Lifestyles of the Rich and Shameless
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 CarterAbercrombie 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-thebootstraps 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 fifthyear 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 noncompete 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.
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 threeyear 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-squarefoot 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 partiesincluding 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 tine 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 an where 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 taxefficiently 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 home 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 dutiesmight 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?
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 taxeschump 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 topend 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 abovemarket 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). Moreoverand in an example of delicate and deliberate lawyerly phrasingACS 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.
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 postEnron, 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 crossreference 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 produce 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 D Magazine Jun 01, 2003