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Darwin Deason built Dallas' ACS into a Fortune 500 company. He
rewarded himself with lavish parties, jet setting, and private yachts. How
much of the tab did shareholders pay? This article was published
in D
Magazine, June 2003. by Tim Rogers
ACCOUNTS DIFFER AS TO WHAT EXACTLY HAPPENED ABOARD THE Cartoush II during its pleasure cruise in the
Bahamas in September 2001. Darwin Deason denies
that he threatened to kill the chef. Others claim he did. "There
certainly was a threat of getting a gun and doing something," says one
person intimately acquainted with the details of the incident. As for the
chef, he isn't saying much. The 118-foot luxury yacht ostensibly belonged to Deason, founder and chairman of Dallas-based Affiliated
Computer Services, or ACS. Deason himself had
overseen a major refit of the boat the year before, which entailed
reinforcing the upper deck so that it could support a massive hot tub.
Playing host to his friends on the boat, Deason
liked to smoke marijuana and drink the unthinkable concoction of Diet Coke
and Kahlua out of a large brandy snifter. The
passengers on that particular voyage, besides the captain and crew of four,
included former Cowboys punter Mike Saxon and his wife Suzanne; Dallasite Carter Abercrombie and his wife Angie; and Deason. He was 61 at the time. Having recently divorced
his fourth wife, he was traveling without a companion. The Cartoush
was sailing the waters off the Exuma chain of
islands when the trouble started. It was in the early afternoon, and Deason, for one reason or another, flew into a rage.
"The guy was definitely having a psychotic episode," says a source.
He began yelling at the chef, Vinny Feola, who locked himself in his quarters. As the
standoff dragged on for hours, the ship's captain, Don Hopkins, worked the
satellite phone, frantically trying to reach someone back in Dallas who could
mollify Deason. Another source says that Deason pulled Saxon and Abercrombie aside and asked them,
"Would you guys be willing to beat the shit out of the chef for me if I
asked you to?" Eventually Feola was put off the
boat at tiny Staniel Cay, about 80 miles southeast
of Nassau, where he was stuck for several days because all flights had been
grounded in the aftermath of the 9/11 attacks. "I really kind of don't
like to talk about it," Feola says now.
"For whatever reason, I wanted to get off the boat. I have nothing bad
to say about anybody, and I never will
say anything bad about anybody, because I believe in karma." Deason says he can't recall why
he was angry with the chef, except to say, "The guy was insubordinate.
He wouldn't do what I told him to do. So I fired him. There were some words,
but there weren't any threats of killing." He still bristles at learning
about the maritime law that governs the discharging of crew at sea. "If
I had known this, I wouldn't have been so stupid as to fire him," he
says. "I had to pay for and arrange a seaplane to come pick him up and
fly him back to Florida." Deason, now worth about $500
million, dismisses the entire incident as little more than a boisterous
disagreement. Not every parting of ways ends with hugs and kisses (as any
number of former Cartoush
crewmembers could tell you, including three who summarily disembarked the day
Deason came aboard for that Bahamian cruise).
Assuming, then, that every story has two sides and the truth lies somewhere
in between, we're not really talking here about the commission of any
crimes—except for the heinous cocktail of Diet Coke and Kahlua.
But more on that later. Rather, the serious matter—the one that may yet hold repercussions for Deason and for the
Fortune 500 company still under his sway—isn't what happened aboard
the Cartoush.
