Two Madoff Victims Sue SEC Seeking Return of $2.4 Million Lost

In what may be the first drop in an expected flood of such lawsuits, two former investors who lost millions in the Ponzi scheme run by Bernard Madoff have sued the Securities and Exchange Commission seeking return of their lost investments.

Phyllis Molchatsky and Steven Schneider accuse the SEC of being negligent and breaching its fiduciary duties to investors by failing to detect Madoff’s massive financial scam. The crime was exposed in December 2008, but only after Madoff admitted his role in ripping off thousands of investors of about $65 billion.

The plaintiffs filed their lawsuit today in New York federal court. The case likely will be closely watched by other defrauded former Madoff clients, who may follow suit with similar legal claims against the SEC for ignoring numerous warnings and tips of wrongdoing by the Wall Street financial titan.

Molchatsky claims she lost $1.7 million in Madoff’s Ponzi scheme, while Schneider says he is out $750,000, according to a Reuters news report.

Madoff is now serving a life prison term for his leading role in the largest such scam in Wall Street history, but the plaintiffs say the federal agency charged with policing investment firms also is to blame for their losses.

SEC Accused of Botching Madoff Investigation

“The SEC had countless opportunities to stop the Ponzi scheme Madoff operated over 16 years, and botched all of them,” the lawsuit states.

An SEC spokesman told Reuters that the agency is of the impression that the lawsuit and others brought on the same grounds have no legal merits. Legal experts say the lawsuit is sure to test the scope of the doctrine of sovereign immunity, which typically shields the SEC and other federal agencies from such allegations of negligence.

While other lawsuits have been brought against Madoff personally, his corporate identities, and others connected with the Ponzi scheme, this is the first such case to name the SEC as a defendant, officials said.

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