path away from indictment.” Jim Lee, chief of criminal investigation for the IRS, made it clear that the alleged tax evasion by Smith and Brockman was a serious matter. “I have not seen this pattern of greed or concealment and cover-up in my 25-plus years as a special agent,” he said.
The son of two Denver educators, Smith earned a degree in chemical engineering at Cornell and an MBA at Columbia University. He went to work as an investment banker at Goldman Sachs Group Inc. in 1994 and moved to Silicon Valley as part of its push into tech. A few years later he tried to arrange a buyout for Brockman, whose company, now known as Reynolds & Reynolds, was emerging as a leading provider of software used to manage auto dealerships.
On the surface, the men had little in common. Brockman, a generation older than Smith, is a former Marine Corps reservist who early in his career sold software for IBM. But both men live in Texas, have homes in Colorado and brought an engineer’s eye to technology. They saw an opportunity in what became Vista’s trademark—buying business software ventures and increasing their value by managing them more efficiently.
A few years after they met, Brockman offered to put up $300 million to launch Smith into the private equity business. There would be at least $700 million more. But the money came with some take-it-or-leave-it conditions. Smith had to locate his first fund in the Cayman Islands, agree to settle any disputes outside U.S. courts and set aside some of the carried interest he earned from it to protect Brockman against losses, according to the statement of facts Smith signed as part of the settlement.
Smith concluded that Brockman was structuring the deal to prevent the IRS from learning about his investment. But he saw the proposal as a unique opportunity and went along, according to the statement. He even worked with one of Brockman’s lawyers to set up entities to help him dodge his own U.S. tax bill, he admitted.
Smith proved to be a private equity wizard. Vista’s first fund earned a net internal rate of return of 29% over its lifetime, according to Bloomberg data. Starting around 2005, some of Smith’s earnings from that fund went to a bank account in the name of Flash Holdings that Brockman’s lawyer had advised him to set up in the British Virgin Islands and that Smith controlled, according to the statement. He paid the lawyer $800,000 over 15 years to create a false paper trail, Smith admitted.
Also in 2005, Smith and his wife, Suzanne McFayden, whom he met at Cornell, purchased a $2.5 million home in California’s Sonoma County with untaxed income from a Caribbean bank account. A few years later they bought two ski properties and a commercial one in Megeve, France, with Smith directing that they be paid for with 13 million euros ($16 million) of untaxed funds from a Swiss bank account.
Smith filed a Report of Foreign Bank and Financial Accounts, or FBAR, for that year which didn’t disclose his financial interest in accounts in the British Virgin Islands and Switzerland. Although American citizens with foreign holdings are required to file such reports annually, Smith failed to do so in 2011, and his 2012 submission again didn’t list his interest in the Caribbean and Swiss accounts.
The following year McFayden filed for divorce, listing several homes and a private jet among the marital assets. Except for her original petition, the filings in that case are sealed. But during the contentious proceedings that followed, McFayden asserted that Smith’s assets included substantial foreign holdings, according to a person familiar with the matter. It was the divorce that piqued the government’s interest in Smith, two people said.
The prospect that Smith’s divorce could stir up unwanted scrutiny doesn’t appear to have surprised Brockman. Two years earlier Evatt Tamine, a Bermuda-based lawyer managing his offshore entities, received an email from a colleague. It said Brockman had “called concerned about the Robert Smith situation and what effect a nasty divorce might have on us,” according to a 2011 email the government filed in court. Tamine, who wasn’t charged with a crime and is cooperating with prosecutors, declined to comment.
Soon, pressure was building on Smith’s Swiss bank, Banque Bonhote & Cie SA. It was one of dozens of Swiss banks the U.S cracked down on over accounts hidden from the IRS. Banks could reduce their financial penalties if they convinced American clients to enter an IRS amnesty program that let taxpayers avoid prosecution.