Nov. 1 (Bloomberg) -- As billionaire Beanie Baby creator H. Ty Warner awaits his sentence for offshore Swiss bank tax evasion, he may find solace in the sentences many similar felons are getting -- probation or prison terms lighter than prosecutors wanted.
Warner, the 69-year-old hotelier and maker of plush toys, pleaded guilty Oct. 2 to tax evasion related to Swiss accounts in which he held as much as $107 million. He owes $5.6 million in taxes and a civil penalty of $53.6 million. Under advisory guidelines for his sentencing, set for Jan. 15 in Chicago, he faces 46 months to 57 months in prison.
If he gets that much time, it would be the most of anyone sentenced for offshore tax crimes since 2008, when the U.S. Justice Department began a push against Swiss banks -- and the people who used them -- to help U.S. taxpayers hide assets from the Internal Revenue Service.
The U.S. has prosecuted 103 people, securing 62 guilty pleas and five trial convictions. Of 49 sentenced, most received probation or home confinement, according to a Bloomberg analysis of the cases, which included criminal filings and transcripts of sentencings.
Only 18 got prison time. Four of those were sentenced to a year and a day, and just two got longer terms. In almost every case examined, the defendants received sentences that were below the guideline range set at sentencing.
“Tax evasion is still viewed as one of those crimes that don’t seem as serious to judges who sentence gun and drug and sex offenders,” said former federal prosecutor Jeff Neiman. “When you bring in these wealthy, charitable defendants, they stick out like a sore thumb in the criminal justice system.”
The tax-evader crackdown has yielded successes, in part as the Justice Department raised the threat of prison time for Americans who didn’t come clean over offshore accounts. The push has helped remove Swiss banks as a sure haven against U.S. taxes. Tens of thousands of U.S. citizens avoid prosecution after paying taxes and penalties and ratting out their foreign bankers. Fourteen Swiss banks are under investigation, and many more could confess misdeeds to the U.S. by year’s end.
“The mere threat of prison, the public shaming and the branding of wealthy individuals as felons was enough for the U.S. government to scare tens of thousands of people into compliance with the tax system,” said Neiman, who now practices in Fort Lauderdale, Florida.
Lawyers for Warner, the biggest name among those pursued in the crackdown, are expected to give his sentencing judge a fuller, more flattering picture of his life as a counterpoint to the criminal acts he admitted in court. Most defendants argue that such mitigating factors make home detention or even probation a reasonable alternative to prison.
“It will be our goal at the sentencing hearing to ensure that the judge has a complete picture of Mr. Warner’s life and his character,” his lawyer Gregory Scandaglia said in an e-mail.
Predicting the outcome, despite the trend toward leniency, isn’t easy because every judge now has considerable leeway in deciding sentences.
“The wide variety of sentences in offshore tax evasion cases -- ranging from probation to home confinement to substantial prison terms -- reflects the general difficulty of predicting how any one particular district judge might sentence a specific defendant in any case,” said Daniel W. Levy, who prosecuted federal tax cases before joining McKool Smith LLP.
Warner will be sentenced by U.S. District Judge Charles Kocoras, who was nominated to the bench in 1980 by President Jimmy Carter. Kocoras hasn’t handled any of the other offshore tax cases since 2008.
Sentencing judges must weigh guidelines written by a permanent U.S. commission that seeks to provide fairness and consistency among similar defendants convicted of similar crimes. The judges gained more latitude in 2005 after the U.S. Supreme Court made the guidelines advisory, rather than mandatory.
The amount of loss or gain in a financial crime usually drives the range of possible prison time. Judges also must look at such individual factors as whether a defendant accepted responsibility or helped prosecutors build other cases, as well as their age, health, life histories and achievements.
With virtually all tax felons in the offshore crackdown getting less time than their range, the sentences have had a domino effect. Defense lawyers routinely advise judges in new cases of other instances that resulted in probation or home detention.
The crackdown ensnared doctors, businessmen, financial advisers, a yacht broker, a watch distributor, a perfume importer and an adult-paraphernalia wholesaler, according to an analysis of cases in 17 judicial districts. They included a cancer researcher and a former U.S. Army surgeon who served in battle zones in Iraq and Bosnia.
