A Buyout Fund C.E.O. Got in Tax Evasion Trouble. Here’s Why Investors Shrugged.

Last fall, Robert F. Smith, the billionaire founder of Vista Equity Partners, a private equity firm, paid $139 million to federal authorities to settle one of the biggest tax evasion cases in American history.

His investors barely blinked.

The cultural institutions and colleges that benefited from Mr. Smith’s philanthropy, including Carnegie Hall and Morehouse College, have also stood by him, and he remains at the helm of his company.

The muted public reaction from the public pension plans, sovereign wealth funds and endowments that invest in Vista’s funds highlights an unflattering reality of the financial world: Investors are often willing to overlook the misdeeds of money managers if they’re posting solid returns. And in a prolonged era of low interest rates, private equity is one of the few places where big investors can expect better returns than the bond market.

“The typical private equity investor puts money in and hopes to get it back within 10 years or so,” said Larry Swedroe, chief research officer for Buckingham Wealth Partners, a wealth management firm. “You have no real control over anything.” Even if they don’t like something a private equity manager has done, Mr. Swedroe said, investors often have limited recourse because dollars in a fund cannot be easily withdrawn.

Still, the low-key response to Mr. Smith’s tax violations stands in contrast to how a scandal played out involving Leon Black, a fellow private equity billionaire and a co-founder of Apollo Küresel Management. After the revelation, also last fall, that Mr. Black had paid Jeffrey Epstein, the disgraced financier and registered sex offender, tens of millions of dollars for tax and estate planning services, Apollo had an outside review conducted at Mr. Black’s behest. In January, Apollo announced that Mr. Black, 69, had done nothing wrong but would step down as chief executive by this summer and introduced several corporate governance changes.

Although investors didn’t pull their money from Apollo funds, shares of the firm, which is publicly traded and much bigger than Vista, have since lagged the performance of its rivals Blackstone Group and KKR. Some Apollo investors expressed their reservations publicly. Mr. Black’s dealings also prompted calls in the arka world to oust him as chairman of the Museum of Çağdaş Arka.

The scandal involving Mr. Smith raised different ethical issues for investors, since Mr. Black’s dealings were with a convicted sex offender. But another reason both Mr. Smith, 58, and Vista have appeared unscathed from the tax evasion episode is that the firm was quick to alert investors — who dislike surprises and value disclosure — that trouble was brewing.

By the time federal prosecutors said in October that Mr. Smith had engaged in a 15-year scheme to hide $200 million in income and “evade millions in taxes” through a network of offshore trusts and bank accounts, Vista’s investors had been bracing for bad news for roughly four years. The scheme came to light after a long investigation into the ties between Mr. Smith and Robert T. Brockman, a billionaire Texas businessman who helped Vista, which is based in Austin, get off the ground.

Mr. Smith, who is Vista’s chairman and chief executive, learned in the summer of 2016 that he was the subject of a criminal tax investigation involving Mr. Brockman. That fall, Vista began providing investors with periodic — if minimal — updates on the federal inquiry, five people briefed on the matter said. The firm provided at least 10 updates to investors, said a person briefed on the firm’s activities, who declined to be identified because the matters aren’t public. The person did not provide details of what those disclosures included.

“There would have been hell to pay” if Vista had not provided any warning, said an investment officer for one institutional investor that has money with the firm, which specializes in buying and lending to technology companies and manages about $73 billion in assets. But the officer, who declined to be identified because of his employer’s relationship with Vista, noted that prosecutors’ documents accompanying Mr. Smith’s nonprosecution agreement in October provided far more details and indicated that Mr. Smith knew he had violated the law.

As part of the deal, Mr. Smith agreed to hisse $139 million in fines and penalties and forgo claims he made on his tax returns for $182 million in charitable deductions in 2018 and 2019.

Representatives for two other Vista investors, who also declined to be identified, said the impact on Vista and its 500 employees would have been far worse had Mr. Smith been indicted, given how critical he has been to the firm’s success. He is cooperating with the investigation.

