In "Swindlers' List" in Los Angeles Lawyer, Alex Pilmer and I addressed many of the legal issues that arise upon the inevitable collapse of a Ponzi scheme. Since our article appeared, there have been significant practical developments in three on-going high-profile Ponzi scheme cases.
Last Tuesday, U.S. District Court Judge David Hittner revoked the bail of accused Ponzi-schemer R. Allen Stanford in Houston, Texas. In revoking Stanford's $500,000 bail, Judge Hittner found that Stanford was a "serious flight risk." In contrast to Madoff's plea bargain, Stanford has vowed to defend the charges against him at a jury trial. Trials in high-profile Ponzi schemes cases are unusual--in part because the evidence is typically overwhelming- so we will continue watching the developments in this case.
Also, Los Angeles Federal Court Judge Phillip Gutierrez extended his temporary order appointing a receiver over the operations of the PEM Group and Danny Pang, who are accused of operating a several-hundred-million-dollar Ponzi scheme.
But the big news last week was Bernard Madoff's sentencing. On June 29th, U.S. District Court Judge Denny Chin, sitting in Manhattan, sentenced Madoff to 150 years--or, as Judge Chin noted, technically 1,800 months--in federal custody for his crimes. Given that Madoff is 71 years old, a 150-year sentence seems like overkill. But Judge Chin took on that argument directly. Calling Madoff's fraud "staggering," he stated that "the symbolism is important....the message must be sent that Mr. Madoff's crimes were extraordinarily evil, and that this kind of irresponsible manipulation of the system is not merely a bloodless financial crime that takes place just on paper, but that it is instead...one that takes a staggering human toll. The symbolism is important because the message must be sent that in a society governed by the rule of law, Mr. Madoff will get what he deserves, and that he will be punished according to his moral culpability."
Madoff's sentencing hearing was conducted before a packed New York courtroom. The Court heard statements from only nine of Madoff's victims, but Judge Chin stated that he received letters from many other victims. These victim statements appear to have been a significant contributing factor in Judge Chin's decision. In contrast, Judge Chin noted that "in a white collar fraud case such as this, I would expect to see letters from family and friends and colleagues. But not a single letter has been submitted attesting to Mr. Madoff's good deeds or good character or civic or charitable activities."
Victim statements can be very compelling to the sentencing judge. For example, federal judge Margaret Morrow sentenced Reed Slatkin to 14 years in federal prison for his Ponzi scheme, even though the prosecutors argued for a sentence of only 11 1/2 years. At the sentencing hearing, two of Slatkin's victims gave statements about the depth of the loss and the human suffering that the scam caused. Those stories were echoed in the Madoff sentencing hearing; stories of retirements ruined, children's college funds decimated, lifetimes of hard work and savings eliminated because of greed and broken trust.
Nevertheless, some commentators have already begun to decry Madoff's 150-year sentence as bad precedent, pointing out that it creates disincentives for future accused defendants to plead guilty. After all, the argument goes, who would plead guilty when the guilty plea results in the maximum sentence? We think that argument misses the mark. Ponzi schemes and similar frauds take an enormous toll on individual victims specifically and on society generally. The personal and financial havoc that fraudsters like Madoff cause can never be fully remedied. Heavy prison sentences serve not only as retribution for crimes like Madoff's but also serve as deterrents to future would-be Madoffs. Although Ponzi schemes are doomed to fail from their inception (and most fail soon after they start), a number of recent high-profile schemes, including Madoff's, endured for many years and claimed thousands of victims. If heavy sentences can deter future frauds from happening in the first place, we will all be better off.
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