Most hid money at UBS AG, the largest Swiss bank. They also used Credit Suisse AG, the second-biggest Swiss bank; HSBC Holdings Plc, Europe’s largest bank; and smaller Swiss banks.
Many of those sentenced helped prosecutors build cases against three dozen offshore bankers, lawyers and advisers charged with helping them hide money. Sharing such inside information is the surest path to a lower sentence, according to tax lawyers.
“The Department of Justice is very serious about going after the enablers, which ties right into the cooperation,” said attorney Steven Toscher. His firm, Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, California, represented at least seven defendants in the crackdown, including cooperators.
Three bankers and two lawyers pleaded guilty. They included ex-UBS banker Bradley Birkenfeld, whose bombshells were the beginning of the end of Swiss bank secrecy to promote tax evasion. In 2007, Birkenfeld disclosed how as many as 60 UBS private bankers crisscrossed the U.S., without licensing from the Securities and Exchange Commission, to find wealthy American customers and help them evade tax laws.
Birkenfeld was charged with conspiracy and pleaded guilty in June 2008, saying UBS earned $200 million a year managing $20 billion in assets for U.S. customers. His prosecutor said Birkenfeld had initially refused to disclose his own wrongdoing and withheld evidence about his biggest client, a billionaire. Still, the prosecutor recommended a term of 30 months, saying Birkenfeld had unraveled a “massive tax-fraud scheme.”
Birkenfeld was sentenced to 40 months -- the longest of the crackdown. After prison, the IRS gave Birkenfeld a whistle-blower award of $104 million.
The crackdown flushed out some tax felons with millions of dollars stashed in Switzerland who inherited the accounts. Others built them from scratch, perhaps with money skimmed from businesses, according to attorney Ian Comisky of Blank Rome LLP.
“A lot of the tax loss numbers were low because Swiss banks were taking such large fees,” Comisky said. “Clients didn’t really care what they were charged.”
Toscher said, “UBS was selling secrecy, not yield.”
Offshore bank accounts are legal if taxpayers disclose their existence to the IRS and pay tax on the income. Americans may open accounts overseas for reasons other than tax avoidance, including getting money while living or traveling abroad, or hiding it from creditors or former spouses.
The felons typically failed to tell the IRS about their offshore holdings and income, or didn’t file a Treasury Department form called a Report of Foreign Bank and Financial Accounts, known as an FBAR.
Of three Comisky clients sentenced, one got probation and another received four months in prison. Richard Werdiger, a diamond and jewelry seller, was sentenced to a year and a day. Under the guidelines, he faced 24 to 30 months.
Werdiger pleaded guilty to conspiracy and filing false tax returns. He inherited a UBS account in 1986, prosecutors said, and hid assets by using entities in Liechtenstein and Panama to invest in U.S. securities and pay business debts.
The accounts earned $1.3 million from 2000 to 2008, and he owed almost $400,000 in taxes. His holdings exceeded $7 million. He paid a civil penalty of $3.8 million and a $50,000 fine.
U.S. District Judge Paul Gardephe in New York rejected Werdiger’s plea for more leniency because he tried and failed to enter a limited amnesty program offered by the IRS after UBS avoided prosecution in February 2009.
UBS admitted then that it fostered tax evasion, paid $780 million to the U.S. and handed over at least 250 U.S. accounts.
It later turned over another 4,450 accounts, leading to a surge in prosecutions. Those targeted accounts were identified by criteria negotiated by the U.S. and Switzerland, including holdings with more than 1 million Swiss francs ($1.1 million) and those with “offshore company accounts.”
Since 2009, more than 38,000 taxpayers have joined the government’s amnesty program and paid $5.5 billion in back taxes, interest and penalties. Many have repatriated their accounts.
If the IRS already had an individual’s account data from a bank or elsewhere, he was barred from the voluntary disclosure program.
Michael Canale, the former Army surgeon, inherited a UBS account from his father in 2000. He used a Swiss financial adviser now under indictment, Beda Singenberger, who hid Canale’s assets and sometimes handed him $10,000 cash withdrawals, prosecutors said. Canale faced 24 to 30 months for false returns that prosecutors said helped him avoid $216,000 in taxes.
