Tuesday, January 14, 2014

The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! (1/14/14; Updated 1/18/14)

This is breaking news.  Ty Warner has been sentenced to probation -- no incarceration.  See Beanie Babies creator Ty Warner gets 2 years probation for tax evasion (Chicago Tribune 1/14/14), here.

I offer the key documents as follows:
  • Docket No 24 Defendants Sentencing Memorandum.zip - here.
  • Docket No 24 Defendants Sentencing Memorandum-Exh A.pdf - here. (This is a spreadsheet of convictions and sentencing in offshore matters that the defense team believed most relevant to their proffered request for no incarceration.)  I have posted a subsequent blog on this spreadsheet:  Sentencing Tales Told in Spreadsheets (6/28/14), here.
  • Docket No 26 Govt Sentencing Memorandum.zip - here.
  • Docket No 28 Defendant's Supplement to Sentencing Memorandum.zip - here.
  • Docket No. 30 Judgment in Warner case.pdf - here.
I do not yet have the transcript from sentencing wherein the Judge presumably would have announced his reasons for the sentence.  I also do not know whether the judge will write an opinion for his reasons, particularly since I suspect the Government will appeal.  I want to understand why the sentencing judge, Judge Kocoras, would have imposed that sentence. I want to hear what the reasons were before I pass judgment on that judge's judgment (of course Judge Kocoras is the judge and I am not; I can only pass judgment on the judge.)  Judge Kocoras' Wikipedia entry is here.  Right off hand, I only know one member of the defense team, Mark Matthews, here, so I offer him my kudos here.  (My kudos are probably worth less than Mr. Warners' kudos, which should be substantial!)

These cases are by their nature fact dependent and each party -- even the judge -- puts his spin on the facts.  But, the advisory Guidelines calculations were essentially agreed.  The key numbers in the Guidelines calculations were as follows:
  • Tax loss (including relevant conduct) - $5,594,877 -- with resulting tax table level of 24.
  • Adjustment  for sophisticated means - +2;
  • Acceptance of Responsibility - -3
  • Resulting offense level for sentencing table - 23 -- with sentencing range of 46-57 months.
Accordingly, from the bottom of the guideline range, the judge departed 46 months.  Quite a departure.  One day when (more likely, if) I have time, I would like to include a stat showing the number of months of downward departure from the bottom of the indicated sentencing range.  I would suspect -- but it is only a suspicion -- that this was the largest departure simply because his tax loss numbers which drove the calculation were so high.

Other aspects of the sentencing judgment:
  • Probation: 2 years.
  • Community Service:  500 hours at Leo, Tilden and Richards High Schools
  • Fine:  $100,000
  • Costs of prosecution:  $500
Restrictions on International Travel: None, but requires approval of court of probation officer to leave the district.

Readers of this blog will know that this result echoes the sentencing of Mary Estelle Curran.  See Sentencing Judge on Offshore Prosecution Chastises the Government for Lack of Judgment (4/25/13), here.

I do ask the question that comes immediately to mind.  What is it about the very rich that seems to resonate with sentencing judges?

And, of course, the obvious question is whether the Government will appeal.  It can appeal the sentence.  And, is not the Government practically required to appeal when the lesser wealthy are treated more harshly?

