The sting that hooked the tax lawyer to a pair of billionaires

(Bloomberg) – Houston tax attorney Carlos Kepke had been teaching wealthy Americans like Robert F. Smith for decades how to move assets overseas when an undercover agent posing as a bar owner arrived in 2018.

The goal was to gather evidence for a tax evasion case against Kepke. It wasn’t difficult. As the wired agent recorded the conversation, Kepke bragged about placing assets in offshore trusts, including in the Central American nation of Belize. Customers are transferring money and claiming to cede control, in accordance with federal law. But they are the ones who decide on its use, not the foreign trustees.

“You never lose control,” Kepke assured his visitor. “You’re just messing with bank accounts.”

This assurance, and others like it, are set forth in a new public affidavit in the Kepke case. It highlights Kepke’s two-decade pursuit by the Internal Revenue Service, part of the global network of lawyers, accountants and financial advisers who help hide billions of dollars in offshore financial havens. And that opens a rare window into how diets work.

“Enablers are very important,” said Victor Song, former head of criminal investigations at the IRS, where he has seen hundreds of undercover operations. “Without them committing illegal acts, taxpayers would not get their money abroad. In these types of cases, it is extremely important to show that the trust structure was a sham. »

Kepke, 82, has pleaded not guilty and is due to stand trial in November. The charges of conspiracy and helping to prepare false tax returns by Smith, founder of Vista Equity Partners, which manages $96 billion in assets. Smith could be called as a witness for the prosecution.

Kepke was paid approximately $1 million by Smith, according to the indictment. A lawyer for Kepke declined to comment.

Whistleblowers

A pair of whistleblowers — a Vista financial officer and a divorce investigator hired by Smith’s first wife — also provided information to the IRS, the affidavit reveals.

The richest black American, with a net worth of $8.9 billion, Smith admitted in 2020 that he used Kepke’s playbook to evade taxes on more than $200 million. Under a non-prosecution agreement, he agreed to pay $139 million in back taxes and penalties and to cooperate with prosecutors.

Smith and a Vista representative declined to comment on the filing. Vista and its employees have not been accused of wrongdoing.

Originally filed under seal in 2018 by IRS Special Agent Trista Merz, Kepke’s affidavit was used by the Justice Department to convince a federal judge he had probable cause to search his townhouse. red brick house in Houston and a storage locker.

By the time Kepke met Smith, the attorney had worked for years for the family of software entrepreneur Robert T. Brockman. Brockman is facing trial for tax evasion on $2 billion in earnings and money laundering. As Vista’s first backer in 2000, he is accused of generating most of that revenue by investing in Vista’s technology-focused funds through a Bermuda-based entity called Point Investments.

Brockman, 81, is the former chief executive of Reynolds & Reynolds, a software provider for car dealerships. After pleading not guilty in 2020, his lawyers told the court he suffered from dementia and unable to help in his defence. A judge dismissed the claims and scheduled a trial for next February. Defense attorneys said in June that Brockman’s health had further declined and he was receiving palliative care at home.

A lawyer for Brockman declined to comment.

singular focus

Kepke is a graduate of the University of Texas Law School. Early in his career, he advised wealthy clients at a major Houston tax law firm. In 1992, he established his own practice with a singular focus – “the use of foreign structures for tax savings and/or asset protection in the United States,” according to his website.

Three years later, Kepke filed for Chapter 11 bankruptcy to satisfy the $1.5 million debt he owed the IRS, according to the 2018 affidavit and the court records.

This wasn’t the first time the IRS had sued Kepke. After an audit of his tax returns, IRS criminal investigators opened a case against him in 1999. An undercover agent recorded the talkative lawyer saying he used a foreign trust and corporation during of the last 27 years, and he explained how he had set them up for clients. Kepke said he advised them to use a non-US citizen or elderly American to impersonate their “maker”.

“What I’m basically trying to do is take your wealth and make it an outsider,” Kepke told the undercover agent in 1999. You’d Appreciate If You Were an Outsider.

The agent determined that 20 of Kepke’s 102 clients, including Brockman, appeared to have created such offshore structures. But the IRS decided around 2002 not to refer a criminal case to prosecutors. The 2018 affidavit does not explain why.