It turns out to be the Cartoush
itself. In papers filed earlier this year in federal court, it is claimed
that Deason, as the chairman and controlling
stockholder of ACS, set up a complex scheme of off-balance-sheet corporations
that, in essence, provided him free use of not only the Cartoush II and its predecessor, but also a squadron of private jets—all
at the expense of taxpayers and the companies he controlled. The charges may
interest the SEC and the IRS. But to get to the Gulfstream
jets and the yachts and the penthouses and all the lawyers, you have to start
in Rogers, Arkansas, with only $50. In the Beginning There exists an official canon of Darwin Deason's up-from-the-bootstraps biography, published in
profiles over the years. The first chapter begins on the day after his high
school graduation, also his 18th birthday. He borrows the $50 from his
father, a farmer, and lights out for Tulsa in an old Pontiac. He lands a job
as a mailboy at a division of Gulf Oil, thinking
he'll work his way to the top. On coffee breaks, he pitches quarters with the
lads in data processing, and his talents in that field win him an entry-level
job sorting IBM punch cards—forebears of the giant mainframes that will one
day make him rich. But at his fifth-year celebration, his boss's boss
mistakenly gives young Deason's anniversary pin to
someone else. He shakes Deason's hand and calls him
Bill. Deason, embarrassed, realizes he'll always be
a lowly wage slave if he stays, so he quits a few weeks later. End of chapter
one. Flip forward a few pages. Deason
moves to Dallas and winds up, at age 39, launching Texas' first ATM network.
(Trivia buffs: it was called MPact, and it was late
1979.) From Deason's 22nd-floor downtown office,
the president and CEO of MTech grows
his company 600 percent in less than five years, making it the largest
bank-data processor in the country. Which brings us to the three-day
retirement. In 1988, with banks failing all over Texas, MTech's majority owner, MCorp
(holding company of once-an-icon Mercantile Bank), begins to slide toward
Chapter 11. Reading the tea leaves, Deason puts
together a $360 million management buyout of his firm. At the last second,
though, Plano-based EDS raises its hand and shouts, "Four hundred and
sixty-five million!" MTech is sold to the
highest bidder. Deason is furious. He resigns some
90 minutes into his employment with EDS, apparently walking out before anyone
can get him to sign a non-compete agreement. So the Deason canon has him
taking $9 million for his share of MTech, more
money than the farm boy from Arkansas ever dreamed he'd have. He retires to
the golf course. But after three days of retirement, Deason
decides it doesn't agree with him, and on a Monday, he dons his best suit,
sits in his home office, and begins to work the phones. Five months later,
with 18 of his top 22 executives from MTech on
board, he launches ACS. The rest of Deason's business
story is jampacked with business process
outsourcing and information technology outsourcing and, in general, tycoonery. He installs a ship's telegraph in his office
and pushes the control back to "full ahead" every time an employee
sneaks in and pulls it back to "slow." He hands out something
called "hustle cards." He prohibits staff meetings between the
hours of 9 a.m. and 5 p.m., because those are prime selling hours. He orders
the embroidering of baseball caps for employees with the message "1B x
2K," meaning he intends ACS to generate $1 billion in revenue by 2000.
When it becomes clear in 1997 that ACS, having gobbled up so many other
companies, will reach its goal by 1998, he has new caps made that read
"2B x 2K." "We rarely have to terminate anyone, because our
treadmill is going 100 mph," Deason tells more
than one publication. "If you're a hustler, you get on and try to go
110. But if you're going 80 or 60, the treadmill throws you off. It's
self-policing." Today, ACS employs more than 40,000 people around the
world. Its revenues approach $4 billion. Three Kings Robert Holly, a local aircraft broker, met Darwin Deason in 1996—at just the right time, it appears. ACS
had gone public two years earlier, and Deason was
in the middle of a three-year buying spree, acquiring the property and toys that
he'd worked so hard to afford. Deason made his first appearance
as a boldface name in the society column of the Dallas Morning News in 1994, when he and then-wife Paula debuted their 10th-floor, 14,000-square-foot penthouse
atop 8181 Douglas, just off the Tollway. The
following year, Deason bought a $1.16 million
property in the golf resort of Rancho Mirage, California. In 1996, he opened
an ill-fated restaurant (and plastic surgery showroom) called NorthSouth with his personal trainer, Larry North. The
next year, Deason bought the old 3-acre Hamon estate in Bluffview for a
bit less than $2 million, then quickly sold it after
he couldn't buy the place next door. Instead, he began assembling what was reportedly the most
expensive penthouse in all of Miami, eventually putting $5 million into the
unfinished space. "I've always wanted a beach house," Deason told the Miami Herald in 1997. He said his
daughter, who was attending the University of Miami, introduced him to South
Beach. "I absolutely fell in love with it. ... Talk about bodies. You
know, on the French Riviera, I always say, eight out of 10 women are topless,
and only one should be. On South Beach, eight out of 10 are topless, and
eight out of 10 should be." Darwin was living large: a man with golf to play on the
West Coast, a company and a restaurant to run in Dallas, and 16 out of 20
breasts to appreciate on the East Coast. Enter Robert Holly, a man who knew
how to buy and sell planes. The two were introduced by a mutual friend named
Dennis Debo, who was a corporate jet pilot. Together the three men started DDH Aviation, which took
its name from their initials. For a time, DDH prospered. But last year, the
endeavor began to unravel. DDH sued Holly and about a dozen other domestic
and international parties, alleging that Holly was guilty of racketeering.
