Two victims of Bernard Madoff’s Ponzi scheme have sued the Securities and Exchange Commission, alleging that the agency was negligent in performing its duties to protect investors. The plaintiffs argue that the SEC should have “done its job” and uncovered the scheme. They claim that the SEC’s failure to detect the fraud led directly to losses by the plaintiffs, Phyllis Molchtasky and Stephen Schneider. Ms. Molchtasky had previously filed an administrative claim against the SEC in December of 2008. The Commission refused to negotiate a settlement, which resulted in the present suit. Ms. Molchtasky and Dr. Schneider lost a combined $2.45 million in the scheme.
The plaintiffs draw a distinction between the actions of Madoff, the direct cause of the loss, and the negligence of the Commission in performing its duties. As evidence of the negligence, the suit alleges that the SEC received many tips over several years about the Madoff scheme but failed to take appropriate action.The plaintiffs rely, in part, on the SEC inspector general’s August report criticizing the agency’s handling of the Madoff scheme. This report cited a multitude of errors by the SEC that led to failed investigation after failed investigation, dating back to 1992.
The lawsuit might encounter a significant legal barrier under the doctrine of sovereign immunity. Sovereign immunity protects the government and its agencies from civil lawsuits. The victims claim that this privilege does not extend to the “serial, gross negligence” perpetrated by the SEC.
If successful, this argument would undoubtedly pave the way for more investors to seek restitution from the SEC for Madoff’s crimes and other undetected abuses.