Robert Brockman, the software executive charged in the largest tax case ever against an American individual, arrives for a jurisdiction hearing at the federal courthouse in Houston, Texas, U.S., Tuesday, November 16, 2021. Brockman was indicted on tax evasion and money laundering charges that accused him of using a complex trust structure in the Caribbean to hide $2 billion in income over two decades.

Criminal investigators became interested in Kepke again after receiving information about Smith from around 2013. The Justice Department launched a program that year for Swiss banks to avoid U.S. lawsuits by sharing information.

Bank Bonhote quickly informed the agency that Smith and his wife held two accounts there and that Smith was the beneficial owner of eight others, Merz’s affidavit states. The bank said by e-mail that it complies with applicable laws in the United States and Switzerland.

Suzanne McFayden-Smith filed for divorce the same month the program launched. Weeks later, a private investigator working for her divorce attorney applied for a whistleblower award from the IRS, according to the affidavit.

Around the same time, Denise Davis was working as Vista’s chief financial officer. His duties included setting up wire transfers from Vista’s first fund bank account to Flash Holdings, a company Smith had set up and secretly controlled with bank accounts in the British Virgin Islands.

No tax ID

Davis noticed that Flash did not have a tax ID, according to the affidavit. Her boss, Vista chief financial officer John Warnken-Brill, told Davis that Flash was Smith’s “offshore entity,” but she should never associate one with the other. He gave Davis similar instructions regarding Brockman and Point Investments. Davis filed two applications for IRS whistleblower awards, according to the affidavit.

Davis, who left the company in 2015, could not be reached for comment. Merz did not respond to requests for comment.

In 2016, a grand jury began investigating Smith in an inquest that led back to Kepke, the affidavit states. Warnken-Brill testified before the panel, according to the filing. The longtime finance chief, who retired from Vista in March and has not been charged with wrongdoing, did not respond to requests for comment.

By 2017, the IRS had expanded its probe to include Brockman and launched its second sting operation targeting Kepke. Two agents were involved, including one posing as a Pennsylvania auto broker who said his grandmother intended to leave him a farm. He wanted to protect him from creditors and his future wife.

Kepke replied that some of his clients’ wives had no idea how much money they had overseas, the affidavit states. The lawyer also indicated that he once favored the creation of entities in Bermuda, but no longer did so because it had “become a sieve for the US Internal Revenue Service”. He recommended Belize.

The second undercover agent posed as the bar owner and friend of the car broker. During a meeting at his home office, Kepke introduced Emil Arguelles, a Belizean attorney who said he worked with Kepke for 15 years and also did business with attorneys in New York, Florida and Los Angeles. Arguelles did not respond to requests for comment.

When the agent pressed Kepke about his biggest clients, he described a pair of billionaires he advised as having made their fortunes in private equity and an IT company that serviced car dealerships.

“Bob made so much money, he made…I mean, he’s a, a multi-billionaire,” the affidavit said, quoting Kepke in an apparent reference to Brockman.

Kepke advised the agent to fund a trust in Belize through a relative in a manner that was “almost identical to the entities and structures that Kepke created and organized for Smith and Brockman,” the affidavit states. . Smith enlisted an uncle from his first wife. A British resident with a primary education, the uncle told prosecutors he believed Smith wanted him to be a “sleeping partner”.

In a 2013 deposition, the uncle testified that he could not afford the $7,500 used to create Smith’s trust, despite the existence of an affidavit purporting to bear his signature and stating that he was the source of funds.

Amended Affidavit

McFayden-Smith later admitted to having created an altered affidavit on his computer. She amended it to identify her husband as the source of the $7,500 “in case she needed it to leverage against Smith,” the IRS agent’s affidavit states. In his 2020 non-prosecution agreement, Smith acknowledged paying some of the money.

A lawyer for McFayden-Smith declined to comment.

Of Kepke’s more than 100 clients, the 2018 affidavit only identified three, other than Smith and Brockman. They included a pair of executives from the steel industry. Both admitted to working with Kepke to set up offshore entities to avoid taxes and entered the IRS’ Offshore Voluntary Disclosure Program in 2009, according to the affidavit.

When IRS agents arrived at Kepke’s doorstep in August 2018 with their search warrant, he was no more reserved than he had been during undercover meetings and no more nervous, according to a memo filed by one of the officers in court. Kepke asked his visitors why they didn’t just ask him for documents and provided them with handwritten consent to grab a wide range of files. Then he went to walk his dog.

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