SEC Faces $1.7 Million Claim over Madoff Oversight FailuresDec 24, 2008 | Parker Waichman LLP A Bernard Madoff investor has filed a claim against the Securities and Exchange Commission (SEC) for failing in its oversight of Madoff's investment business. According to Newsday, the administrative claim is seeking $1.7 million in damages from the SEC for allowing Madoff's alleged Ponzi scheme to continue unchecked for at least a decade.
The 70-year-old Madoff was arrested on one count of securities fraud on December 11. Madoff - once a chairman of the Nasdaq stock exchange - is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.
According to the FBI complaint against Madoff, that business was largely a Ponzi scheme. The FBI said Madoff “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.” Madoff reportedly told employees that his fraud could cost investors as much as $50 billion.
The SEC has already admitted to failures in its oversight of Madoff. SEC chief Christopher Cox said last week that he has ordered an internal investigation to uncover why his agency failed to launch an investigation of Madoff’s investment business even after “credible and specific allegations” were brought to the SEC.
According to the Post, the SEC conducted routine examinations of the company in 1999, 2004, and 2005, as well as investigation that ended in 2007. Only the 2005 examination found “minor problems”.
The Washington Post said the SEC’s internal investigation will focus, in part, on the relationship between Madoff’s niece, Shana Madoff, and her husband, Eric Swanson. Shana Madoff served as her uncle’s compliance officer, and Swanson, a former SEC official, was involved in the 2004 SEC examination of Madoff’s business before their marriage, the Post said. Swanson also conducted an internal review of the 1999 examination.
The SEC maintains that Swanson played no role in any Madoff examinations after his personal relationship with Shana Madoff began in 2006 But according to the Washington Post, Madoff reportedly bragged of their marriage at a conference last year, when he spoke of having “close” ties with regulators.
According to Newsday, Phyllis Molchatsky, 61, of upstate New City, has filed an administrative claim against the SEC, accusing the regulator of "negligent conduct." The 13-page document says she invested $2 million in 2001 with American Masters Broad Market Fund LP, a hedge fund associated with Madoff.
If the SEC doesn't respond to Molchatsky's claim in six months, she can pursue her allegations against the agency in a federal court, Newsday said. Molchatsky's attorney also told Newsday that he's interviewing other Madoff investors who are considering taking action against the SEC.