In what looks to be the end of the tax evasion saga of H. Ty Warner, the billionaire behind the Beanie Babies toy empire, the Seventh Circuit upheld a district court's curious decision to spare Warner prison time for engaging in a decade-long scheme to evade taxes by hiding assets in a Swiss bank account.
Warner struck it rich in the early 1990s with his line of Beanie Babies dolls, eventually becoming a billionaire from selling the plush toys. In 1996 through 2007, Warner hid some $100 million of his gains in Swiss bank accounts, thus avoiding tax of $5.6 million on the $24 million in interest he earned on the money in the accounts.
In the end, however, things went south when the U.S. Justice Department began its probe of Swiss banker UBS. The DOJ's investigation turned up Warner's account, and in 2013 he was charged with criminal tax evasion. Warner pleaded guilty for his misconduct related to the Swiss accounts for the years 1996 to 2007. As part of his plea agreement, he agreed to pay full restitution and a civil penalty of $53.6 million under 31 U.S.C. Section 5321 for failure to file FinCEN Forms 114, Report of Foreign Bank and Financial Accounts (FBAR).
Under the plea, Warner was also subject to a criminal penalty. Under the relevant federal sentencing guidelines, the advisory sentencing range was 46 to 57 months in prison. The government charitably requested a far less severe sentence of "in excess of a year and a day." The district court judge was even more charitable, sentencing Warner to only two years of probation, community service, and $100,000 in fines and costs. Applying the sentencing factors set forth in 18 U.S.C. Section 3553(a), the court decided to impose this below-guidelines sentence based on "the nature and circumstances of the offense and the history and characteristics of the defendant."
Although the court admitted that Warner's offense was very serious and that other tax evaders had been imprisoned for far less, it found that his situation was unique. First, the judge observed that Warner had already paid an enormous civil penalty, had been through a humiliating prosecution, and was unlikely to commit further crimes. More importantly, though, the judge stated that he was moved by the many letters the court had received testifying to Warner's good character and outstanding generosity, which led the court to decide that the good works he had done in life outweighed his misconduct and that society would be best served by allowing him to continue his good works outside of prison.
The government, apparently feeling that its rather generous sentencing request represented the low end of what Warner should have been sentenced to, appealed the district court's decision.
The Seventh Circuit's Decision
The Seventh Circuit affirmed the district court's sentence. The court noted that no statute required the district court to send Warner to prison, that the district court had wide discretion in making its sentencing decision, and that an appellate court was required to apply a deferential abuse-of-discretion standard to a district court's sentencing decision as long as it was adequately explained. Applying these principles, the Seventh Circuit concluded it was required to defer to the district court's decision.
Because the sentence handed down by the district court was well below the one recommended under the sentencing guidelines, the court analyzed the sentence to determine if it was substantively reasonable based on the sentencing factors in 18 U.S.C. Section 3553(a). The district court had stated that these factors "run in different directions" and that it was necessary to "weigh . . . and balance them." The government's primary complaint on appeal was that the district court put too much emphasis on Warner's history and characteristics (i.e., his charitable deeds and apparent generosity) and not enough on the seriousness of his offense, the general deterrence the sentence would provide, and the disparity between his sentence and sentences received by similarly situated defendants.
After reviewing the district court's explanation of its sentence and the government's various arguments for a stronger sentence, the court determined that the district court had adequately explained its decision and that the decision was not based on factual or legal errors and was not obviously unreasonable or arbitrary. Thus, the sentence was substantively reasonable and the district court had not abused its discretion. The court stated that
Considering (1) Warner's excellent character, as shown by his long history of charity and kindness to others; (2) the isolated and uncharacteristic nature of his tax evasion; (3) his attempt to enter the [IRS's Offshore Voluntary Disclosure Program]; (4) his guilty plea and prompt payment of his liabilities; (5) his $53.6 million FBAR penalty, which is nearly ten times the tax loss; and (6) the fact that the government charged him with only one count and itself sought a well-below-guidelines sentence, we conclude that Warner's probationary sentence is reasonable. [Slip op. at 31]
While the district court judge was well within in his discretion in sentencing Warner to probation and, from a legal standpoint, the Seventh Circuit was correct to affirm it, the justifications for the sentence ring hollow. The Seventh Circuit states in its opinion that Warner did not use his wealth as a get-out-of-jail-free card and that a nonwealthy defendant who showed the same qualities of charity and benevolence as Warner would be entitled to the same lenient treatment. However, the district court explained that the primary motivating factor for its leniency was the many letters it received attesting to Warner's charitable good deeds. Since Warner was only able to finance all these good deeds because he was extremely wealthy, whether he did so intentionally or not, he used his wealth to avoid prison.
Adding further to this perception, both the district court and the Seventh Circuit asserted that another factor in support of the sentence was that the FBAR penalty was adequate punishment for Warner's misdeeds, even though it was a separate civil penalty, and they gave Warner credit for willingly and promptly paying the penalty. However, he could pay the enormous FBAR penalty, and do so quickly, only because he was an extremely wealthy man.
Warner committed tax evasion, a serious crime, on an epic scale for a decade. Had he not been caught up in the DOJ's crackdown on foreign tax evasion, there is no evidence to show that he would have voluntarily discontinued his misdeeds or voluntarily come forward and paid for them. Giving him virtually the most lenient criminal sentence possible sends a bad message to all taxpayers.
Warner, No. 14-1330 (7th Cir. 7/10/15)