Tuesday, December 23, 2008

SEC being sued for losses in Madoff case

Finally, someone is taking on the SEC, despite the high hurdles for relief:

A New York woman who lost nearly $2 million investing with Bernard Madoff has filed a claim against the Securities and Exchange Commission alleging the agency was negligent in failing to detect an alleged decades-long fraud.

The administrative claim for relief was filed with the SEC on Monday and is believed to be the first attempt by an investor to recover lost money from regulators. Phyllis Molchatsky, a 61-year-old retiree from Valley Cottage, N.Y., is seeking $1.7 million in damages from the agency.

The SEC's "statutory purpose is to protect the public interest. We feel they fell down on the job in this instance," said Howard Elisofon, the lawyer representing Ms. Molchatsky and a former SEC enforcement attorney.

The SEC declined to comment.

An administrative claim for relief is the first step in filing a lawsuit against the government. If the SEC doesn't negotiate or respond to the claim within six months, the investor can file a lawsuit in federal court.

The doctrine of sovereign immunity limits the kind of cases in which a U.S. citizen can sue the government for damages.

"It's an uphill battle to succeed with this," said Gregory Sisk, a law professor at the University of St. Thomas School of Law in Minneapolis. He said courts are reluctant to find that government agencies should act as insurance against any losses.

"The government undoubtedly would argue that if liability is imposed here it creates a disincentive for the government to do any regulation in the future," he said.

Last week, SEC Chairman Christopher Cox admitted that the SEC's examination staff had missed red flags over the years. He said the agency had credible and specific allegations about Mr. Madoff's alleged fraud going back nine years and added he was "gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations."

An SEC enforcement investigation in 2006, prompted by complaints from a former competitor to Mr. Madoff, found that Mr. Madoff had lied to SEC examiners during a routine review of his investment advisory business. The SEC closed the investigation without any public punishment and said it found no fraud. Previous SEC examinations of the Madoff trading business also didn't detect any investment fraud.

According to Ms. Molchatsky's claim, the SEC's "failure enabled Madoff to perpetuate and expand the scheme, drawing in more and more innocent investors."


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