May 9 2014, 10:36pm CDT | by Forbes
Federal prosecutors argued in a court filing today that the no-jail sentence given to billionaire tax-cheat H. Ty Warner was “substantively unreasonable,’’ in part because the sentencing judge was unduly impressed by his “not so extraordinary” charity and by 70 letters attesting to his generosity written primarily by employees, business associates and those he had donated to after learning the government was investigating him.
Last September, in a deal with the U.S. Attorney for Northern Illinois, Beanie Babies inventor Warner pleaded guilty to one felony count of tax evasion and agreed to pay a $53 million fine for hiding as much as $106 million in secret Swiss accounts and evading at least $5.5 million in tax on the accounts’ earnings over 12 years. According to the U.S. Sentencing Commission Guidelines, which ratchet up sentences with the dollar value of a white collar crime, the 69-year-old Warner should have been sentenced to between 46 and 57 months of jail time.
But in January, Chicago Federal District Court Judge Charles F. Kocoras let him off with probation and community service, after reading aloud from nine letters and declaring: “Mr. Warner’s private acts of kindness, generosity and benevolence are overwhelming. Never have I had a defendant in any case —white collar crime or otherwise—demonstrate the level of humanity and concern for the welfare of others as has Mr. Warner.’’ Warner’s charity, the judge added, “Trumps all of the ill-will and misconduct he engaged in.”
The downward departure from guidelines in Warner’s case was particularly dramatic and the U.S. Attorney for Northern Illinois, who had asked Kocoras to give Warner jail time, is now appealing the sentence to the 7th Circuit Court of appeals. The rare appeal, which had to be approved by the U.S. Solicitor General, is hardly a slam dunk; the government hasn’t won an appeal of a below-guidelines sentence for a tax crime since the Supreme Court ruled that the guidelines are not binding on sentencing judges.
In their opening appeals brief filed late Friday, prosecutors painted Warner as distinctly ungenerous when compared with either ordinary Americans or with the billionaires who have pledged to give at least half their net worth to charity. (Since Warren Buffett and Melinda and Bill Gates started The Giving Pledge four years ago, 127 of the 1,650 or so billionaires that have been confirmed by Forbes, have signed the pledge, with a new crop, including Facebook COO Sheryl Sandberg, announced just this morning.)
At his sentencing, Warner’s net worth was pegged at $1.8 billion and his lawyers said he had donated $140 million to charity over the past decade. But prosecutors argued before the sentencing and again in their appeals brief, that that number was inflated because it reflected the retail value of the Beanie Babies Warner had donated and not his cost for producing the stuffed animals. They pegged the value of Warner’s contributions from 1998 to 2011 at just $35.7 million. Moreover, prosecutors pointed out, many of the donated toys “helped spur a Beanie Babies craze,’’ including, for example, a Beanie created for the benefit of the memorial fund for Princess Diana. Warner’s cash donations for an aquarium and bike path in Santa Barbara, Cal., they added, helped attract tourists to the nearby Four Seasons Resort he owned.
That $35.7 million Warner gave over 14 years, prosecutors calculated, amounted to just 2% of his net worth at sentencing. Translating that to common man equivalence, prosecutors noted that the median net worth of households in the U.S. in 2011 was $68,828 and that 2% of that is $1,377, which would amount to $100 a year of donations over 14 years.
“Warner is no `Robin hood.’ His past charitable contributions were not so extraordinary, in light of his wealth, that they qualified as a `get-out-of-jail-card,’’’ the prosecutors wrote.
The prosecutors also pointed out, as they have before, that Warner has never said where the money he deposited in UBS AG in Switzerland in 1996 came from. “The books and records of defendant’s company show the funds were not transferred from the company, nor did they come from defendant’s personal domestic bank accounts,’’ they wrote, raising the possibility that the money he stashed in UBS was income he skimmed from his business and never reported to the IRS. If that is the case, then Warner evaded a lot more than $5.5 million in tax. (In 1999 alone, Warner, as the sole owner of Ty Inc., had an adjusted gross income of $662 million.)
Before sentencing, Warner’s lawyers made much of the fact that he had tried to “rectify his mistake” by applying to the Internal Revenue Service’s Offshore Voluntary Disclosure Program in September 2009. More than 40,000 individuals with previously secret offshore accounts have entered that program, which gives miscreants amnesty from criminal prosecution if they tell all and pay stiff penalties and back taxes. Warner was turned down for the program, however, because the government was already investigating him, making him ineligible.
In their brief, prosecutors noted for the first time that, as Forbes first reported in February, Warner resisted complying with a federal grand jury subpoena for his foreign bank records. (He turned over the records after an appeals court ordered him to, but nevertheless appealed anonymously to the Supreme Court, which declined to hear his case.)
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