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United States v. Warner

United States Court of Appeals, Seventh Circuit

July 10, 2015

UNITED STATES OF AMERICA, Plaintiff-Appellant,
H. TY WARNER, Defendant-Appellee

Argued September 17, 2014

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:13-cr-00731 -- Charles P. Kocoras, Judge.

For United States of America, Plaintiff - Appellant: Stuart D. Fullerton, Attorney, Michelle Marie Petersen, Attorney, Office of The United States Attorney, Chicago, IL.

For H. TY Warner, Defendant - Appellee: Paul D. Clement, Attorney, Erin Murphy, Attorney, Bancroft Pllc, Washington, DC; Mark E. Matthews, Attorney, Caplin & Drysdale, Washington, DC; Michael Samuel Shapiro, Attorney, Scandaglia & Ryan, Chicago, IL.

Before FLAUM, KANNE, and ROVNER, Circuit Judges. FLAUM, Circuit Judge, concurring in the judgment.


Kanne, Circuit Judge.

Defendant H. Ty Warner, the billionaire creator of Beanie Babies, evaded $5.6 million in U.S. taxes by hiding assets in a Swiss bank account. He pled guilty to one count of tax evasion, made full restitution, and paid a $53.6 million civil penalty. The Sentencing Guidelines provided a recommended 46- to 57-month term of imprisonment, but the district judge gave Warner a more lenient sentence: two years' probation with community service, plus a $100,000 fine and costs. The government claims his sentence is unreasonable because it does not include a term of incarceration.

In a typical case, we might agree. But this is not a typical case. The district judge found Warner's record of charity and benevolence " overwhelming." Indeed, the judge remarked that Warner's conduct was unprecedented when viewed through the judge's more-than-three decades on the bench. In the district court's opinion, this and other mitigating factors--including the uncharacteristic nature of Warner's crime, his attempt to disclose his account, his payment of a penalty ten times the size of the tax loss, and the government's own request for a sentence well below the guidelines range--justified leniency. District courts enjoy broad discretion to fashion an appropriate, individualized sentence in light of the factors in 18 U.S.C. § 3553(a). The court here did not abuse its discretion. Rather, it fully explained and supported its decision and reached an outcome that is reasonable under the unique circumstances of this case. We therefore affirm Warner's sentence.

I. Background

Warner was born in Chicago in 1944 and grew up in a troubled family. He attended a military high school in Wisconsin and spent a year at Kalamazoo College, but ultimately dropped out because he could no longer afford tuition. To make ends meet, he worked a series of odd jobs, including stints as a busboy, a bellman, and a door-to-door salesman. Eventually, he found his feet selling children's plush toys for the Dakin Toy Company. Within a few years, he was Dakin's top salesman.

In 1985, Warner formed his own plush toy company, Ty Inc., which he initially ran by himself out of his condominium. His big break came in the early 1990s with the introduction of a new toy to the market: the Beanie Baby. A huge success, the Beanie Baby propelled Ty Inc. into a multi-billion-dollar company and made Warner rich. His net worth at the time of sentencing was roughly $1.7 billion.

A. Warner's Tax Evasion and Attempted Disclosure

In 1996, during the early period of Beanie Babies' success, Warner traveled to Zurich, Switzerland, and opened an offshore bank account at UBS AG (" UBS" ). The record does not disclose how much money Warner originally deposited or where the funds came from, but within several years the account contained $93 million. Consistent with their advice, Warner instructed his bankers not to send him any correspondence and to destroy all account documents after five years. He did not report the account to the Internal Revenue Service (" IRS" ).

Warner was not the only American taxpayer hiding assets at UBS. With the help of bankers in UBS's cross-border division, many others opened offshore accounts to avoid U.S. taxes. One of the bankers involved in this fraudulent scheme was Hansreudi Schumacher, who serviced Warner's account. After UBS entered into a Qualified Intermediary Agreement with the IRS in 2001 (which created certain tax reporting obligations), Schumacher left to join another Swiss bank.

Warner followed him. In late 2002, Warner traveled to Switzerland and, with Schumacher's help, transferred his funds from UBS to Zuercher Kantonalbank (" ZKB" ), a smaller Swiss bank without a significant U.S. presence. He placed the funds at ZKB in the name of a Liechtenstein shell entity, the " Molani Foundation." And he instructed UBS " not to engage in any sort of communication with me re transfer," but instead to send all correspondence to Schumacher. At ZKB, Warner's account grew to over $107 million.

Warner did not disclose his offshore account to the IRS. On the contrary, he reported on his annual tax returns that he had no foreign financial account. And he did not report or pay taxes on the interest income generated by his offshore assets, which amounted to over $24.4 million through 2007. As a result, the government lost $5,594,877 in tax revenue--the second-highest loss among the former UBS clients who have been prosecuted to date.

In 2008 the Department of Justice launched a program to aggressively combat offshore tax evasion.[1] The program began with an investigation of UBS. In April the government indicted former UBS banker Bradley Birkenfeld. In February 2009 it filed a one-count information against UBS and quickly executed a deferred prosecution agreement, under which UBS admitted wrongdoing and agreed to hand over information on certain U.S. offshore clients. Several months later, the government brought charges against former UBS and Schumacher client Jeffrey Chernick. In August 2009 Schumacher himself was indicted.

