Datto’s Weller On Vista CEO’s Tax Crimes: Smith Is ‘Not On Our Board’

In an interview with CRN, Datto CEO Tim Weller sought to separate the company from the legal troubles facing the embattled CEO of its private equity owner, Vista Equity Partners.

Datto CEO Tim Weller (pictured) last week distanced the newly public storage and networking vendor from the tax evasion case levied by the federal government against Robert Smith, the CEO of Vista Equity Partners, Datto’s private equity owner.

“[Smith] is not on our board,” Weller said in an interview with CRN Oct. 21 after Datto raised $594 million in an IPO. “[Vista has] many partners. And now we’ve brought on public investors. So Datto won’t change. Datto hasn’t changed. And the operating management team of the business is the same.”

Vista—which acquired Datto and merged it with Autotask, another of its portfolio companies, in 2017—took Norwalk, Conn.-based Datto public last week in an IPO under the ticker symbol “MSP” that saw Weller ring the bell on the floor of the New York Stock Exchange.

[Related: Datto CEO Tim Weller: IPO’s ‘MSP’ Ticker Symbol A ‘Shout-Out’ To Our Partners]

One week prior to Datto’s public offering, Smith—who co-founded Vista in 2000 and serves as its chairman—signed a six-page confession of crimes prepared by prosecutors as part of a deal that will allow him to avoid charges.

When asked about the statement of facts in which Smith admitted to evading $43 million in taxes while hiding income inside two secret offshore accounts that held an ownership interest in his private equity firm, Weller said he was “not privy to anything like that.”

“I would direct you over to [Vista] for further details on that. I’m not aware of that situation in any detail. You’d have to talk to Vista or to [Smith]’s team about any specific details there. I’m not privy to anything like that and wouldn’t be commenting in any case.”

Vista would not discuss Weller’s statements on the record.

While Smith does not sit on Datto’s board, as long as Vista owns 40 percent of the company it is allowed to nominate Datto’s entire slate, under the terms of the IPO. Vista owns about 72 percent of Datto following last week’s IPO. Vista also keeps the right to designate the chairman of Datto’s board as long as it owns at least 30 percent of the company.

There are now eight members of Datto’s board of directors. Five of the directors, including the board’s chairman, Maneet Saroya, are currently Vista executives.

In its first S-1 filing, Datto included Vista co-founder Brian Sheth on its board. After Smith struck the deal with prosecutors, Sheth stepped down from Datto’s board. Datto was then forced to amend its S-1 and remove Sheth’s name from its board of directors days before the IPO. According to a Vista source, Sheth is said to be considering leaving Vista as well. CRN reached out to Sheth but has not heard back by press time.

In a subsequent filing, Datto disclosed several risks to investors, among them, “Vista controls us, and its interests may conflict with ours or yours in the future.”

Weller told CRN the risk factors in any S-1 filing are meant to be public disclosure. He said the company would continue to be run as it has been, by himself and the board of directors.

“You know, I’m CEO of the business,” Weller said. “We’ve got an executive management team. [Datto founder] Austin [McChord] is on our board. In fact, he was with us today to celebrate at the NYSE. I wouldn’t as an MSP look for any change at all other than we now have a much stronger balance sheet and are very committed to accelerating our investment in technology and support for MSPs. And we told all the investors on our road show over the last week that very thing, that they should expect profit margins to probably decline next year based on investment into this industry. We’re not bottom-line-driven as much as we are driven to grow with MSPs.”

Datto’s regulatory filings make it clear that Vista is in the driver’s seat, but it is too soon to say what that means for the channel, said one executive at a solution provider that works with Datto, speaking on condition of anonymity.

“You’re never going to see someone else get control,” the MSP executive said. “So the control hasn’t changed as a result of the IPO. They finished the IPO. Vista accomplished what it was started to do. Now they can change the board however they want.”

Investors and MSPs should expect Datto to be transparent in terms of its business, especially now that it is a public company, Weller said.

“Now we have a meaningful public investor base,” he said. “All the things you need to know about Datto are disclosed in an S-1, and we’ll continue to do public filings now. So, if anything, I think MSPs can be even more confident that they understand exactly what’s happening at Datto going forward. And we’re still in the same battle. I think people would probably fairly judge.”

Shares of Datto Thursday closed up 9 cents at $29.15, $2.05 cents higher than its IPO price.

In the run-up to the IPO, the tax scheme involving Smith and Robert Brockman, CEO of Dayton, Ohio-based Reynolds & Reynolds, a developer of retail management software for automotive dealerships, came to light. Brockman provided Smith the first $1 billion in committed capital to start Vista, but only under certain conditions. One of them was that the private equity fund must be held offshore. Brockman as well as an associate also instructed Smith in how to set up two offshore trusts to shelter his income from taxes.

Smith admitted to multiple federal crimes, including falsifying his tax returns, failing to report the two offshore tax havens to the Internal Revenue Service, and then falsifying the reporting of those offshore trusts when he finally did report them.

Smith struck a deal with prosecutors that will force him to turn over evidence and provide testimony in the case against Brockman and to help with other ongoing investigations. In addition, Smith has agreed not to rebuke any portions of the statement of facts, which he and prosecutors agreed to make public.

If Smith fails to live up to any of those terms in the next five years, he could face prosecution for attempting to defraud the U.S., failing to pay and evading taxes, any fraud or false statements on documents he filed with the IRS between the years 2000 and 2015, and failure to file and truthfully report his offshore accounts between 2012 and 2019.

Brockman has been charged in U.S. District Court in San Francisco in a 36-count indictment with evading $2 billion in income taxes. He pleaded not guilty in a court appearance from Houston via Zoom last week. He was released on $1 million bond.