From an early article:  Janet Novack, No Jail Time For Beanie Babies Billionaire Tax Evader Ty Warner (Forbes 1/14/14), here.  Excerpts (emphasis supplied by JAT):
Rejecting federal prosecutors’ argument that a tough message must be sent to would be tax cheats, Chicago Federal District Court Judge Charles P. Kocoras today sentenced Beanie Babies creator H. Ty Warner to two years of probation and 500 hours of community service for evading taxes on a secret Swiss bank account that reached $106 million in value. The account, which Warner opened at UBS AG in 1996 and kept secret for 12 years, earned $25 million during that period, allowing him to  avoid $5.5 million in tax. 
The probationary sentence is the latest and arguably most dramatic case yet of federal judges going easy on tax cheats and particularly old rich folks convicted of hiding offshore accounts. According to the U.S. Sentencing Guidelines, which ratchet up sentences with the dollar value of a white collar crime, Forbes 400 member Warner should have gotten 46 to 57 months in jail. (The maximum sentence for the one count of tax evasion Warner pleaded guilty to in September is five years.) 
The Chicago Tribune reports that  Warner read aloud from a prepared statement before his sentencing, telling the judge that he was “truly sorry” and “never realized that the biggest mistake (I) ever made in my life would cost me the respect that was most important to me.” 
* * * * 
Warner, in contrast to Olenicoff, was required to plead guilty to the more serious offense of tax evasion and federal prosecutors had asked that he get at least a year and a day of jail time. In their sentencing memo, they  dismissed Olenicoff’s no jail deal as an “outlier” because it took place “prior to the discovery of the scope and depth of the scheme to evade taxes perpetrated by UBS AG and its customers.” 
* * * * 
In pushing for a jail term for Warner, prosecutors said in their court filing that probation “would further a public perception that a defendant of means can avoid further punishment simply by writing a large check” and  could lead would-be evaders “to believe that if they underreport their income, they can simply pay a fine and the tax due.”  (The government  more successfully used a public message argument before action star Wesley Snipes was sentenced to a three-year sentence on tax charges, the maximum allowed in his case.) In arguing for jail for Warner, prosecutors noted that some offshore tax cheats have gone to jail and those who have avoided prison had less money offshore and in some cases had provided prosecutors information about banks and asset managers it didn’t already have. 
But Korcoras cited the good works Warner has done, the fines he paid and the fact that he tried unsuccessfully to join the government’s offshore amnesty/voluntary disclosure program. “Warner’s private acts of kindness, benevolence and generosity are overwhelming,”  said the judge, who read aloud several letters from Warner supporters. He added, according to a report broadcast on Chicago’s WBBM Newsradio, that he had struggled with the decision, but considered his decision just. In addition to requiring community service, he fined Warner $100,000. 
Warner applied to the IRS’ offshore amnesty program in September 2009, but was rejected because prosecutors already had his name, making him ineligible. More than 39,000 taxpayers have been granted amnesty from criminal prosecution since the Internal Revenue Service started the program in 2009.  His lawyers had speculated that his was one of the 285 names UBS turned over to the U.S. government in February 2009 as a part of deal to avoid prosecution, but prosecutors said they learned of his secret account back in 2008. Moreover, they pointed out, by the time Warner tired to enter the program, his UBS banker, Hansreudi Schumacher, had been indicted and another Schumacher client, Jeffrey Chernick, a toy manufacturer, had pleaded guilty. Chernick, who had a maximum of $8 million off shore, cooperated with prosecutors and was sentenced to three months incarceration. Ironically, one of the longest offshore sentences was imposed on Bradley Birkenfeld, the former UBS banker who became a whistleblower and exposed the extent of the bank’s business with tax evading Americans.  He got 40 months, (prosecutors claimed he didn’t tell them about client Olenicoff), but later won a $104 million IRS informant’s award, the largest ever.
 From Andrew Velarde, Beanie Babies Creator Avoids Prison in Tax Evasion Case, 2014 TNT 10-2 (1/15/14), these excerpts:
Defense counsel had in its sentencing memorandum   asked the court to forgo imposing prison time. In addition to his charitable work, the defense argued, Warner deserved probation because of the high civil penalties and restitution paid, the previous sentencing of similarly situated defendants, and the defendant's "extraordinary acceptance of responsibility, including his unprompted efforts to join the IRS voluntary disclosure program." 
But the government said that it was already aware of the undeclared account when Warner attempted to enter into the voluntary disclosure program in 2009, even though there is no evidence that Warner himself knew he was under criminal investigation. Describing Warner as "a shrewd and successful businessman," the Justice Department had sought imprisonment for Warner. In its sentencing memorandum , the government set out as aggravating factors the continuing nature of the evasion -- which proceeded for more than a decade -- and the sizable tax loss to the government. 
"This is a crime committed not out of necessity, but greed, as defendant was earning millions of dollars each of the years of his tax evasion scheme," the government memorandum said. "The civil penalty alone does not provide just punishment for the defendant's serious pattern of conduct, as justice is not served when those that are able to pay penalties avoid further criminal consequences." 
In a DOJ release 2014 TNT 10-33: Justice Department Documents following the sentencing, Zachary T. Fardon, U.S. attorney for the Northern District of Illinois, said, "It is imperative when an individual brazenly breaks the law and lies repeatedly on tax returns year after year and evades millions of dollars in taxes, that person has to be held accountable. That's true if you are rich or poor and no one is above the law." 
The DOJ, in its sentencing memorandum, also dismissed Warner's charitable works as "hardly exceptional" given his means and balked at the idea that they could be offered as a "get-out-jail card."
The USAO ND IL press release is here.  Following are excerpts which reads like a brief for stiff sentencing and lament that the judge did not give stiff sentencing:
“It is imperative when an individual brazenly breaks the law and lies repeatedly on tax returns year after year and evades millions of dollars in taxes, that person has to be held accountable. That’s true if you are rich or poor and no one is above the law,” said Zachary T. Fardon, United States Attorney for the Northern District of Illinois. 
“When people cheat on their taxes, honest taxpayers suffer the consequences and have to make up the difference. IRS Criminal Investigation is here to ensure that everyone pays their fair share of taxes regardless of their social status,” said James C. Lee, Special Agent-in-Charge of the Internal Revenue Service Criminal Investigation Division in Chicago. 
In pleading guilty, Warner admitted that between 1996 and 2008, he opened and maintained undeclared bank accounts in Switzerland at both UBS AG and Zuercher Kantonalbank (ZKB). Warner failed to report the income from those accounts, as well as their existence, on his individual income tax returns and amended returns for tax years 1996 through 2007. Between 1999 and 2007, Warner’s unreported gross income from those accounts totaled $24,448,912, while the there are no records of how much he earned for the tax years 1996-98. 