At the same time, the government encouraged tax-evaders to come forward on their own by announcing an IRS offshore voluntary disclosure program in March 2009 (the " OVDP" ). Under the program, taxpayers who voluntarily disclosed their offshore accounts could avoid criminal prosecution by paying back taxes, interest, and penalties, including 20% of the account's peak value. On the other hand, those who continued to hide their assets would face heightened enforcement and severe penalties. Taxpayers had a six-month window--until September 23, 2009 (later extended)--to take advantage of the OVDP. Thousands of taxpayers were admitted into the program.[2]

Warner was aware of the government's investigation of UBS, which was widely publicized, and of Schumacher's indictment. Warner says that he regretted his decision to open the offshore account from the beginning but felt stuck; and that he never withdrew or otherwise used the funds in the account. In 2009 he contacted his lawyer to discuss his options, and his lawyer told him about the OVDP. On September 18, 2009--just before the original deadline--Warner applied to enter the program. Unbeknownst to him, however, he was already under investigation; the government had obtained his account information in 2008 or 2009, possibly from UBS. The pending investigation made Warner ineligible for the OVDP, see IRM §, (b) (Sept. 9, 2004), so the government rejected his application.

Two years later, in 2011, a grand jury subpoenaed Warner's offshore banking records. He resisted the subpoena, but we ultimately required him to comply. In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903, 909 (7th Cir. 2012), cert. denied, 133 S.Ct. 2338, 185 L.Ed.2d 1064 (2013).

B. Warner's Information and Guilty Plea

In September 2013 the government filed a one-count information charging Warner with willful tax evasion in violation of 26 U.S.C. § 7201. The information alleged that Warner evaded $885,300 in taxes for 2002 by: (1) excluding from his reported income the interest from his offshore assets; (2) fraudulently stating on his tax return that he had no foreign account; and (3) failing to file a Report of Foreign Bank and Financial Account (an " FBAR" form), as required by the Bank Secrecy Act and implementing regulations, see 31 U.S.C. § 5314.

In October 2013 Warner pled guilty to the one-count information. As part of his plea agreement, he also admitted to similar misconduct from 1996 to 2007, which he agreed constituted " relevant conduct" under U.S. Sentencing Guidelines Manual § 1B1.3 (Nov. 2012) (" USSG" ). He promised to pay full restitution and a civil FBAR penalty of $53,552,248--equal to 50% of the maximum balance in his offshore account in 2008 (which is 30% higher than the penalty he would have owed had he been admitted to the OVDP). As far as we are aware, Warner's $53.6 million payment is the largest FBAR penalty the government has collected to date. Warner paid both the penalty and restitution before his sentencing hearing.

Warner's plea deal included an agreed-upon guidelines calculation. The base offense level for a tax loss of $5.6 million was 24 under U.S.S.G. § § 2T1.1 and 2T4.1(J). The parties agreed to add 2 levels under U.S.S.G. § 2T1.1(b)(2) because the offense involved sophisticated means, subtract 2 levels for acceptance of responsibility under U.S.S.G. § 3E1.1(a), and subtract 1 more under U.S.S.G. § 3E1.1(b) because Warner's guilty plea obviated the need to prepare for trial--resulting in a final offense level of 23. Because Warner had no prior convictions, his criminal history category was I. This yielded an advisory guidelines range of 46 to 57 months' imprisonment. See U.S.S.G. ch. 5, pt. A (sentencing table).

Beyond stipulating to the guidelines calculation, the plea agreement left each side free to argue for whatever sentence it deemed appropriate.

C. Sentencing

In their pre-sentencing submissions, neither side proposed a sentence within the guidelines range. The government requested incarceration " in excess of a year and a day," a sentence well below the recommended minimum. The probation officer recommended a prison term of 15 months. Warner argued that a sentence of probation with community service would suffice, and that it would provide greater benefit to society. He offered to mentor students in business and product development at three urban high schools on Chicago's South Side. The president of one of the schools submitted a letter detailing specific ways that Warner could help. In addition, approximately seventy people--business associates, employees, neighbors, charitable foundations, and others who knew Warner--submitted character-reference letters in his behalf.

The sentencing hearing took place on January 14, 2014, before District Judge Kocoras. After argument from both sides, the court pronounced Warner's sentence and explained its decision. The court also issued a short written statement of reasons to supplement its oral explanation. The hearing transcript runs fifty-five pages.

The district court adopted the findings in the presentence report and agreed with the calculation of the guidelines range. But the court decided to impose a below-guidelines sentence based on " the nature and circumstances of the offense and the history and characteristics of the defendant." 18 U.S.C. § 3553(a)(1). The court was moved by the letters submitted in Warner's behalf, which were " quite different" from the letters it typically received in other cases: they were voluminous, detailed, and revealed Warner's " personal qualities, which differ from those he manifested in committing the crimes he has admitted." The court read several letters into the record. For brevity's sake, we give only a partial summary.

One letter related that in 2012 Warner stopped to ask a stranger for directions in Santa Barbara, California. Her name was Jennifer Vasilakos, and she was holding a fundraiser called " Parking for Jenny." In addition to directions, she gave him a flyer explaining that she suffered from kidney failure and needed money to pay for an expensive adult stem cell treatment. An hour later, after reading the flyer, Warner returned and promised to pay the full amount she needed ($20,000). He followed through, but " [his] generosity went further than simply donating." He helped her " raise awareness" and connected her with others interested in the potential of adult stem cells for ...

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