2 Madoff Investors Sue SEC, Claim Negligence

mykevermin

mykevermin

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http://online.wsj.com/article/SB125553847707385223.html

Two New York investors are suing the U.S. government, alleging the federal agency responsible for overseeing Bernard Madoff's business failed in its duty to protect investors.

The investors, who filed a lawsuit in federal court in Manhattan, alleged the Securities and Exchange Commission was negligent for failing to detect the decades-long fraud by Mr. Madoff despite receiving many tips that something was amiss.

The investors, Phyllis Molchatsky, a retired office worker, and Steven Schneider, a doctor, invested with Mr. Madoff years ago. After the fraud was discovered in December 2008, Ms. Molchatsky lost $1.7 million from her retirement savings while Dr. Schneider lost $750,000, according to the lawsuit.

"Bernard Madoff is obviously the chief culprit in the scheme that imploded so shockingly in December 2008. However, the SEC must be held accountable and responsible for its own negligent actions and inactions that directly and proximately caused the loss of billions of investor funds," the lawsuit said.

"Based on our initial understanding of the matter, we believe there is no merit to the complaint," said SEC spokesman John Heine.

The lawsuit follows an administrative claim Ms. Molchatsky filed against the SEC in December. The SEC didn't negotiate to settle the administrative claim, opening the door for a lawsuit.

The doctrine of sovereign immunity limits the kind of cases in which a U.S. citizen can sue the government for damages. In an attempt to get around those limits, the lawsuit cites a report by the SEC's inspector general, who found the agency's staff didn't follow up on tips and didn't verify basic data on trades that Mr. Madoff purportedly made.

The report found no evidence that the SEC staff had been influenced by Mr. Madoff or any of his family members.
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Now the investors are correct that some of the whistleblowing attempts were ignored by the SEC; Harry Markopolos (the dude what was the first to say "Madoff's either front-running or a ponzi scheme" back in 1999) made no fewer than 6 attempts to get the SEC to investigate. He provided them with documentary evidence that gift-wrapped the whole scandal. The summarily ignored it.

Here's the real shitkicker, and how I think the SEC will get the suit dropped:
In the middle part of this decade, though (2005-2006ish), the SEC *did* investigate Madoff, and found everything was on the level. (context for a moment: Madoff's guilty plea had him admitting Madoff Investment Firm, LLC was a ponzi scheme since the 1991 recession).

So they did investigate, and did so very poorly and demonstrating their ineptitude. Their negligence, in other words. So what I fear will happen to these two investors is that their negligence suit will be thrown out because the SEC did investigate Madoff. They just did so negligently.

Maybe there's another layer of complexity here for you tunnel-vision federal spending folks. Say the investors win and receive huge payouts. Well, them's straight federal dollars, son. Leaders (government) of English societies during the middle ages would compensate victims of crimes if the culprit couldn't be caught. The government saw it as their responsibility to protect individuals from crime, and it was thus their responsibility to right what was wronged if possible.

That's still sort of the case today - at least gov't protection in the form of first responders. Attitudes towards government compensating for individual losses due to crime are mostly gone, I think. So how might that impact your feelings towards those who sue the SEC for funds, claiming their financial lossess are the SEC's negligent responsibility?
 
All good points.

IMO the Wall Street today is akin to the Chicago mafia ala 1920s. It's moral quicksand, a reform quagmire, there's just too much damn corruption. Only difference is that the American govt never bailed out Al Capone.
 
I don't see how a government where its police can argue they are not there to protect or serve will allow private citizens to sue it for poor performance.

Without a lot of bribes to the right judge, the victims aren't getting anything.

If they would succeed, what would be next? Should the inbred ratings companies be sued? Should businesses be sued when their stock naturally loses value? Should I get to sue the government when Social Security and Medicare are so gutted that I receive no return from it?

Somebody made a mistake by investing with Madoff and they want a bailout instead of taking it on the chin.
 
[quote name='fatherofcaitlyn']
If they would succeed, what would be next? Should the inbred ratings companies be sued? Should businesses be sued when their stock naturally loses value? Should I get to sue the government when Social Security and Medicare are so gutted that I receive no return from it?[/QUOTE]

Yes, No, Yes.
 
[quote name='mykevermin']^ mens rea is the difference, my friend.[/QUOTE]

I guess one out of four.

Police can be let off the hook because "protect and serve" isn't spraypainted on their cars anymore.

Businesses can be let off the hook because no one business can cause 20% unemployment in our country no matter how big a bonus they give out during bankruptcy.

Inbred ratings companies? Their job is to understand a product so it can rate it accordingly. They are presented with products they don't understand, shrug and lie to their customers stating they understood the products and gave them such and such rating.

Social Security and Medicare going red? The CBO and any other number crunching organization in DC have been forecasting and tracking these problems for decades. I suppose they can be left off the hook as long as they are representing the great mass of functionally retarded adult Americans.
 
How solid of a legal case might you have if you had audio of a Fire Dept. call where you alerted them to a fire at your premises, laid out discrete instructions on how to arrive there from the station, and gave them to-the-cubic-foot locations of the fire itself...and they never showed up?
 
