I don't see what benefit sending this guy to jail provides other than a simple avenue for enacting vengeance on someone who behaved poorly. Worst case, he should have to repay all of his debts and money he swindled. He'll take whatever lessons from his mistakes that he may.
I've known people like this, luckily that didn't get backed, and it can get incredibly messy. Things like maxing credit cards, identity changes, disappearing to foreign countries. It's better for everyone in the long run that this gets sorted properly as he'll just emerge from prison desperate to get back and will do something worse.
On the face of it, it sounds like a much more blatant fraud than Dennis Kozlowski, the former Tyco CEO who served about 8 years in prison, or Bernie Ebbers (what is it with guys named "Bernie"?), who is still serving a 25 year sentence for defrauding WorldCom investors.
People stealing money and behaving erratically when it collapses around them isn't evidence of mental illness. Maybe he's nuttier than a squirrel hole, but right now, I don't see any reason to assume he's not just a criminal.
One main difference is Madoff wasn't alone. He needed the help of a group in on the conspiracy over a long period of time. Combined with the overall magnitude and the regulatory failures I'm much more persuaded Madoff had criminal intent. This case sounds a lot like he was lying to absolutely everyone all the time (and especially to those closest to him), not that he was trying to orchestrate some group conspiracy to fleece outsiders of their cash. The whole story isn't out yet, so maybe there is more, but it sounds to me like he's one of those people that genuinely believes that if you act rich you become it.
There are a lot more interesting things to come with this case, this is only the beginning. His doctor isn't the only one he has scammed.