Posts Tagged ‘madoff’

20 Years Sounds About Right for Dreier

Monday, July 13th, 2009


So Marc Dreier was sentenced today to 20 years in prison, plus forfeiture of $746 million and restitution of nearly $388 million (that’s more than a billion dollars, with a “b”). That’s his punishment for his guilty plea to conspiracy, securities fraud, money laundering and wire fraud. The feds had asked for 145 years in prison, and Dreier’s counsel Gerald Shargel had asked for a sentence in the 10-12.5 year range.

We have to say, we’re not offended by this sentence. It’s high enough to be meaningful, but not so high that it will scare away future plea bargains in white collar cases.

It’s important to have a meaningful sentence, if the justice system is to function properly. If justice is not perceived to be done, then law and order lose their authority. For many years, white collar crimes were seen to be treated unjustly, with sentences too low for the harm done. A massive financial fraud could have many more victims than a violent street crime, and can do far more damage to each victim by taking not just their wallet, but the savings representing a lifetime of labor. But until recently, such frauds were punished far more lightly.

In recent years, however, the pendulum began to swing the other way. From Tyco to Enron to MCI to Madoff, we saw white-collar sentences lurch upward and upward. Madoff’s 150-year sentence earlier this summer was just amazing, and not at all proportionate to the harm done. The pendulum had swung too far.

If that was to be the new par for the course, white collar sentencing would be just as unjust as it was in the days of the old slap-on-the-wrist. In addition to the very real problems of perception, in a world where perception equals reality, there is the separate problem of efficiency.

If people think they’re going to get slammed at sentencing whether they plead guilty or not, as Madoff did, then there is no point to pleading guilty. One might as well take one’s chances with a jury and shoot for the off chance of an acquittal. It happens.

(As an aside, there’s an old story of a band of soldiers in medieval China, who had become lost in a swamp en route to a muster. The penalty for being late was death. The penalty for rebellion was death. So they rebelled. And eventually toppled the government. Extreme punishments have had extreme public reactions throughout history. *Cough*drug laws*cough*)

Here, the government wanted 145 years for Dreier, to punish him for putting one over… not on mom and pop investors, but on sophisticated hedge funds who really ought to have done their homework. That would be just five years less than what Madoff got, for essentially doing the same thing. But it would have been a horrible outcome for our criminal justice system if they actually got their way.

Fortunately, Dreier drew Judge Jed Rakoff, who has been vocal in opposing the recent trend towards ever-higher sentences in white collar cases (in addition to his criticism of the severity of the U.S. Sentencing Guidelines). Rakoff is making him give back the money he filched, and forfeit his ill-gotten gains, and serve a prison sentence equal in severity to his crimes.

Nobody can reasonably say Dreier got off light, and nobody should complain that his sentence was unjustly harsh. We think Judge Rakoff nailed this one.

Are White Collar Sentences Too Harsh Now?

Tuesday, June 30th, 2009

dilbert-wcc.pngPrison Farm

When we started law school back in ’93, we felt that white-collar criminals just weren’t punished that harshly in this country. The Dilbert strip above, from about the same time, shows that we were not alone in thinking this. It seems that this was a common perception going at least as far back as our early childhood — click on the audio button above to listen to an early ’70s National Lampoon skit called “Prison Farm.”

Like many, we felt that there was some serious injustice going on here. Socioeconomic elites were getting off lightly, even though they may have victimized far more people, far more seriously, than street-level crooks who were doing hard time. A mugger takes one person’s money, and gets a long sentence in a high-security prison. Meanwhile, a Wall Street scammer wipes out thousands of families’ savings, erases their years of labor and planning, and gets a slap on the wrist. It seemed absurd, like something from Alice in Wonderland.

And we weren’t wrong. As late as the early ’90s, we had guys like Mike Milken serving less than two years, even after the sentencing judge (Kimba Wood) had said such things as “You were willing to commit only crimes that were unlikely to be detected…. When a man of your power in the financial world… repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself… a significant prison term is required.”

The lesser sentences were of course due in no small part to the difficulty of spotting white-collar crime in the first place, and then proving it to a jury. Also, the law itself classified these crimes at the less-serious end of the spectrum. So you had to expect significant plea bargaining in difficult-to-prove cases, and the plea sentences were being discounted from relatively short terms in the first place.

Another important factor was the socioeconomic status of the white-collar defendants. These were not street thugs, they weren’t skeevy bottom-feeders. They were college-educated, productive members of the community, involved in charities and otherwise living “normal” lives. Their crimes weren’t violent, they were almost administrative. Victims weren’t in your face, with visceral injuries and tangible losses; they were anonymous and diffuse, with paper losses of mere money. These middle- and upper-class defendants weren’t people who belonged in prison — their loss of status, their shame, did more to rehabilitate and deter than any time behind bars. Judges felt this, and acted accordingly.

But by the time we graduated law school, this had all started to change. By then, the federal Sentencing Guidelines had gone into effect. The Guidelines had three major effects on federal cases. First, they increased the penalties for white-collar crimes, especially where the dollar amounts were high and there were many victims. Second, judges lost most of their discretion to sentence lightly based on the defendant’s socioeconomic status, and were not all that willing to put such reasoning on the record. Third, the Guidelines took away much of the plea-bargaining leeway, only permitting two or three levels of departure for taking a plea.