How solid of a legal case might you have if you had audio of a Fire Dept. call where you alerted them to a fire at your premises, laid out discrete instructions on how to arrive there from the station, and gave them to-the-cubic-foot locations of the fire itself...and they never showed up?
 
[quote name='mykevermin']How solid of a legal case might you have if you had audio of a Fire Dept. call where you alerted them to a fire at your premises, laid out discrete instructions on how to arrive there from the station, and gave them to-the-cubic-foot locations of the fire itself...and they never showed up?[/QUOTE]

Boo! I wanted to respond to the second one.

The Fire Department would claim they had another fire first, a bigger fire or problems with the engine.

...

In this case, the SEC will claim Madoff was too smart for them or one of their employees will be made a patsy and take the fall for the organization.
 
[quote name='mykevermin']How solid of a legal case might you have if you had audio of a Fire Dept. call where you alerted them to a fire at your premises, laid out discrete instructions on how to arrive there from the station, and gave them to-the-cubic-foot locations of the fire itself...and they never showed up?[/QUOTE]

The Fire Department won't prevent your house from burning down. In fact, if the fire didn't destroy your house, the water pumped onto it almost certainly will. The Fire Department will prevent your house from being burned down when you're next-door neighbor's house is on fire. Damages from Fire are covered by a homeowner's insurance policy, and if you don't have insurance, then you are responsible for the damages. The Police Department also is not liable if someone sets your house on fire, and they didn't prevent it.

The SEC is not an insurance company, nor do they guarantee the security of your investment. They investigate the crimes that they can, but do not guarantee that everyone is operating on the level. When you invest, you are inherently taking a risk with that investment, and it's your responsibility to make sure that it's sound. All of the people that lost money on bad, but not fraudelent investments didn't get any of their money back, so why should this case be so different?
 
the SEC's jurisdiction is not good versus bad investments. it's legal vs. illegal investments. given the information and requests to investigate it had for Madoff, the investors' civil suit is that the SEC was legally negligent. Comparing it to an investment that goes sour is not a proper comparison at all.
 
A new lawsuit alleges that convicted swindler Bernie Madoff financed a cocaine-fueled work environment and a "culture of sexual deviance," and he diverted money to his London, England, office when he believed federal authorities were closing in at home.
...
The complaint alleges that some employees and investors were aware of the drug purchases, and that BMIS [Bernard Madoff Investment Services] was known by insiders as the "North Pole" in reference to the excessive amount of cocaine use in the work place.
...
The alleged illicit behavior outlined in the complaint did not stop at drug use and extravagant spending. Company parties consisted of topless entertainers, and some employees had affairs in places such as Madoff's own office, the lawsuit says.
Madoff was fond of escorts and masseuses, and used money stolen from investors to pay them, according to the complaint.
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http://www.cnn.com/2009/CRIME/10/22/madoff.lawsuit/

LOL North Pole. I bet Madoff's going to have to get used to a different North Pole this Xmas.
 
Nobody returns that kind of money for that long unless they're a cheat. I'm sorry, but the deviation from the norm is so wild as to be obvious. Sure the SEC was asleep at the wheel (just like everyone likes it amirite?), but how dumb do you have to be to invest your life savings with a firm not using one of the big four accounting houses?

I cannot believe that his clients, whom most of which appear to be pretty goddamn rich, didn't think or have someone in their employ think that something wasn't right. I honestly believe most of them believed Madoff was an inside trader and that the gains were illegal. Which is exactly why they were willing to pump money into the black box.

Sorry, we're fresh out of pity for stupid rich people round these parts.

Protip: If you're fund has 9 or more digits in assets and isn't using one of the big four, you should probably ask why. Probably.
 
[quote name='mykevermin']the SEC's jurisdiction is not good versus bad investments. it's legal vs. illegal investments. given the information and requests to investigate it had for Madoff, the investors' civil suit is that the SEC was legally negligent. Comparing it to an investment that goes sour is not a proper comparison at all.[/QUOTE]

It's not an entirely unfair comparison. When you invest, you are putting your money at risk, and if you don't do your research you can get burned or caught up in an illegal investment scheme. It sounds like both of the investors had money with Madoff for quite a long time, and it is the investor's responsibility to do their research. They likewise should have been aware when he was investigated by the SEC back in '05, so they should have gotten out then. I can understand their desire to blame the SEC, but if the SEC would have found that Madoff was running a Ponzi scheme, he would have gotten shutdown, and they still would have lost a lot of their investment.

All that aside, their claims of lost money are likely quite inflated, because they didn't lose their fictional balance that Madoff said they had in 2008. The only lost their initial investment (and the years of interest that a sound investment would have yielded).
 
My prediction: Regardless of the outcome of this case, the tax payer loses. Even if the guys don't end up with a dime, some left-wing gov watchdog will try and use the situation as evidence that the SEC would have been able to do their job better had they had more funding.
 
[quote name='thrustbucket']some left-wing gov watchdog will try and use the situation as evidence that the SEC would have been able to do their job better had they had more funding.[/QUOTE]
I agree. The nerve of some people. To suggest that after the most anti-regulation, anti-enforcement, pro-business at all costs 8 years in my lifetime, that extra enforcement would be helpful?

The nerve of some people. You tell em thrust.
 
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