Two investors that were victimized at the hands of Bernie Madoff and his Ponzi scheme have decided to sue the Securities and Exchange Commission (SEC) for neglecting to do the proper due diligence on Madoff.

The suit was filed in the U.S. District Court in New York by Phyllis Molchatsky and Steven Schneider on Wednesday.  Their suit alleges that the SEC was careless in their research of Madoff and should have seen the red flags.  Between 1992 and 2008, the SEC had received more than eight reports pointed to evidence of Madoff running a Ponzi scheme.

“Through its negligent actions and inactions ... the SEC caused Madoff’s scheme to continue, perpetuate and expand, eventually in billions in losses by investors, and directly caused [the two] plaintiffs to lose more than $2.4 million,” read the lawsuit, filed by the New York firm of Herrick, Feinstein LLP.

“Instead of watching the backs of Ms. Molchatsky and Dr. Schneider and the backs of all the other investors, the SEC—through its negligence—was effectively watching Bernie Madoff’s back,” said one of the plaintiffs’ lawyers, former SEC attorney Howard Elisofon. “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.”

Madoff was arrested in March for scheming 2,336 investors out of over $13 billion.  He is currently serving a 130 year sentence in North Carolina.  Madoff’s company would not actually make investments, but take money from new investors, and pay a portion of it as returns to older investors.  The only way to keep a Ponzi scheme running is to continually get new investors.  The fund started to have problems when the market was causing many investors to try and withdraw their funds, only to find out there wasn’t really any money left.

Our Take

Madoff’s scheme is a prime example of the boundless greed that has gotten us into all of our nation’s financial woes.  The fact that the SEC could have stopped it sooner and saved more people’s investments but didn’t is appalling.  It is the SEC’s duty to do thorough due diligence on all things financial in this country and they failed miserably.  The SEC should refund all of those investors who do not get their money back from Madoff’s estate.