Wednesday, April 25, 2012

Importance Of The Mandatory Victims Restitution Act For Victims Of Ponzi Schemes

If you’ve been the victim of securities fraud, including a Ponzi scheme, your first thought may be to call an investment fraud attorney and sue them in a private right of action. While this may be a valid course of action, the case of United States v. Marino, decided on August 18, 2011 by the Second Circuit illustrates why getting the federal government involved to prosecute the defendants criminally may also be something to put on your wish list.

Mario Massillamany, securities fraud attorney
The Marino case involved a large Ponzi scheme called the Bayou Fund, which was run by three individuals, including a CPA named Daniel Marino. Daniel brought his brother, Matthew, who was the defendant in this particular case, into the scheme too, having him help set up and run the fake independent accounting firm, called Richmond-Fairfield Associates, the brothers set up to pass their fake blessing onto all the trades and accounts of the Ponzi scheme. While the defendant was not involved in the actual trades which lost investors money, he was actively involved in concealing the fraudulent nature of the so-called independent accounting firm, and of Bayou. In addition, he also played a substantial role in concealing Bayou’s losses from its investors. In fact, he often went by the pseudonym Mr. Richmond, the fictitious principal of the accounting firm, to give the appearance of the accounting firm’s independence.

Eventually the Ponzi scheme fell in around the ears of the four people with knowledge of it, and all four were arrested. Defendant Marino plead guilty to the crime of misprision of a felony for failing to report the Ponzi scheme and being actively involved in the concealment of the fraud. As part of that plea he was sentenced to 21 months in prison, and the district court issued a restitution order against him, ordering him to pay $60 million, pursuant to the Mandatory Victims Restitution Act (MVRA), 18 U.S.C. 3663A.

Marino appealed the restitution order, arguing it was too large and that he did not proximately cause the victims’ losses because of his less prominent role in the scheme. The Second Circuit affirmed the restitution amount, and took the opportunity to explain more about the MVRA at the same time. The MVRA requires sentencing courts to order restitution for certain crimes, including any offense committed by fraud and deceit, with the goal that victims can be restored, to the extent possible, back to the position they occupied before sustaining the injury. There is a requirement in the statute that the victim’s harm must be directly and proximately caused by the defendant’s criminal activity. This causation requirement does not appear to be as strenuous as the element of loss causation in private action securities fraud cases however, based on the reasoning of the Second Circuit in the Marino case.

Instead, in the Marino case it was enough that the evidence showed that Marino not only failed to disclose the fraud, but also took active steps to conceal it. The court noted that this concealment was critical to bringing in the approximately $60 million in new investments into the Bayou fund during the time in question, and therefore affirmed the $60 million dollar restitution order from the district court.

Victims of Ponzi schemes may need to try many different methods in an attempt to get back the money they invested. Gaining some money back directly from the perpetrators through an order of restitution is potentially another tool in victims’ tool belts for bringing back in what they lost, and should not be discounted as a possible viable strategy. This is especially true in gaining restitution from those involved as secondary and supporting players in the fraudulent scheme since the causation elements are relaxed in this criminal setting, after conviction.

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