Warner also admitted that he failed to report his interest in the foreign bank accounts each year from 1996 to 2008 to the Treasury Department, as required on the Report of Foreign Bank and Financial Accounts (FBAR) form. U.S. taxpayers must report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year, and a deliberate failure to file the FBAR form can result in a civil penalty of up to 50 percent of the high balance in the account each year. 
According to court documents, Warner traveled to Zurich in January 1996 to open an undeclared account at UBS and executed a form instructing that any correspondence regarding the account be held at the bank in Switzerland rather than being mailed to him in the United States. Warner has never identified the source of the funds or the purpose behind the secret account, other than to suggest that opening the account was based on the success of Beanie Babies sales. It remains unknown if the initial deposits were diverted pre-tax funds, which, if so, would significantly increase the tax loss. 
In 2001, UBS agreed to report certain tax information to the Internal Revenue Service. In 2002, Warner’s UBS banker, Hansreudi Schumacher, left UBS and later counseled his former clients to move their UBS accounts to ZKB because it had no similar agreement with the IRS. In December 2002, Warner traveled to Zurich and transferred approximately $93.63 million from UBS to ZKB, where his new account was managed by Schumacher, who was indicted in Florida in 2008 for conspiracy to defraud the United States and remains a fugitive. 
Instead of opening the ZKB account in his own name, Warner opened the account in the name of a purported Liechtenstein entity, the “Molani Foundation,” which effectively concealed his identity as the account holder. From 2002 through tax year 2007, Warner, again, did not report the existence of, or income from, the ZKB account, and he also failed to report the accounts and income on amended tax returns he filed in December 2007 for tax years 2002-05. 
In early 2009, UBS entered into a deferred prosecution agreement with the United States, admitting that it helped U.S. taxpayers hide accounts from the IRS. As part of the agreement, UBS provided the government with the identities of, and account statements for, certain U.S. clients. The IRS also announced a voluntary disclosure program for taxpayers to declare secret accounts, but taxpayers whose accounts were already known the government were ineligible for the program. 
Despite publicity in 2009 of tax fraud indictments of former UBS employees, including Schumacher, and its U.S. clients, Warner did not attempt to disclose his account at ZKB until late 2009, after he learned that UBS was going to disclose client records and that Schumacher had been indicted. Warner requested eligibility for the voluntary disclosure program a week before the original deadline in September 2009, but the government had learned that he had an undisclosed UBS account in the summer of 2008, according to court documents.
I am reminded in all of this about this famous supposed quotation that the "Rich are different from you and me.  From the Wikiquote Entry on Scott Fitzgerald, here.
Ernest Hemingway once said of F. Scott Fitzgerald: 
"His talent was as natural as the pattern that was made by the dust on a butterfly's wings" 
Hemingway is responsible for a famous misquotation of Fitzgerald's. According to Hemingway, a conversation between him and Fitzgerald went: 
Fitzgerald: The rich are different than you and me. 
Hemingway: Yes, they have more money. 
This never actually happened; it is a retelling of an actual encounter between Hemingway and Mary Colum, which went as follows: 
Hemingway: I am getting to know the rich. 
Colum: I think you’ll find the only difference between the rich and other people is that the rich have more money. 
The full quotation is found in Fitzgerald's words in his short story "The Rich Boy" (1926), paragraph 3: "Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft, where we are hard, cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand."  source: http://www.quotecounterquote.com/2009/11/rich-are-different-famous-quote.html: 
You may have heard about a legendary exchange between the American novelists F. Scott Fitzgerald (1896-1940) and Ernest Hemingway (1899-1961). 
Usually, Fitzgerald is quoted as saying: “The rich are different from you and me.” And, 
Hemingway is quoted as responding: “Yes, they have more money." 
In fact, this is a mythical quote-counterquote. Here’s how it became a legend… 
In 1925, Fitzgerald wrote a short story titled “Rich Boy.” It was later published in a popular book of his short stories titled All the Sad Young Men (1936). The story begins with this passage: 
"Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different." 
Clearly, that’s not a favorable view of the rich. 
But years later, Ernest Hemingway, who was supposedly a friend of Fitzgerald, mocked the famed opening lines of “Rich Boy” in his short story “The Snows of Kilimanjaro.” In the original version of that story, printed in Esquire magazine in 1936, Hemingway wrote: “The rich...were dull and they drank too much, or they played too much backgammon. They were dull and they were repetitious. He remembered poor Scott Fitzgerald and his romantic awe of them and how he had started a story once that began, “The very rich are different from you and me.” And how some one had said to Scott, Yes, they have more money. But that was not humorous to Scott. He thought they were a special glamorous race and when he found they weren't it wrecked him as much as any other thing that wrecked him.” 
Understandably, Fitzgerald was offended. He complained to Hemingway’s publisher and when the story was reprinted in a 1938 collection of Hemingway’s short stories, “Scott Fitzgerald” was changed to the name “Julian.” 
But in his personal notebooks, Fitzgerald made the mistake of writing a cryptic entry that said: “They have more money. (Ernest’s wisecrack.)” 
After Fitzgerald’s death, entries from his notebooks were included in The Crack-Up (1945), a book compiled from Fitzgerald’s writings by his friend Edmund Wilson. 
Wilson added a footnote to the notebook entry about Ernest’s wisecrack that explained: “Fitzgerald had said, ‘The rich are different from us.’ Hemingway had replied, ‘Yes, they have more money.’” 
After that, books began citing this footnote as if it were an actual conversation between Fitzgerald and Hemingway. And, thus a famous quote-counterquote myth was born.
See also Jillian Berman, 12 Ways The Rich Are Not Like You And Me (Besides The Money) (Huffington Post 8/13/13), here.
1. They're more aggressive at the wheel.
2. They're less empathetic.
3. They're more likely to take candy from children.
4. It's easier for them to become American citizens.
5. Their bodies have a different chemical makeup.
6. They're more likely to be tricked into buying brand-name medications.
7. They're nearly twice as likely to vote as the poor.
8. They're more likely to worry about deficit reduction and low taxes.
9. They're less likely to be concerned with raising the minimum wage.
10. They see a different Internet than we do.
11. They're more likely to be satisfied with their jobs.
12. They're also more likely to be happier overall.
To this I would add four more which are facets of the same phenomenon:
13.  They hire better lawyers; actually gaggles of lawyers who can collectively push the envelope for marginal and sometimes spectacularly better results.
14. They -- at least the uber-rich among the merely rich -- get better sentences.
15.  As a result, presumably, they are happier with their sentences than the lesser among us.
16.  And this result and the expectation that, if called to the bar for misbehavior, they will get better results (just as they get better everything else) contributes to their overall happiness (per #12 above).


