Litigation: Madoff and the SEC—A loss for private litigants, with a twist

While the SEC itself may be immune from litigation, its GC and officials may not be as secure.

On April 19, 2011, Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York dismissed a $2.4 million suit against the U.S. government alleging gross negligence on the part of the Securities and Exchange Commission (SEC) in the agency’s failure to uncover Bernard Madoff’s massive Ponzi scheme. In Molchatsky v. U.S., 09-cv-08697 (S.D.N.Y. April 19, 2011), Judge Swain granted the federal government’s motion to dismiss for lack of subject matter jurisdiction.

The plaintiffs derived the allegations of their complaint from the SEC Office of the Inspector General’s (OIG) report on the causes of SEC’s failure to discover Madoff’s Ponzi scheme. The OIG’s report detailed numerous tips sent to the SEC that indicated, with varying levels of specificity, that Madoff was duping his investors. The SEC conducted four formal inquiries as a result of these tips. The plaintiffs alleged, citing the OIG’s report, that numerous factors, including: departmental rivalry, failure to verify information provided by Madoff, failure to forward complaints to the New York office of the SEC, misinformation, incompetence, and inexperienced, often-unqualified staff, compromised the investigations. The plaintiffs argued that if the SEC had properly conducted its investigations, it would have uncovered Madoff’s Ponzi scheme, and their losses would have been prevented.

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Matthew Ingber

Matthew Ingber is a litigation partner at Mayer Brown.

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