Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 30 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. She also handles SEC and CFTC whistleblower claims. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Monday, May 20, 2013

Ponzi Scheme Sentences: Maybe 150 Years Isn’t So Bad

Posted by Kathy Bazoian Phelps

   On June 29, 2009, Bernard Madoff received a prison sentence of 150 years for his Ponzi scheme that resulted in about $17.3 billion in losses. That type of prison sentence is effectively a life sentence and appears to accomplish two of the most important objectives of the U.S. criminal justice system - punishment and deterrence. We have seen some stiff prison sentences come out of Ponzi scheme operations over the past several years, and the general trend seems to be some correlation between the length of the sentence and the amount of losses suffered by the defrauded victims.

Long Prison Sentences
   In addition to Madoff, recently we have seen some other long Ponzi scheme prison sentences: Allen Stanford received 110 years for $8 billion in losses. Thomas Petters received 50 years for $3.65 billion of losses. Scott Rothstein received 50 years for $1.2 billion in losses. Marc Dreier received 20 years for $380 million in losses. And the list goes on and on.

   There are, of course, a few aberrations of large sentences for disproportionately small losses, like Karen P. Bowie of Texas, who received 80 years for $4.7 million in losses. The unevenness in the length of prison sentences may cause some to complain about the unfairness of the sentencing process. And others may feel dissatisfied when they hear that inmates such as Madoff seem happier in prison than he was running his scheme or that others are playing croquet in prison.

The Death Penalty?
   Let’s compare this level of discontent with the United States criminal justice system with what goes on in other parts of the world. This week, a Chinese court just sentenced a Chinese woman, Lin Haiyan, 39, to the death penalty for running a $70 million Ponzi scheme. Given China’s history, death will most likely be by firing squad. Yikes!

   So what did Lin Haiyan do to merit the death penalty? She promised friends, family, former classmates and others high returns with little risk. She appears to have started her business as a legitimate investment program, but she kept on soliciting new investments even after her investments in futures and speculative stocks suffered losses and then made payments to earlier investors in a Ponzi scheme-like fashion.

   China permits the imposition of the death penalty for about 55 types of crimes, including some economic crimes. China does not publicly report execution figures. However, it has been estimated that 4,000 prisoners were executed in China in 2011 and that there are a few thousand executions each year.

   However, whether Haiyan will actually be executed remains to be seen. The death penalty sentence of Wu Ying, another Chinese woman found guilty of running a Ponzi scheme, was commuted to a life sentence in 2012. Wu Ying had turned a nail salon into a $60 million Ponzi scheme, but an outcry of opposition may have led to the change in her sentence.

   The frauds that the Madoffs and Haiyans of the world commit make paupers of their victims, who can number in the tens or hundreds or thousands. The victims are then left to burden their friends and family, or society, who thus also become victims. And there is also the emotional trauma and wreckage left behind.

   All of this raises many questions. So far, our response in the U.S. has been to impose long prison sentences (which often amount to life sentences), along with virtually complete asset forfeiture. The death penalty is (thankfully) off the table because that can only be imposed for first degree murder and, possibly, certain crimes against the state. Kennedy v. Louisiana, 554 U.S. 407 (2008).

   Have long sentences and forfeiture worked as a deterrent? If not, what else can we do to deter would-be Madoffs and Haiyans from committing fraud and victimizing so many of us? I am certainly not advocating the death penalty, but do question the effectiveness of what we have now since Ponzi schemes just seem to keep proliferating. How should we punish perpetrators when deterrence fails and their victims demand justice? What do you think?

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