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November 30, 2012

Fraud sentencing of National Lampoon CEO no laughing matter (though recommended sentence are funny)

A notable white-collar sentencing took place in federal court in Indiana today, as reported in this AP piece headlined "Ex-National Lampoon CEO sentenced to 50 years in jail."  Here are the details:

A financier and former chief executive of humor magazine National Lampoon convicted of swindling investors out of about $200 million was sentenced Friday to 50 years in prison.

U.S. District Judge Jane Magnus-Stinson said the case against Timothy Durham was characterized by "deceit, greed and arrogance" and that Durham had violated the trust of thousands of small investors from the American Heartland.  "We drive Chevys and Buicks and Ford, not Ducatis. That's how most of us roll," Magnus-Stinson said. "When they're defrauded, it is the most serious offense because it undermines the fabric of this country."...

Prosecutors have said [Durham and his codefendants] stripped Akron, Ohio-based Fair Finance of its assets and used the money to buy mansions, classic cars and other luxury items and to keep another of Durham's company afloat. The men were convicted of operating an elaborate Ponzi scheme to hide the company's depleted condition from regulators and investors, many of whom were elderly.

Durham's attorney, John Tompkins, argued at trial that Durham and the others were caught off-guard by the economic crisis of 2008 and bewildered when regulators placed them under more strict scrutiny and investors made a run on the company. Attorneys for all three men had asked the judge for lighter sentences than those recommended. Tompkins sought a total of five years for Durham β€” three years in prison and two years of home detention.

Prosecutors had wanted 225 years for Durham. Magnus-Stinson said she couldn't sentence him to that much because that number would be as "puffed up" as statements that he held $280 million in assets. But she clearly showed her displeasure with Durham, telling him he had been "raised better" and noting that though he testified that he "felt terribly" for the victims, he had shown no sincere remorse.

Barbara Lukacik, 74, an Ohio nun who said she lost $125,000 in the Fair Finance collapse, said she had forgiven Durham and the others but testified before the sentencing that a lengthy sentence was warranted. "If you receive a short sentence β€” a slap on the wrist, so to say β€” I do not think it will be enough time for your heart and your conscience to realize your sin and your greed," she said.

There is nothing funny about lives ruined by a massive fraud and by a decision to impose a 50-year prison sentence on a white-collar scoundral. But this story struck me as especially blogworthy and somewhat laughable on a Friday afternoon because of the seemingly crazy (though arguably not foolish) sentencing recommendations coming from the parties.  I know I would never in good conscious be able to seriously advocate for a sentence of 225 years in prison for anyone, and I probably also could not urge only 3 years in prison for a massive Ponzi schemer.  At both extremes, the recommendations coming from the parties here seem more fitting for the National Lampoon's pages than federal court filings.

November 30, 2012 at 05:16 PM | Permalink

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So Doug, what sentences would you have proffered if you were the prosecutor and defense attorney respectively, if you find those proposed laughable? Law profs have the luxury of critiquing both sides, but if you were an advocate instead of a pundit, what would you have suggested.

Posted by: Gritsforbreakfast | Nov 30, 2012 6:04:28 PM

Rajat Gupta did not simply request but indeed received a sentence of only TWO years for the most egregious act of insider tippig on record. Plus he doesn't need to start the sentence until after holidays with his family. Is that funny? To me, it is frustrating and very sad.

Meanwhile, on the other side of things, people need to realize that prosecutors can label as a "ponzi scheme" pretty much any situation where (1) the financier is taking significant ongoing compensation, and (2)there's also an ongoing stream of investment from new investors.

For example, if Goldman Sachs jad gone bankrupt, one could have argued that Goldman's ongoing bond offerings (or sale of preferred stock to Warren Buffett) coupled with the ongoing generous compensation being paid to Goldman executives such as Lloyd Blankfein together meant that Goldman was being operated as a ponzi scheme. Prosecutors could have argue that the Goldman executives were just raising more and more money into Goldman to "prop up" their scheme and fund their lavish lifestyles.

And the prosecutors would be right to at least some extent, but not to the same extent as in a situation like Madoff.

