CHICAGO—The creator of Beanie Babies who pleaded guilty to tax evasion last year after concealing millions of dollars in foreign bank accounts will not be going to prison.
H. Ty Warner, the sole owner of Westmont-based Ty Inc., was sentenced Tuesday in federal court to two years' probation for failing to report more than $24.4 million in income hidden for more than 10 years in two Swiss bank accounts, and evading nearly $5.6 million in federal taxes, according to a release from the U.S. Attorney's Office in Chicago.
Warner, 69, a resident of nearby Oak Brook, was charged with one count of tax evasion in September and pleaded guilty in October.
Prosecutors recommended jail time for Warner in a court filing released last week, but U.S. Judge Charles Kocoras said it's best that Warner, who agreed to pay a $53 million civil penalty in addition to $27 million in back taxes, be kept out of prison.
"Society will be best served to allow [Warner] to continue his good works," Kocoras was quoted as saying in the U.S. Attorney's Office release.
According to the Minneapolis Star-Tribune, the judge said Warner once paid a $20,000 medical bill for a stranger suffering from kidney problems and $20 million in charitable proceeds that he raised with a toy commemorating Princess Diana.
In addition to probation, Kocoras ordered Warner to perform at least 500 hours of community service for at least three Chicago high schools and to pay another $100,000 fine.
The $53 million civil penalty represents half of the highest balance of his unreported foreign bank accounts.
"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," U.S. Attorney Zachary T. Fardon said in a statement. "That’s true if you are rich or poor and no one is above the law."
James C. Lee, the special agent in charge of the Internal Revenue Service Criminal Investigation Division in Chicago, echoed Fardon.
"When people cheat on their taxes, honest taxpayers suffer the consequences and have to make up the difference," he said in the statement. "IRS Criminal Investigation is here to ensure that everyone pays their fair share of taxes regardless of their social status."
Between 1996 and 2008, Warner opened and maintained undeclared bank accounts in Switzerland that he failed to report income from. One was a UBS AG account and the other was a Zuercher Kantonalbank (ZKB) account.
Warner accumulated more than $24 million in gross income from those accounts between 1999 and 2007.
Here's more from the U.S. Attorney's Office release:
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.
Warner is the second taxpayer convicted and sentenced in Federal Court in Chicago in connection with the investigation of U.S. taxpayer clients of UBS and other overseas banks that hid foreign accounts from the IRS.