Holly filed his answer to the allegations in March, but he didn't stop there.
He made counterclaims against DDH and brought in other parties—including Deason himself. If these claims are successful, they
could have dire implications for Deason and his
continuing relationship with ACS, the company of his creation. (While Deason did answer certain
personal questions for this article, neither his attorneys nor Holly's would
allow their clients to comment on the record about their respective
lawsuits.) Here we'll hit tough sledding through some prickly
legalese. Buckle up. A Curious
Arrangement Described in ACS proxy materials as "a startup
corporate airplane brokerage company," DDH Aviation was organized in
1997. Holly and Debo served, respectively, as
president and executive vice president, drawing salaries from the firm and
commissions on completed sales. Holly and Debo were
also granted minority stockholdings in the firm. Deason's principal initial
contribution to DDH appears to have been the guarantee of a bank line of
credit for the startup effort. He became the nonexecutive
chairman and the majority stockholder. Under the arrangement, Deason wasn't involved on a day-to-day basis with the
operation of DDH. He did, however, retain approval rights over airplane
purchases that were the subject of his financial guarantee. Interestingly, at the time that DDH was founded, Deason not only served as chairman and chief executive
officer of ACS, but also as the chairman of Precept Business Services, a
wholesale distributor of office paper products headquartered in Dallas.
Precept, which had been spun out of ACS several years earlier, went public in
1998 with Deason's son Doug—a commercial real estate
broker prior to joining Precept—as its president and chief operating officer.
Precept also operated limousine services in Dallas, and Deason
became chairman of it in 1999. During early 2001, Precept was forced into
bankruptcy. Undoubtedly due to Deason's
involvement with ACS and Precept, these two publicly traded firms became
stockholders in the Deason-controlled DDH Aviation.
ACS and Precept each disclosed in their securities filings for 1997 their
equity and customer involvement with DDH, including the cryptic and parallel
acknowledgements that each firm "had access to aircraft from DDH." In exchange for this access and for DDH stock, ACS became
a co-guarantor, alongside Deason, of the DDH bank
credit line. Also, public documents reveal that Precept, under Deason's control, paid $99,000 for a 3-percent stake in
DDH, a price that effectively valued the startup firm in excess of $3
million—an astoundingly high valuation for a service business that had barely
begun formal operations, did not have anywhere near that equity investment,
and had apparently not yet closed a single deal. Flying High From all public appearances, DDH Aviation seemed to thrive
in its early years, as the firm became an active trader and lessor of luxury corporate aircraft—and, starting in
1998, of oceangoing luxury yachts. Yet by 2001, rifts had begun to develop
between the principals of the business, with Debo
and Deason increasingly at odds with Holly over the
direction and methods of the business. Certainly 9/11 and the resulting
collapse in values of private aircraft exacerbated the problems at DDH. But
there were internal forces at work, too. Unfortunately, reading the two competing pleadings in the
DDH and Holly papers doesn't clarify much of anything in most of the allegations.
These pleadings present such vastly different versions of the history between
Deason, Debo, and Holly,
and they present it in such a convoluted fashion, that without inside access,
it's impossible to differentiate between fact and fiction. There's the claim
of the "Indonesian Gold Fraud." There's the flipping of a defective
Fokker in the Netherlands. Not to mention the missing Picasso painting. Most
of the claims and counterclaims will have to be sorted out in court.