Having said all of that, I agree that the disparate sentencing recommendations were notable and endemic of a situation in our society and justice system where confusion and mixed message rein when it comes to white collar crime.

After all, as Madoff himself said in a jailhouse interview, the Fed itself has been operating a ponzi scheme since 2008. And again the funny, sad and scary part is that this is pretty much correct. How many years is the proper sentence for a $2 trillion ponzi scheme?

Posted by: Paul Mitford | Nov 30, 2012 10:44:41 PM

Grits, based on the sketchy facts here and Durham's age of 50, I think any prosecution recommendation over 50 years is crazy, and any defense recommendation under 5 years is unrealistic following a trial conviction.

Meanwhile, Paul, Gupta asked for community service, based in part on the fact he did not make a penny based on his tipping.

Posted by: Doug B. | Nov 30, 2012 11:35:51 PM

Assume a human life to have a value of $6 million, based on the market method of calculation. That is at the high end in my opinion. But let's accept it.

Anyone whose fraud exceeds that amount has assassinated an economic life. There fore the death penalty should be mandatory. The sentence should be mandatory for the following reasons.

1) as a factor in the calculated risk assessment by criminals;

2) uniformity of sentencing, and therefore fairness in sentencing requires it;

3) as leverage in plea bargaining, at the discretion of the prosecutor;

4) to draw a bright line, which if exceeded will forfeit one's life.

Posted by: Supremacy Claus | Dec 1, 2012 12:20:16 AM

Doug B- Minor correction: Gupta was indeed de facto a partner of Rajaratnaram. He was touted by Gupta as a being a director of Rajaratnam's funds for fundraising purposes, and Gupta himself raised money for the funds. Gupta himself was also an earlier $10 million investor in one of the funds.

So to think there was no quid pro quo invoved in Gupta's repeated tips to Rajaratnaram would be naive. But yes, obviously neither Rajaratnaram nor Gupta would be stupid enough to have a direct bribe occur after each successful tip. Instead the bribe was probably to occur several years later, and probably the details of the specific mechanics and amounts of the bribe were never even discussed.

Having said that, the amounts being made off of the tips were so astronomical that obviously the quid pro quo would have been over ten million. "Thanks my friend. Believe me you will have a comfortable retirement. Ha ha ha." Maybe a $200k/month consulting contract for Gupta or one of his children at some point. Something along those lines. (Other alternatives are funding an offshore account that Gupta controls and can access but can't be traced back to his ownership. Or then there are bearer bonds.)

I have the fortune or misfortune of working on these sorts of cases, and that is how such things are done these days amongst these types.

Posted by: Paul Mitford | Dec 1, 2012 2:17:43 AM

And Corzine is a free man. IOKIYAAD.

Posted by: federalist | Dec 1, 2012 2:25:53 AM

If what you speculate was true, Paul, the feds could have and should have proved up these facts at sentencing and I suspect Rakoff would have (and certainly could have) given him longer than 2 years in prison.

Posted by: Doug B. | Dec 1, 2012 10:22:07 AM

Doug, that is in fact what they proved up in the trial proper and in sentencing. The prosecution could have put it more emphatically, in my view, but those are the facts.

I am sympathetic to your desire to believe in the system, but Judge Rakoff's sentence of Gupta was simply a travesty. Moreover, his implicit rationale for the sentence -- that Gupta because of his social position and privelege would in a sense "feel the pain" of incarceration more deeply than a normal person -- was deeply troubling for obvious reasons.

In addition, the way that his sentencing decision was plainly influenced by his receipt of 400 letters from fellow plutocrats such as Bill Gates and Bill Clinton was an outrage.

And keep in mind that this was a defendant who has never shown any remorse or admitted even the slightest culpability or responsibility. Apparently the trial tax is waived for plutocrats.

This was a man who got out of a Goldman Sachs board meeting that approved a $5 billion preferred stock purchase by Warren Buffett and immediately called Rajaratnaram minutes before the close of the stock market so that he could buy a massive position in Goldman shares before the close. Are you kidding me? As I said, this was the most egregious act of insider tipping in history.

Two years. Black people get that much time for looking at the judge wrong.

Posted by: Paul Mitford | Dec 1, 2012 4:23:34 PM

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