David de Ferrars
15 June 2012
M&A Weekly Update: fraud, bribery and money laundering sentencing guidelines; limited liability partners as workers; and more
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25 October 2013
UK Ponzi fraudsters should count their lucky stars that they aren’t in the US, says David de Ferrars
International playboy Allen Stanford was sentenced yesterday to 110 years in a US jail for his role in a $7bn (£4.5bn) alleged Ponzi scheme, one of the biggest frauds in history. If he is patient, he’ll be a free man at the tender age of 172.
His sentence is 120 years less than the Department of Justice’s recommendation of a statutory maximum of 230 years. Stanford’s defence lawyers pleaded for a sentence of ’time served’ because of the three years he spent in prison waiting for his trial.
Prosecutors recommended 230 years, the maximum according to sentencing guidelines for his crimes of conspiracy, wire and mail fraud, obstruction and money laundering. Stanford also maintained that his operations were not, in fact, a Ponzi scheme at all, given he was actually investing the money in real-estate, private equity, foreign and domestic investment companies and airlines. That left a wide gap of time and beliefs between the two sides, and the court came down somewhere in the middle.
Although the victims won’t get all of their money back, somehow I think they will be able to take at least some comfort from this gruelling sentence.
This news comes hot on the heels of the sentencing of Kautilya Nandan Pruthi here in the UK. Pruthi was recently convicted for duping celebrities, sports stars and hundreds of other victims out of £115m ($178m) in what may well be Britain’s largest and longest-running Ponzi investment scam to date.
Running a Ponzi scheme is also what Bernard Madoff was convicted of in the US to the tune of a staggering $65bn - he is currently in the third year of his 150-year sentence.
On a smaller scale and more comparable to that of Pruthi in the UK, Keith Franklin Simmons was sentenced in the US on 23 May to 50 years in prison for four counts of fraud in connection with a $40m (£25.7m) Ponzi scheme. Following his time inside, he will be subject to three years under court supervision and an order to the tune of more than $35m in restitution. He swindled less than a third of the amount that Pruthi did.
Stanford, Madoff, Simmons and Pruthi all spent years ’robbing from Peter to pay Paul’, managing to lure in hundreds of investors and resulting in some losing their homes, pensions and life savings. However, while Stanford, Madoff and Simmons are destined to spend the rest of their lives in prison in the US, Pruthi got just 14.5 years in the UK. This pales in comparison, particularly when he might be released on licence after just half of that term.
So why are the sentences for fraud handed down in the US so much longer than those in the UK?
The stark difference in sentencing is three-fold. First, in the US the sentencing guidelines for fraud are much harsher than here in the UK as historically white collar fraud is seen as a victimless crime.
Secondly, American courts tend to accumulate offences so that many counts or incidents of fraud stack up to produce a very long sentence. The UK does not do this to the same extent. Unlike here, those convicted of multiple offences in the US are more likely to receive consecutive rather than concurrent terms. Stanford’s 13 counts of fraud could have accumulated him up to 230 years in prison. The accumulation of Pruthi’s seven counts of fraud, by reference to the sentencing guidelines in the UK, produced just 14.5 years. Had his sentence been handed down in consecutive terms, it would have been much greater. He can count himself lucky he was not tried in the US.
In addition, the US judicial system views imprisonment as a punitive measure, as opposed to an opportunity for rehabilitation. Judge Denny Chin, who ordered that Madoff be locked up until the 22nd century, explained later that his intention had been to make clear that the fraudster’s conduct had been “staggering” and “extraordinarily evil” and that he should do everything he “possibly could to punish him”. The judge in Simmons’ case said “a 50-year sentence is an enormous sentence but there seems to be no other sentence […] that would accomplish justice in this case.” Similarly, the judge handing down Stanford’s sentence yesterday called Stanford’s actions “egregious criminal frauds” during the hearing and agreed with prosecutors that he was a “ruthless predator” who stole from investors “simply to satisfy his own greed and vanity” and had treated his victims like “roadkill”.
Why are so many schemes being revealed now?
Ponzi schemes, named after the 1920s fraudster Charles Ponzi, involve taking the money from one investor to pay another and, like a house of cards, the scheme is set to eventually collapse.
As we are currently witnessing, Ponzi schemes like other forms of white collar crime, are typically exposed in an economic downturn when investors are forced, for cashflow reasons, to liquidate their investments. This withdrawal of funds causes a cash run that eventually exhausts the scheme and exposes the fraudulent network.
It will be interesting to see if the trend for revealing these frauds continues, and whether the number of high-profile convictions in the last couple of years will go some way in preventing potential Ponzi perpetrators from considering concocting such a scheme in the first place, or at least in the US.
David de Ferrars is a partner in Taylor Wessing’s commercial disputes group