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Victims of Madoff’s ponzi scheme file suit against SEC United States Securities and Exchange Commission accusing the government of “serial, gross negligence” for its failure to properly investigate “numerous detailed, credible complaints” against Madoff.

10/16/09 - Phyllis Molchatsky and Dr. Steven Schneider, both victims of Bernie Madoff’s ponzi scheme, filed suit against the United States Securities and Exchange Commission on October 14, accusing the government of “serial, gross negligence” for its failure to properly investigate “numerous detailed, credible complaints” against Madoff. The plaintiffs are seeking a combined $2.45 million in restitution; Molchatsky lost $1.7 million and Dr. Schneider lost more than $750,000 when the scheme collapsed.

In a 63-page complaint, Molchatsky, a disabled retiree and Dr. Schneider, a physician, accuse the SEC of failing to perform its non-discretionary duty of care for investors; to wit, the agency received a minimum of eight credible complaints about Madoff between 1992 and 2008, each accusing him of operating a ponzi scheme through his former firm, Bernard L. Madoff Investment Securities, LLC. The suit says that the SEC conducted four formal investigations – and multiple informal inquiries – into these allegations, and due to “rank negligence, incompetence, inexperience, inattentiveness and laziness” it failed to uncover the truth about Madoff, whose massive frauds were finally exposed in December 2008.

To substantiate their claims of misconduct against the SEC, the plaintiffs' action notes:

The SEC’s negligence would take many forms over the course of its multiple investigations of Madoff. Inquiries were delegated from SEC teams that had expertise in financial fraud to ones that did not. Critical tasks were assigned to junior staffers who had no relevant training or experience. Those junior staffers were at best functionally unsupervised, and at worst, were given supervision that actively discouraged them from pursuing leads. Policies and practices regarding case opening and closing memoranda, investigation planning memoranda, and communications between SEC offices and teams were routinely disregarded. Investigative teams consistently failed to contact third parties to confirm Madoff’s claimed trading activities, even when called for by the teams’ own plans for their investigations. Petty jealousies and inter-office rivalries led to tipsters being disregarded and key resources of other SEC teams going unutilized. And clouding every step of the SEC’s various investigations was a perception of Madoff’s power and influence that cowed staff members into giving him the benefit of the doubt, despite their suspicions – or even knowledge – that he had lied to them. For at least sixteen years, the SEC’s failure to follow basic investigative procedures and practices, or even to observe simple common sense, allowed Madoff to perpetuate his scheme, drawing in innumerable new victims who were totally unaware that the government agency sworn to protect them had fallen down on the job.

Later in the complaint, several attempts made by whistleblower Harry Markopolos – who is credited as “an industry analyst and Certified Fraud Examiner” – to alert the SEC about Madoff’s criminality are highlighted. In May 2000, he submitted an eight-page complaint to the SEC’s Boston Regional Office, which questioned Madoff’s authenticity and “provided substantial evidence and analysis to support his complaint” that Madoff was operating a ponzi scheme. Following this warning, Markopolos met with SEC employees to elucidate his examination, and encourage the agency to formally investigate Madoff. The suit contends that:


[I]t was clear to Markopolos and an SEC accountant in attendance that the top SEC staffer at the meeting had ‘zero comprehension’ of what Markopolos was explaining. In fact, Markopolos characterized the staffer as ‘not having a basic understanding of finance.’

Ten months later, in March 2001, Markopolos filed an additional complaint, which included an updated analysis “aimed at simplifying the presentation to the SEC staffers.” On this occasion, two colleagues – Neil Chelo and Frank Casey, both experts on investment funds – corroborated Markopolos’ claims. The second complaint was forwarded to the SEC’s New York Regional Office, which declined to investigate the matter; this imprudent decision was made exactly one day later.

It is this writer’s opinion that all SEC employees involved with Markopolos’ complaints should face criminal and/or civil proceedings for allowing Madoff to operate a ponzi scheme – regardless of whether their professional impotencies were caused by negligence, or otherwise. These revelations, if properly utilized, would have saved Molchatsky, Schneider and countless others a significant amount of money and heartache.

Furthermore, prudent observers are right to draw the conclusion that the SEC is continuing to facilitate ongoing, massive criminal operations; two months ago, Markopolos warned that major scandals will soon be revealed about the unregulated over-the-counter derivatives market, and it will make Madoff “look like small time.” In light of that, for an explosive report on derivatives – which includes the highly credible words of Gerald Celente, who calls them “ponzi schemes” – please review this article, and make sure to forward it to as many people as possible. The game is over.

COMPLAINT REFERENCE/SOURCE: Molchatsky et al v. United States Of America, Case No. 1:2009-CV-08697, filed by Herrick, Feinstein LLP 10/14/2009, U.S. District Court, Southern District of New York, Judge Laura Taylor Swain presiding.

http://www.examiner.com/x-9341-Manhatta ... C-failures