  1. Yes the Government should be required to appeal when the lesser wealthy are treated more harshly .....if not this would further a public perception that a defendant of means can avoid further punishment simply by writing a large check . Again Jack another proof of my long standing disagreement with you that it is all about the money and maximizing fines and not about enforcing the law or compliance !

  2. Here is how illogical the FBAR law is. He paid a willful penalty of 50% or roughly 50 million. Had he been even more (yes, more) willful he could have paid less. How? By moving his account to a new bank between January 1 and June 30 of each year.

    Let's say he had $100m in bank A in 2005. Sometime between January 1 and June 30 of 2006 he moves everything to Bank B. Doesn't file an FBAR. The willful penalty for not reporting the Bank A account on 6/30/2006 is only $100K because it's the maximum of 100K or the balance in the account ($0) at the time the FBAR was due.

    Then during the first half of 2007 he closes the Bank B account and moves the money to a new account at Bank C. The accounts at A and B held in 2006 should have been reported on 6/30/2007 but weren't but as of 6/30/2007 the penalty is the greater of 50% of zero, or $100K per account. So he owes 200K penalty. The following year he will owe again 200K but on accounts at banks B and C (all the money by then is in bank D.

    Result? When he gets caught the max nonwillful penalty is 200K times 6 years SOL or $1.2 million which is way less than 50 million.

    Another possibility? He could have sent the money in $100K increments every Monday and Wednesday (that's $10 million per year) with instructions to the receiving bank to immediately wire the funds back to the US to a bank account owned by a Delaware corporation. Since he's using a US bank and a US entity, the money bounced back tot he US isn't subject to the FBAR penalty. The Swiss account never reaches a high balance over $100K so the max willful penalty is $50K times 6 years SOL or $600K.

    Important: This is only an illustration of how willfulness can be penalized much less harshly for large accounts than minnow accounts. The examples I have given would almost certainly result in criminal charges in spite of reducing the willful penalty so this is NOT how-to advice!

  3. I am guessing that the fact that he tried to enter OVDP but unbeknownst to him the government already had his name and he was not eligible, may have been a major factor in the outcome of probation.


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