At sentencing, his lawyer, Robert Fink, said Canale had served on the battlefield with distinction and was treated for post-traumatic stress disorder. Canale’s father, Fink said, had urged him to use the account only to care for his mother.
“It wasn’t greed that was involved here, but a misguided adherence to his father’s direction, a father who literally beat his son to unconsciousness because his son had not followed an order,” Fink told U.S. District Judge Denise Cote in New York on April 25. “Dr. Canale foolishly didn’t betray him.”
Rather, he betrayed his core values of duty, honor and country, the lawyer said.
“Dr. Canale dedicated his entire life to our country,” Fink said. “He lost his dignity. He lost his feelings of self-worth.”
Canale’s shame was understandable, said the judge. Still, Cote said, he deserved punishment, and she needed to deter other tax cheats. She gave him six months.
Singenberger hasn’t responded in court to charges he helped clients hide assets. He didn’t respond to an e-mailed request seeking comment.
Michael Reiss was a breast cancer researcher with hundreds of published articles and a stable of devoted patients. He pleaded guilty in 2011 to failing to declare Swiss accounts, admitting that Singenberger helped him change banks to hide assets that grew to $2.6 million. Reiss also filed false FBARs disclosing Dutch accounts and not his Swiss accounts, prosecutors said.
Under the guidelines, he faced from 30 months to 37 months in prison. After pleading guilty, he had to retire from the Cancer Institute of New Jersey.
At his January 2012 sentencing in New York, Reiss apologized to his family and patients who “have suddenly lost the physician who they thought was going to guide them through a serious disease.”
U.S. District Judge Richard Berman sentenced Reiss to one day in prison and three years of probation, including eight months in a halfway house. He put Reiss’s medical training to use, ordering 30 hours a week of community service during his probation at an outpatient clinic, a hospice program and a cancer education and early detection program.
Reiss’s attorney Paula Junghans said the entry of 38,000 people into the voluntary disclosure program affected how judges consider “whether or not this conduct should be viewed in the same way as regular old tax evasion.”
Other factors hold down sentences as well, she said.
“Probably all of them are first offenders, and they’re not going to be recidivists,” Junghans said.
Warner, the Beanie Babies creator, will likely ask for probation, not prison, when he is sentenced in Chicago, lawyers not involved in the case say.
He employs hundreds as the owner of TY Inc. in Westmont, Illinois, which makes Beanie Babies. He also owns Ty Warner Hotels & Resorts, which runs the Four Seasons Hotel in New York and other facilities.
Since 1995, he donated almost $140 million in cash and plush toys to charities and organizations, according to his legal team. He also tried to disclose his accounts to the IRS in 2009 and was denied, according to Scandaglia, his lawyer.
“Mr. Warner has taken responsibility for his actions and recognizes that the judge will impose the penalty that he sees fit,” Scandaglia said. He also pointed to Warner’s “voluntary efforts to resolve this matter well before any criminal investigation began.”
Warner’s admissions in pleading guilty to tax evasion make his possible push for probation more problematic than in most of the other offshore cases, say lawyers not involved in the case.
He admitted to opening an account at UBS in 1996 and transferring $93.6 million in 2002 to Zuercher Kantonalbank, a small Swiss bank. He filed a false return in 2002 that reported income of $49.1 million, while omitting his UBS income of $3.2 million. He also didn’t file an FBAR. He amended his 2002 return in 2007, yet still understated his tax by $885,300.
In pleading guilty, Warner acknowledged that from 1999 through 2007, he underreported his gross income by $24.4 million and owed taxes of $5.6 million. That tax loss is “huge,” said attorney Jay Weill, who prosecuted tax cases for 37 years before joining Sideman & Bancroft LLP in San Francisco.
“His lawyer has a tough battle to convince the judge that there should only be probation, given the amount of unreported tax,” said Weill. “I wish defense counsel well. But boy, he’s got an uphill battle.”
The case is U.S. v. Warner, 13-cr-00731, U.S. District Court, Northern District of Illinois (Chicago).
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