Comfortable Pants Auction

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Audio Length: 00:51:37

(S=Speaker, as best identified by transcriptionist)

S2: Hello and welcome to the Comfortable Pants auction edition of Slate Money, your guide to the business and finance news of the week.

S3: If you are in the market for sweatpants and frankly, who isn’t these days? Would you like a sophisticated auction mechanism to work out how much to pay? The fact is there probably is one. We are going to talk about that in this week’s Slate Money. We are also going to talk about tax evasion and private equity firm Vestor Equity Partners, or rather, its founder, Robert Smith, not to be confused with the lead singer of The Cure and his first big investor, Robert Brockmann. We are going to talk about performance reviews and whether they even make sense during a pandemic and in the slate. Plus, we are going to talk about what it makes sense to wake people up in the middle of the night to tell them so. One other note, the first segment about tax evasion is a little bit subpar in terms of my own personal audio quality. Oh, I should mention that I’m Felix Salmon of Axios and I’m here with Emily Peck of Huff Post. Hello. I’m here with Anna Shamansky of Breakingviews. Hello. I am not at Sea Planum, other studios in Brooklyn, so I don’t sound as good as they have done for the past few weeks. I am sitting at home in a pandemic addled fog and because of that I forgot to turn on my recorder for the first segment. So the first segment I don’t sound so great, but Jessamine rescued me at the end of the first segment and then for the rest of the show I should sound more like this. All of that is coming up on Slate Money.

S4: OK, so the big news of this week is tax crime.

S1: We have one hundred and forty million dollars of fines going to Robert Smith, who’s this big private equity honcho who founded Pista Equity Partners and whose first. Big investor with this guy, Bob Bruckman software, a guy who made all of his money making software for car dealerships. One of the classic ways that Americans become billionaires and the thing which I love about this is that Robert Smith is the richest black person in America. He’s this huge success story and he’s the small fry in this story, like he’s the guy who isn’t going to jail because he’s cooperating in the case against Gluckman, who’s a really big fish. And I’m like, wow, this is huge. So Brockmann is being charged with evading taxes on like two billion dollars of income. This is absolutely huge and crazy. And because it’s a very, very high profile private equity billionaire who’s in the middle of it all. We have to talk about this. Anna, what’s your what’s your take?

S5: I mean, I actually think in an odd way, it’s a it’s a good thing by which I mean the fact that they are they have been discovered that they are being forced to pay fines, that they’re some are being prosecuted. I think we often talk about the inability of the IRS to go after anyone with wealth.

S1: And I think this shows that actually they can, although the amount of time it took to do this is astonishing. If you read the statement of facts, there was this kind of amnesty that the IRS put forward in 2014 for people with Swiss bank accounts where they said, look, we know that there’s a bunch of Americans with Swiss bank Swiss bank accounts and they’ve been putting foreign income into Swiss bank accounts and not declaring it. And obviously, even if it’s foreign income, you still need to pay tax on it if you’re an American. So. We were about to do this deal with the Swiss banks where the Swiss banks are going to tell us about everyone who has all of the Americans who have Swiss bank accounts.

S4: And if you want to just come up to us voluntarily and admit that you’ve been doing this, we will maybe be a little bit more lenient unless we’ve already started investigating you and we already know that your tax criminal, in which case, sorry, no dice.

S1: Robert Smith, who had a Swiss bank account and was doing exactly that. Went along to the IRS in 2014 and tried to, like, turn himself in voluntarily and the IRS said, nope, sorry, you’re already under investigation, so no dice. This was 2014. So this settlement, it was just announced this week has been in the you know, in under investigation for six years at least. It’s amazing how long these things take.

S5: Yeah, but if you think about the amount of money that they will now get in fines, I would say that that still is definitely worth it.

S1: Oh, it’s totally worth it. And it should happen. And it should happen more often. But it does give you an idea, like when everyone’s talking about how much the IRS budget has been cut and how little they audit rich. You know, if you think about the resources that the IRS has certainly put into just this one case, like you have to wonder, like how many other cases they could even have the resources to prosecute.

S6: Yeah, and I was struck by how long this has been going on because Brockmann recruited Smith in the 90s to run this private equity fund, Vistar, of which Brackman was the only client. If I’m getting this right and then for the next 20 years, if you read the indictment, they just did all these schemes that I mean, maybe there could be a movie if someone could really make it more fun. But like, everyone had code names, you know, Bonefish Snapper, the IRS was called the house. At one point, they bought encryption software, literally called Evidence Eliminator.

S1: My favorite one was that Bruckman had a like a whole sort of filing system basically of computer printer paper that he had bought in certain years. So if he ever needed to create a fake document backdated to a certain time, he would print it on age appropriate paper so that if anyone, like, examined the paper to see whether it was correct, it would be correct.

S5: And he was clearly taking that as thinking.

S6: And then I don’t I guess my question maybe one of you could answer was, is did this to make seems to have made money legitimately and then the Brockmann and Smith just didn’t want to pay their taxes? It just seems so gross to me. Like it’s it’s it’s like you guys are doing fine. Just pay your taxes or am I exactly.