The biggest change happened when the tech bubble burst in 2000. In the late ’90s, Americans became investors like never before, with even cops and construction workers becoming day traders at home. Tons of our money went into IRAs, brokerage accounts and 401(k)s. And then the bubble burst, the markets dipped, and the average Joe saw his investments tank. As always happens, this revealed financial frauds that had escaped unnoticed in the up market. The middle class was outraged, and began to demand severe penalties for the fraudsters.

Prosecutors and judges got the message, and the exposed fraudsters got slammed. WorldCom’s Bernie Ebbers got 25 years. Enron’s Jeff Skilling got 24 years and 4 months (Andy Fastow, reported to be the primary Enron fraudster, cooperated and got six years). Adelphia’s John Rigas got 15 years. In state court, Tyco’s Dennis Kozlowski got 8-1/3 to 25 years.

This pattern repeated itself in the recent economic downturn. After several boom years, a credit crunch and market dip exposed many white-collar offenses (most of which we are told are still in the pre-indictment phase). Voters had lost a lot, and their voices were heard.

So now we get yesterday’s 150-year sentence of Bernie Madoff. As we’ve explained before, we’ve avoided writing about the Madoff case, because everyone else is already talking about it, and we don’t feel like we have anything new to add.

But this 150-year sentence… we’re going to go against the grain here and wonder out loud if perhaps it’s too harsh.

* * * * *

Whoa. How can we say that, when we just got done saying how unjust it seemed when white-collar types were getting off lightly? Isn’t this exactly what we wanted?

No, it isn’t. We wanted the punishment to fit the crime, and to fit the policies underlying criminal punishment. This sentence doesn’t do that.

For one thing, Madoff took a plea to avoid trial. And yet he still got the worst sentence that he could have gotten had a jury convicted him. What was the point of taking a plea? This sends a strong message to white-collar defendants now: you might as well just go to trial, because you’re going to get the same sentence if you lose — and juries being what they are, you might just win. The system could see a lot fewer pleas — pleas it relies on to keep working.

For another thing, Madoff got a bunch of consecutive sentences. Normally, even after trial, they’d mostly run concurrently. He’d have gotten about 30 years — still a life sentence for a 71-year-old guy. Judge Chin said he did so for “symbolic” reasons, to make the victims feel better. But is that a valid purpose of sentencing?

Of course it isn’t. The purpose of sentencing is not to make victims feel better, or give them closure, or anything like that. The criminal justice system does not serve the function of making victims whole. That’s the job of the civil courts. A criminal court can order restitution as a condition of sentencing, but that’s about it. The purpose of sentencing is not reparation, but punishment. Punishment is supposed to deter future crimes, retaliate against the offender, rehabilitate the offender so he doesn’t do it again, or remove a threat to society.

But maybe Judge Chin is on to something here. Perception is important. Few of the purposes of punishment work unless there is some perception. Deterrence doesn’t work, unless people get the impression that crimes are probably going to be punished, and that they will probably be punished harshly enough to make them not worth your while. (This raises an interesting thought experiment — would the criminal justice system work just as well if we could give the public the impression that crimes are punished, without actually incurring the expense and hassle of, you know, punishing them? Discuss.)

Another problem we have with this sentence is that his scam wasn’t directed at Joe Retail out there. It was a secretive investment fund that did not disclose what it was doing, as it would have had to if it had been sold to the average person. It could be secretive because it was sold to sophisticated investors. These sophisticated investors saw an unusually high and steady rate of return, and instead of investigating to see what was going on, simply told Madoff to cut them in.

Sophisticated investors have a duty to check these things out. Are we blaming the victims here? Yeah, a little. They had the size or experience to know that something that sounds too good to be true probably isn’t. And yet they shoved their money into the fund anyway. And for those who shoved all of their money into the fund, ignoring basic investment principles of diversification, they were victimizing themselves just as much as if they’d invested in And for those who invested beyond their discretionary income, but actually sent Madoff the money they needed to live on, that’s the epitome of dumb. These weren’t blue-collar workers, these were investors with enough dough to get in the game, and enough savvy to have known better. The law just doesn’t need to afford them the same protections as ordinary folks.

So the law doesn’t need to impose punishments harsher than those imposed on victimizers of ordinary folks.

What is needed is parity. Yes, white-collar sentences should reflect the seriousness of the harm done, just as sentences for violent crimes and street crimes need to be proportionate to the offense. A white-collar offense that causes as much harm as a back-alley mugging probably deserves a similar punishment, all else being equal. Maybe a little less, actually, as there is more likelihood of deterrence or rehabilitation. White-collar crimes are usually calculated, they aren’t crimes of the moment, and offenders usually have the smarts to take punishment into account. And white-collar offenders aren’t as likely to re-offend once they’ve gone through the system. So sure, maybe they don’t need quite as much punishment. But it ought to be about the same.

Giving 150 years here, though, is not at all proportionate. Murderers don’t get that much. Kidnappers don’t get that much. And taking someone’s life or liberty is just not the same as taking someone’s property. White-collar victims only lose money. It’s only money. It’s a big deal, but it should not be punished more severely than crimes that are obviously more severe.

The pendulum has swung too far.