Nonetheless, an exploration of two important allegations made by Holly
reveals enough. The Holly counterclaim charges that Deason
used DDH from its inception as a sort of personal motor pool with which he
could tax-efficiently indulge his developing tastes for luxury air travel and
maritime recreation without direct economic cost to himself. More gravely,
Holly's charges suggest that a corporate conspiracy existed by which Deason defrauded the taxman. As for the DDH jets, Holly accuses Deason
of habitually using these planes and associated pilot services for purely
personal travel unrelated to the business of the aircraft brokerage. Holly
also charges that Deason not only failed to provide
reimbursement to DDH for the fair market rental value of its aircraft, but
also that Deason further stiffed the firm by not
even paying for the fuel. Concerning the yacht business, Holly says that the only
reason DDH got involved was because Deason wanted
big boats. The assertion is that Deason
illegitimately spent corporate money on the purchase, refurbishment,
maintenance, and operation of these big boats solely for his own personal
pleasure. Now, ordinarily, such accusations involving a privately
held firm should not be worrisome. From an economic standpoint—and assuming
here that Deason was, in fact, taking extraordinary
financial liberties with the firm's assets during the course of his
partying—as DDH's majority stockholder, Deason would have borne most of any financial damage
caused by his own freeloading (with the remainder being borne by his fellow
stockholders in DDH Aviation). And while the investor positions of DDH's minority stockholders—which, it should be noted,
included both ACS and Precept, two public companies controlled by Deason and to which he owed significant fiduciary duties—might
be compromised as a result of such larks, from a public standpoint, it's not
really our business. In other words, why own jets and yachts if you can't use
them, privately, to compare the topless women in the French Riviera to the
ones in South Beach? Sailing Free However, if you haven't learned by now, you never will:
nothing is free. It was the purported manner by which Deason
engaged in this borrowing of assets that may be disturbing to various federal
authorities. The Holly counterclaim charges that most of the considerable
expenses associated with Deason's jet-setting was disguised within the firm's financial records as
"demo flights." If true, this strongly suggests that Deason and DDH acted in a concerted manner to conceal the
personal use of corporate assets by the company's controlling stockholder. Again, if Deason were using the
aircraft and yachts of his privately held firm for purely personal pleasure,
it would be no problem—so long as Deason recognized
it on his income taxes. But the clear implication is that DDH characterized
these expenses as legitimate business costs so that Deason
could avoid anyone's knowing the extent to which he made use of his company's
air force. If Deason concocted this scheme to fool
the IRS, that's not the way the game is supposed to be played. And how big is
the amount in question? According to Holly, DDH intentionally mischaracterized Deason's personal jet use to the tune of $1.7 million.
Using an income tax rate appropriate for Deason's
known compensation for these periods (and a presumed value of $1.7 million
for such services), the artifice outlined by Holly could have saved Darwin in
the neighborhood of $600,000 in income taxes—chump change to Deason. However, the federal government seems to think it
needs every penny it can collect. Holly goes on to claim that Deason's
disguised free use of corporate assets was not limited to DDH's
fleet of corporate aircraft. Here we get back to the big boats. In a
revealing anecdote, Holly contends that in late 1998—and in the aftermath of
a trip taken by Deason and Debo
to Miami—Debo informed Holly that DDH Aviation was
soon going to enter into yacht-brokerage business. Holly says he protested
that none of them knew anything about the yacht-brokerage business. Remember that this happened during the same time that Deason was buying penthouse space on South Beach, a
penthouse that he later sold. When Deason was
asked, for this article, why he sold the penthouse—a question that didn't
pertain directly to the lawsuits—Deason volunteered
the following story: "We were going to the beach one day, and it was
raining like hell, and these friends convinced me to go look at boats. I
said, 'Aw, I don't want a boat.' Well, at the end of the day, I had bought an
85-foot boat. That is how I got into the boating business." He said that
since he planned to spend more time on the water, keeping the huge penthouse
