SEC Rejects Madoff Customer Damage Claim for $1.7 Million; Lawsuit Likely

By | June 24, 2009

The U.S. Securities and Exchange Commission has rejected an attempt by a Bernard Madoff customer to get the agency to pay $1.7 million she lost in the fraud, setting the stage for a federal lawsuit, the investor’s lawyer said Tuesday.

The legal action, believed to be the first by an investor to try to hold the agency responsible for the massive fraud, has been closely watched by other Madoff victims who blame the SEC for failing to detect the scam despite repeated warning signs.

While some Madoff investors have sued the jailed swindler himself or feeder funds that gave him client money to oversee, investor Phyllis Molchatsky is trying to obtain damages from the U.S. government.

“We can confirm that the SEC has rejected the administrative claim for relief that we filed six months ago,” said her lawyer Howard Elisofon, a partner at law firm Herrick Feinstein LLP.

“This rejection gives us standing to file a lawsuit in U.S. district court on behalf of Ms. Molchatsky, and it starts a six-month clock for us to do so,” he said.

Molchatsky, 62, of New City, New York, brought an administrative claim against the commission soon after Madoff was arrested in December. She contends the commission was negligent in failing to uncover Madoff’s $65 billion Ponzi scheme.

Legal experts have said Molchatsky’s case is novel because the doctrine of sovereign immunity historically has limited the type of cases that could be brought against the SEC and other federal agencies.

After she filed the administrative claim, the SEC had six months to settle it, reject it or fail to respond, Elisofon said. He said if such cases are rejected or there is no response, investors then can sue for damages in federal court.

“We had anticipated the SEC’s either rejecting or ignoring our claim, and nothing here has changed our view that this will be a difficult and uphill legal battle,” said Elisofon, a former SEC lawyer.

An SEC spokesman declined to comment on the case.

Elisofon said he expects soon to file similar administrative actions against the SEC on behalf of other Madoff victims. He said he will discuss the matter further at a news conference in New York on Wednesday.

Madoff investors are looking wherever they can to try to recoup money.

Some are eligible for payments of up to $500,000 by an investor protection group. A court-appointed trustee is also trying to gather all assets linked to Madoff’s business that could be used to compensate investors, but only about $1.2 billion has been located so far — a fraction of client losses.

Madoff pleaded guilty to criminal charges in March. He is to be sentenced on Monday and faces possible life in prison.

The SEC’s inspector general is investigating the agency’s handling of the Madoff case, and recently met with the swindler to discuss the fraud, according to court papers filed by Madoff’s defense lawyer Tuesday.

(Editing by Bernard Orr and Steve Orlofsky)

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