Couple blames SEC in lawsuit for losing $2.4 million through Madoff investment

Couple sues SEC for $2.4 million in Madoff losses

NEW YORK — Two investors who lost more than $2.4 million investing with failed financier Bernard Madoff sued the U.S. Securities and Exchange Commission Wednesday, blaming the agency for failing to detect the epic multi-decade fraud that involved tens of billions of dollars.

Investors Phyllis Molchatsky, a disabled retiree, and Dr. Steven Schneider, filed the lawsuit in U.S. District Court in Manhattan.

The lawsuit said the SEC had “countless opportunities to stop the Ponzi scheme Madoff operated over 16 years, and botched all of them.” The lawsuit said the SEC directly caused the investors to lose their investment.

SEC spokesman John Heine said Wednesday that the SEC would contest the lawsuit.

“Based on our initial understanding of the matter, we believe there is no merit to the complaint,” he said.

Attorney Howard R. Elisofon, representing Molchatsky and Schneider, said the lawsuit was the first lawsuit filed on behalf of Madoff investors against the SEC.

“Instead of watching the backs of Ms. Molchatsky and Dr. Schneider and the backs of the other investors, the SEC — through its negligence — was effectively watching Bernie Madoff’s back,” Elisofon said in a statement. “Now it is time for the SEC to be held accountable and for the federal government to do what the law says it must do: compensate the victims for its negligence.”

The SEC has faced heavy criticism for not discovering the multibillion-dollar fraud since it was revealed last December, when Madoff was arrested after confessing the fraud to his sons. He is serving a 150-year prison sentence after pleading guilty to fraud charges.

Elisofon said Molchatsky quit working when she was diagnosed with Parkinson’s disease and decided that her $1.7 million in savings would be safest with the steady income Madoff promised his customers.

“Now, she may lose her house,” he said.

The lawyer said Schneider invested $750,000, nearly all of his retirement money, with Madoff.

“He had planned to slow down and retire, but now he cannot,” the lawyer said.

In his statement, Elisofon acknowledged legal challenges faced by a lawsuit against the government, which can usually fend off such actions by claiming sovereign immunity.

He said he must prove negligence but that the job was made easier by admissions from the SEC inspector general, who said last month in testimony before the Senate Banking Committee that more than 20 SEC employees were involved in failed examinations of Madoff’s business.

Elisofon also acknowledged the difficulty of a lawsuit succeeding in a “political and economic climate that makes it difficult for some to countenance the U.S. Treasury’s writing a large check to cover these losses.”