didn't make sense. Holly says that the yacht—the Cartoush I—cost approximately $1.3 million and required a crew of five to
maintain and operate. The boat never produced any revenue. Holly says Deason used it exclusively for personal pleasure
throughout 2000 and into 2001. It was eventually sold at a substantial loss. Deason used up almost $4 million of the credit line extended
to DDH—again, according to Holly—toward the purchase of a second yacht, the Cartoush II. Again: even if true, there would be no earthshaking legal
consequences solely from such corporate tomfoolery. Deason's
supposed grandiose living on the DDH expense account would only indirectly
impact his own pocketbook and, to a lesser extent, those of his fellow
stockholders. However, Holly's lawsuit alleges that DDH spent more than
$5 million bankrolling Deason's maritime hedonism, which
amount, if it were never reimbursed, should have been recognized by Deason as taxable income in the form of non-cash
compensation. At top-end income tax rates, the plot outlined by Holly's
counterclaim regarding Deason's misappropriation of
the naval armada may have disguised up to $2 million that he would have had
to pay. ACS to the Rescue Beyond implying that Deason
evaded income taxes, Holly also accuses Deason of
defrauding ACS by directing it to subsidize his lifestyle. As one example,
Holly says Deason got ACS—the goose laying the
golden eggs—to purchase a Challenger 600 jet for $8.5 million from DDH, an
above-market price that allowed Deason's aviation
company to reap a critically needed windfall profit of $1.5 million at a time
it was allegedly desperate for cash as a result of its outlays for a Deason-ordered yacht. Surely, with his millions, Deason
could have floated DDH himself. And maybe he did. Yet certain aspects of the
interaction of ACS with DDH bear further examination. In its 2002 proxy statement, ACS acknowledges its
agreement to purchase a Challenger from DDH occurred in August 2001 and that
the purchase price for this aircraft was paid in full prior to June 30, 2002
(the end of its fiscal year). Moreover—and in an example of delicate and
deliberate lawyerly phrasing—ACS implicitly admits in the same filing that
the Challenger was not delivered by DDH until some date after payment was
rendered. Also, during the same timeframe, ACS admitted that it took the
unprecedented action of transferring an additional $1 million to DDH in the
form of prepaid fees for future charter flights on DDH planes. Although not absolutely clear, it appears highly possible
that by July of 2002—during which time Holly insists that DDH had become
financially distressed as a result of Deason's
spendthrift ways—ACS may have advanced to DDH as prepayments cash to the tune
of $9.5 million without requiring anything in return. A study of the public
filings of ACS reveals no precedent for this type of transaction. What rationale would motivate ACS to extend such terms to
another company? And why would ACS purchase $1 million of prepaid flight
services from DDH Aviation when that amount exceeded the prior year's bill
with DDH and when ACS was expecting the imminent delivery of its own very
expensive Challenger 600 jet? More interestingly, during this period, ACS severed its
ownership ties with DDH, as a result of which divorce Deason
assumed responsibility for the ACS portion of the guarantee of the DDH credit
line. It is uncontested during the periods in question that Deason was the principal stockholder of both DDH Aviation
and ACS. But how could Deason—by himself—have been
able financially and administratively to engineer the details necessary to
document the types of allegedly fraudulent arrangements claimed in Holly's
court papers? Holly's answer is that there was a "unity of
identity" between Deason, ACS, and DDH. Holly
says that, in addition to Deason functionally
controlling both firms, DDH and ACS shared many of the same officers and
directors (including the president of ACS, Mark King, and William Deckelman, who has for more than a decade been a key
transactional aide to Deason and who now serves as
general counsel to ACS). Furthermore, Holly alleges that DDH was operated as
the "alter ego" of ACS and shared many corporate functions, with
the upshot being that events at both corporations were systematically
manipulated by Deason to his personal benefit—and
to the detriment of each company's minority stockholders. The Endgame Holly's counterclaim is pregnant with issues that are not
good news for Deason and an entire coterie of
businessmen who have ridden the Party Chief's corporate coattails to the apex
of the Fortune 500 mountain. More specifically, if Holly's claims concerning Deason's "demo flights" prove true, federal and