S1: Know you’re not missing anything. That’s exactly right. Vista Vista is genuinely an extremely successful private equity company. And while it’s true the Bruckman was the only investor in the first fund, now nowadays Vista raises 15 billion dollar funds and has sovereign wealth funds and big endowments. And, you know, has is a huge successful business. And Brockmann is like a small investor in Besta overall right now. The broken little guy who got it all started and one of his conditions for getting it all started was, look, you need to have it all offshore or at least my funds offshore for basically tax evasion reasons. And it’s like, oh, OK. And then. Even though Smith could have done that and just said, like, OK, if you want enough not a vehicle to invest in, I’ll create an office or a vehicle for you to invest in. But then I will pay taxes on my income because I am an American and I am law abiding. But he didn’t do that. He used Brockman’s accountant basically to avoid paying taxes on all of the income that he got, at least from Brockmann, just so immoral.

S6: And meanwhile, this guy and Smith, we talked about him last year because he showed up at Morehouse historically black college and gave a commencement speech. And spontaneously or maybe it was planned, announced that he would pay off the student loans of all the graduates. Remember that?

S7: And so that was a central part of the plan, right?

S1: Is that his whole argument when the IRS came after him was I didn’t need to pay any income on this money because it was all in the charitable trust. And you don’t need to pay money on money, which isn’t your own, because it belongs to the charitable trust and it has to go to charity. It wasn’t really my money. Now the IRS has chapter and verse explaining why it wasn’t really a charitable trust and that he had complete discretion over it and he could use that money to buy a house in Switzerland or whatever else he did with it. But the. But what’s pretty clear is that as the investigation was getting to the crunch point and hard core negotiations, what Smith did was he just gave all the money to charity genuinely, and he announced this big like I’m paying off all the student debt for everyone at Morehouse thing in order to say to the IRS, look, honestly, it was all for charity, but you can’t just expose give it to charity. You have to sort of make sure that it has to go to the xanthi. And he totally did not do that. And it really does look to me for the entire Morehouse announcement was in large part an attempt to get the IRS off his back.

S6: Wow. That’s and also what’s interesting is to compare this kind of blatant tax evasion to the Donald Trump story we talked about last week, because I feel like they’re of a different ilk. Right. Like Donald Trump is trying to avoid paying taxes he owes, just like these guys are. But I can’t believe I’m saying this, but I I think he’s doing it in a more upfront way.

S5: Yeah. This is this is ultimately the big the real problem is that there the line between tax avoidance and tax evasion can be very blurry. And this is in no way to justify anyone crossing it. But there are just enormous industries around reducing the tax bills of very, very wealthy people, which is why this is not surprising at all and obviously not the only instance where this is happening. And Felix, as you said, if you look at the amount of resources that had to go into prosecuting this one person, there obviously are going to be many, many, many, many who are not being prosecuted.

S1: Well, I mean, the other thing that came out in the news this week was that. Leon Black, who is another big private equity billionaire, was revealed to have spent somewhere between 50 and 75 million dollars on, quote unquote, tax avoidance or consultancy services from one Jeffrey Epstein. And that’s likely on the story. And he’s sticking to it. There’s no evidence whatsoever that Jeffrey Epstein was particularly good at helping people avoid taxes. But the fact that Leon Black can even say that with a straight face kind of implies that, yeah, like billionaires spend 50 million dollars, 50 million dollar checks to individuals just to help them pay less tax. And that’s normal.

S6: I just I guess I’m naive, but if you have two billion dollars, what is the worst tax bill you could possibly have? You’re still going to be left with so much money. I just yeah. I don’t understand why you need to avoid the like, just pay the taxes.

S7: You’re absolutely right. But that’s not how people think, because I’ll tell you why.

S1: It’s because of this whole thing about. Compounded returns. I talked to a couple of rich philanthropists who try to explain to me why they. Make pledges to give a lot of money in the future or give money in annual installments rather than just writing the check that they’ve said that they’re going to give. And they’re like, because I have to keep myself fully invested because I’m making all of these amazing annual returns. And so if I spend money now, I’m not just losing that money. I’m losing all of the money. But it will grow to become in the future. And I’m quite sure that’s a large part of how Smith was thinking. He was like, if I pay a million dollars of taxes today, it doesn’t just cost me a million dollars, it cost me ten million dollars, because that’s how much that one million dollars is going to wind up going to. No, this is not, you know, an entirely coherent or sensible way of thinking. But I’m sure that that was part of how he was thinking.

S5: I’m sure that’s part of it. And there is some some logic to that now, not in terms of wanting taxes, but just in the terms of that. Obviously, you do want to remain invested. But I also think partly it’s because a lot of these men and they’re almost always men who get to these positions, they think about everything in terms of winning and losing and paying taxes and having to pay more taxes than you want can often be conceived of as losing. So even if you end up giving this money to other areas, that’s something you’re doing yourself. You’re not being forced to do that. So I really do think it’s also just you have some of these men who fundamentally don’t think they should have to pay this amount. They think that that is something that’s being done to them.

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