Investor tries to hold SEC liable for Madoff losses

NEW YORK Tue Dec 23, 2008 3:27pm EST

The offices of Bernard Madoff, who confessed to defrauding investors of 50 billion dollars, are seen on 885 Third Avenue in New York December 15, 2008. An investor who lost nearly $2 million investing with Bernard Madoff has filed a claim against the U.S. Securities and Exchange Commission (SEC) alleging the agency was negligent in failing to detect an alleged decades-long fraud, the Wall Street Journal said. REUTERS/Chip East

The offices of Bernard Madoff, who confessed to defrauding investors of 50 billion dollars, are seen on 885 Third Avenue in New York December 15, 2008. An investor who lost nearly $2 million investing with Bernard Madoff has filed a claim against the U.S. Securities and Exchange Commission (SEC) alleging the agency was negligent in failing to detect an alleged decades-long fraud, the Wall Street Journal said.

Credit: Reuters/Chip East

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NEW YORK (Reuters) - A woman who says she gave accused swindler Bernard Madoff $2 million to manage is trying to hold U.S. regulators responsible for her losses, a case that shows how widely investors are casting their net in trying to find potential defendants in the scandal.

The claim by retiree Phyllis Molchatsky is believed to be the first attempt by an investor to recover investment losses from the U.S. Securities and Exchange Commission. Since Madoff was arrested, other investors have sued hedge funds they say improperly entrusted their money to him.

Molchatsky's lawyer said on Tuesday that the SEC failed to protect investors from Madoff, who has been charged with securities fraud by federal prosecutors but has yet to formally respond to the fraud accusations in court. The commission has also brought a civil fraud case against him.

"We believe in this particular instance that the SEC has fallen down on the job," said attorney Howard Elisofon, a former SEC lawyer who represents Molchatsky. "They should be held responsible for these catastrophic losses."

The SEC declined to comment.

The SEC has come under fire for not uncovering the Madoff scandal until the money manager's sons went to authorities and told them he had confessed to the fraud. The agency has been accused of missing a number of red flags in the past about the way Madoff operated his investment business.

A U.S. House of Representatives panel plans to convene an inquiry in January into the failure of regulators in the case.

Molchatsky brought an administrative claim on Monday against the commission, contending the agency was negligent in failing to detect the alleged $50 billion fraud at Madoff's money management operation.

Molchatsky, 61, of New City, New York, is seeking $1.7 million in damages from the agency.

She could face an uphill battle because the doctrine of sovereign immunity historically has limited the types of cases that could be brought against the SEC and other federal agencies.

"It would be a reversal of long-standing precedent for there to be a recovery," said Evan Stewart, a partner at law firm Zuckerman Spaeder in New York and an expert in securities and regulatory law.

He said that even if the case survived a sovereign immunity challenge by the government and was allowed to move forward, Molchatsky would then have to prove a direct link between her money losses and the actions of the agency.

An administrative claim is an investor's first step in trying to get monetary damages from the SEC. Elisofon said that the commission has six months to act on Molchatsky's claim. After that, he said, she could bring a lawsuit in federal court if the matter is not resolved.

Elisofon said other Madoff investors who have sought legal advice from his law firm, Herrick Feinstein in New York, may want to pursue similar legal avenues.

"We anticipate a bitter legal battle over this," he said.

(Reporting by Martha Graybow; editing by Jeffrey Benkoe, Bernard Orr)

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