state authorities could claim complicity by other ACS officials in the
alleged accounting funny business. Also worth noting: if the unrelated charges prove accurate
that Deason engineered a de facto kickback to one
company under his thrall (DDH Aviation) through a publicly traded firm also
under his control (ACS), the same authorities will almost certainly want to
do some digging. We'd guess that, in a post-Enron, post-Tyco, post-WorldCom
world, the SEC might want to have a talk with some of these aforementioned
ACS guys. As far as proving or disproving any tax evasion scheme at
DDH, it shouldn't be difficult for an empowered investigator either to
substantiate or to disprove these allegations. The FAA, for example,
typically requires commercial pilots and aircraft charter businesses to keep
detailed flight manifests concerning the identity of passengers carried on
private flights. These records can presumably be checked against similar
accounts maintained for tax purposes at DDH. Analogous records for the Cartoush twins may exist. At last, with these records in hand,
authorities could cross-reference their findings against the financial and
tax records of DDH Aviation, as well as against Deason's
personal income tax returns. There should emerge a clear picture of the tax
and accounting methods in place at DDH Aviation. Now, about Holly's allegations concerning the purported
Challenger 600 sham transaction: it will be difficult for any outside parties
to demonstrate that both DDH and ACS were aware that the jet's purchase price
was artificially inflated as a favor to Deason—barring,
of course, the cooperation of insiders at DDH or ACS. If the books at DDH Aviation contain false entries, that
may support the notion that a conspiracy existed among the company's top
officers. And given the interconnected nature of the senior ranks of DDH and
ACS, there may be a number of DDH and ACS officials involved. That means
there are a lot of people walking the halls at ACS who might have a very good
reason to cooperate with any official investigation. The 19th Hole Back to the Kahlua and Diet
Coke. Remember Deason's signature drink? Well,
another chapter in the Deason canon relates how Deason had become an alcoholic at the age of 37. He had
taken to carousing every night. When his friends went to breakfast in the wee
hours of the morning, Deason would find himself, he
says, sitting in the car, drinking scotch out of the bottle. He knew he had a
problem. So Deason went to see a doctor
at Medical City, who prescribed for him the drug Antabuse,
which produces copious vomiting, among other unpleasant reactions, when
combined with alcohol. Continued drinking while taking Antabuse
can be lethal. Driving home from that doctor's appointment, Deason wadded up the prescription and threw it out the
window. He told himself, "I am not going to be such a weak-willed son of
a bitch that I am going to have to take a drug that could kill me to stop drinking."
So he quit cold turkey. That's the story that's been printed more than once. From his house in Palm Desert, Deason
admits, though, that the story doesn't end there. After he threw the
prescription out the window, he set to drinking his entire liquor cabinet,
getting oiled every night, until the cabinet was empty. Then he really did
quit cold turkey. Except for the Kahlua and Diet
Cokes. "I have to trick myself," he says. "After
about three of those, sometimes two—they're so sickeningly sweet that I just
get sick of them and I won't drink anymore of them—and then I'll just go to
soda with Rose's lime juice and a lime. When I drank up my liquor cabinet, I
figured out what I didn't like. I don't like Kahlua."
He says he's been drinking it with Diet Coke for 25 years. Darwin says he's slowed down in other ways, too. In 1995,
he anointed Jeff Rich the CEO of his beloved ACS. Now, instead of getting up
at 4 every morning, Deason rises at 5. He does a
stretching workout and plays golf at Big Horn, where he's a member (he's also
a member of Dallas National). After two surgeries to treat spinal stenosis (and two cancer surgeries), he's had to adapt a
"natural" golf swing, he says, and his handicap has climbed from 6
to 12. After golf, he lifts weights about five days a week. Somehow, he
squeezes in about four hours of ACS work per day. And he finds time for his current girlfriend, 35-year-old Katarina. When asked about her, Deason
jokes in his thick Arkansas accent, "If you want to print that I lee-uv in see-un and I'm not married—yes, Katarina lives with me. She's much younger than me."
And he says he's selling the Cartoush II. Now Deason is building a 203-foot
yacht in Italy. It's called the Apogee.
In court papers, Robert Holly says it will cost $26 million. Copyright © 2005 D Magazine |