Vista’s buyout funds have historically performed above average. A recent Vista marketing document reviewed by The New York Times shows the funds have collectively generated an internal rate of return — a measurement for projecting the annualized rate of return of an investment — of 31 percent for investors, after fees are deducted. By comparison, a study of several thousand private equity funds found that the best-managed ones tended to generate returns in the low 20 percent range.

Vista also convinced investors that Mr. Smith’s tax evasion had nothing to do with the firm, calling it a “personal tax matter” and directing those wanting to know more to the news release that federal prosecutors issued.

Prosecutors have alleged no wrongdoing by Vista. Its birth, however, is tied up with the tax fraud.

Mr. Smith met Mr. Brockman in 1997 when Mr. Smith was an investment banker at Goldman Sachs, court filings show. Three years later, Mr. Smith set up Vista with up to $1 billion from Mr. Brockman for its very first fund. Mr. Brockman, who gave Mr. Smith instructions on how to structure his investment, used offshore companies and trusts to avoid paying taxes on any capital gains from the investments the Vista fund made. Court filings show that Mr. Smith was aware of Mr. Brockman’s activities and had relied on a Houston lawyer referred by Mr. Brockman to establish similar offshore entities to avoid paying taxes as well.

The billionaire Robert Brockman, who invested in Mr. Smith’s first fund at Vista, was indicted on tax evasion charges in October. Credit…Dave Rossman/Houston Chronicle, via Associated Press

Mr. Smith’s defenders have pointed out that Mr. Brockman — who was indicted in October on charges that he sought to hide about $2 billion in income — was the sole investor only in Vista’s first fund, and no other Vista fund is mentioned in his indictment. The court filings do note that Mr. Brockman lent Mr. Smith $75 million in 2014, when Mr. Smith and his first wife divorced. As part of his nonprosecution deal, Mr. Smith agreed to testify against Mr. Brockman.

Mr. Smith declined to comment. A lawyer for Mr. Brockman did not return a request for comment.

Vista was less forthcoming about the federal tax investigation with would-be investors. When the New Mexico Educational Retirement Board began negotiating with Vista last April about investing $100 million in a credit fund, no one from Vista mentioned the tax investigation, said Bob Jacksha, chief investment officer of the pension fund.

The fund canceled its investment plans after Bloomberg reported in August that Mr. Smith and Mr. Brockman were under investigation and could face serious charges. Mr. Jacksha said he and his colleagues had felt blindsided by the report. “We were not initially aware of the investigation,” he said.

In the world of philanthropy, Mr. Smith’s supporters have rallied to his defense publicly. With an estimated fortune of $7 billion, he is one of the wealthiest men in America.

Carnegie Hall, where Mr. Smith serves as chairman, said it continued to support him. And Morehouse College, the historically Black college where Mr. Smith famously announced in 2019 that he would hisse off $34 million in student loan debt of the 400 members of the college’s graduating class, said it, too, remained solidly in his camp.

David A. Thomas, president of Morehouse, said Mr. Smith could have moved on after making his commitment in 2019 but instead had started an initiative to relieve the debt burden of students at other colleges and universities that are historically Black.

“Robert’s passion for solving problems with solutions that scale, and his continued engagement beyond writing big checks, is what sets him apart from just about any philanthropist,” Mr. Thomas said in an emailed statement.

At a DealBook conference in November sponsored by The Times, Mr. Smith briefly addressed the tax evasion case during a panel discussion on race and corporate America. He said: “I’m moving forward. I made right with the government. I’m absolutely committed to continuing my important work, my philanthropy, returns to all the stakeholders.”

After he spoke, another panelist, Michael Render, the social activist and rapper better known as Killer Mike, defended Mr. Smith’s charitable giving as important to the Black community. He then added: “Never forget that this country was founded by people who didn’t want to hisse taxes.”

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