Former CEO Accused of Large-Scale Tax Evasion Found Competent to Stand Trial

(Parker Tax Publishing June 2022)

A district court held that a billionaire former CEO of a large software company, charged in what prosecutors claim is the biggest tax evasion case against an individual in U.S. history, is competent to stand trial for tax evasion, wire fraud, and money laundering. The court found that the government's arguments and expert testimony regarding the taxpayer's competency to stand trial on concealing $2 billion in income from the IRS were persuasive and supported by compelling evidence of the taxpayer's past malingering and sophisticated furtive behavior. U.S. v. Brockman, 2022 PTC 148 (S.D. Tex. 2022).

Background

In 2020, a federal grand jury returned a 39-count indictment charging Robert Brockman, former Chief Executive Officer (CEO) of Reynolds & Reynolds (Reynolds), a billion-dollar computer systems and software company, with tax evasion, wire fraud, money laundering, and other offenses. According to the IRS, the charges stem from a decades-long scheme to conceal approximately $2 billion in income from the IRS as well as a scheme to defraud investors in Reynolds' debt securities. The indictment charges that Brockman used a web of offshore entities based in Bermuda and Nevis to hide from the IRS income earned on his investments in private equity funds which were managed by a San Francisco-based investment firm. As part of the alleged scheme, Brockman directed untaxed capital gains income to secret bank accounts in Bermuda and Switzerland. To execute the fraud, the indictment alleges, Brockman took measures between 1999 and 2019 such as backdating records and using encrypted communications and code words to communicate with a co-conspirator, among other alleged actions.

In addition to the tax offenses, Brockman is charged with engaging in a fraudulent scheme to obtain approximately $67.8 million in the software company's debt securities. As CEO, Brockman was contractually restricted from purchasing any of the software company's debt securities without prior notice, full disclosure, and amending the associated credit agreements. The indictment alleges that Brockman used a third party to circumvent those requirements and used material, non-public information about the software company to make decisions about purchasing the debt. In addition, the indictment also alleges that Brockman persuaded another individual to alter, destroy, and mutilate documents and computer evidence with the intent to impair the use of such evidence in a grand jury investigation.

In September of 2021, the IRS issued a Notice of Jeopardy Assessment and Rights to Appeal concerning Brockman's alleged individual income tax liability for tax years 2004 through 2007, 2010, and 2012 through 2018 and a Notice of Jeopardy Levy and Right of Appeal for collection of the alleged liability set forth in the Jeopardy Assessment. The IRS also immediately issued liens on real property and levies against financial accounts held by Brockman, his wife, and his daughter-in-law.

Competency Issue

Brockman's attorneys filed a motion asking a district court to find Brockman, who is 80 years old, not competent to stand trial. The motion was based on Brockman's doctor diagnosing him with Parkinson's related-mild to moderate dementia and a memory that functioned in the bottom one-percent of his age group.

The government replied that validity tests, designed to detect intentional exaggeration of an intellectual disability or malingering, indicated that Brockman's poor cognitive test results stemmed from a deliberate attempt to perform poorly to avoid prosecution rather than from a genuine intellectual disability. The government noted that Brockman sent an email to the doctor who diagnosed him with dementia the day after he found out that the Bermuda Police Service searched the home of his key co-conspirator and found incriminating records of Brockman's decades-long tax fraud sufficient to put him in prison for the rest of his life. At the time he emailed his doctor, Brockman was enjoying a remote Alaskan fishing trip with a friend. His diagnosis from the doctor came six months later; yet, as the government noted, Brockman continued to shoot guns, give cogent testimony in depositions, and run his software company. Brockman's attorneys countered that the validity test results were flawed and unreliable because of, among other things, Brockman's advanced state of cognitive decline.

Analysis

The district court concluded that Brockman is competent to stand trial. The court found the testimony of two doctors who examined Brockman for the government and the results of the cognitive and validity testing performed by these experts to be clear, credible and reliable regarding Brockman's current competency to stand trial. The court noted that, as part of two assessments, in May and October of 2021, one of the doctors, a forensic neuropsychologist, administered several cognition and validity tests to Brockman and ultimately concluded that Brockman was intentionally exaggerating his cognitive impairment on the testing.

The court noted that, even though Brockman was clinically diagnosed with dementia in late 2018 and early 2019 and was deemed incompetent by a neuropsychologist in 2019 and 2020, his behavior outside of clinical settings during that time period showed few, if any, signs of impairment. Brockman continued to run Reynolds as its CEO until late 2020. Before he stepped down, the court observed, Brockman regularly sent emails and memos evidencing that he had a firm grasp of the intricacies of his company and the industry in which it operated.

The court found that the disconnect between Brockman's performance on cognitive evaluations and other evidence of his intellectual capabilities persisted in 2020. Even after an assessment by Brockman's doctor in December 2019 deemed him incompetent to stand trial, the court observed that Brockman continued to serve as CEO of Reynolds for almost a year and his longtime friend who succeeded him as CEO testified that Brockman showed no sign of cognitive impairment during that time. Numerous emails authored by Brockman in 2020 demonstrated to the court that Brockman had an exhaustive understanding of both the various sectors of Reynolds and the complex dynamics of the relationships among its executive team, and Brockman wrote several of those emails either just before or after his criminal counsel sent a letter to the Department of Justice arguing that Brockman's cognitive abilities had deteriorated to the point where a criminal prosecution against him would contravene the principles of due process.

For a discussion of criminal and forfeiture penalties for tax evasion, see Parker Tax ¶265,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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