Credit Herald

Victims of Bernard Madoff must surmount laws that shield federal workers and agencies from liability if they want to sue regulators and their staffers for not stopping Madoff years before he confessed to a $65 billion Ponzi scheme.

A report by U.S. Securities and Exchange Commission Inspector General David Kotz said the SEC allowed inexperience, indifference and memory lapses by some staffers to thwart five probes of Madoff.

The report, released last week, provides fodder for investors hoping to recover some of their money, either from the government or liquidation of Madoff’s assets.

But to get anything from the government, they would have to prove that the SEC and some of its staff were negligent and that could be extremely difficult, lawyers said.

“Although a claim against the government itself is at least plausible here, it would be very difficult to overcome the hurdles of sovereign immunity,” said Russell Ryan, a former assistant enforcement director at the SEC and now a partner at the law firm King & Spalding in Washington, D.C.

The doctrine of sovereign immunity has roots in English common law and is sometimes summarized as the idea that the king or queen can “do no wrong”. It helps protect a government from interference with official functions, including from lawsuits.

At Herrick Feinstein LLP, a mid-size New York firm, lawyers are closely examining the 457-page report, which quotes dozens of current and former SEC staffers, many of whom claimed not to have recalled or pursued evidence that in retrospect could have led them to uncover Madoff’s fraud.

“It confirms what we have been alleging, that the SEC was negligent in its duty to protect the public interest,” said Howard Elisofon, a partner who represents nine of Madoff victims free credit score online.

Madoff pleaded guilty in March to fraud and is serving a 150-year prison term. A court-appointed trustee, Irving Picard, is trying to recover what he can to cover victims’ losses.

On Thursday, the Senate Banking Committee is due to hold the first of what may be several Congressional hearings to examine what went wrong and how the SEC can avoid a repeat.

Kotz is among the witnesses expected at the hearing, along with new enforcement director Robert Khuzami, acting director of examinations John Walsh, and Harry Markopolos, a whistle-blower who repeatedly warned the SEC that Madoff’s business was a sham.

NO FOLLOW-UP

Kotz’s report paints a picture of an agency plagued by inexperience and indifference as it botched five Madoff probes.

In one case, an SEC branch chief said he might have decided in early 2004 not to request a large amount of Madoff trade data, known as audit trail data, because “it can be tremendously voluminous and difficult to deal with and is a huge resource issue for us. It takes us a ton of time.”

His boss Eric Swanson, whose romantic relationship with Madoff’s niece, Shana, did not influence the probes according to Kotz, told investigators he could not explain why the data request had been scuttled. “It would have been, frankly, asinine for us to not get the audit trail,” he said. 

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