On December 22, 2008, as discussed here, Phyllis Molchatsky, a 61-year-old retiree from Valley Cottage, NY who lost nearly $2 million investing with Bernard Madoff, filed a novel claim against the SEC. Her administrative claim reportedly alleges that the SEC was negligent in failing to detect alleged Madoff’s alleged fraud and seeks $1.7 million in damages.

Legal experts such as renowned law professor Erwin Chemerinsky have opined that they do not see a viable suit for money damages against the SEC because the United States government (including the SEC) has sovereign immunity in such cases. Prof. Chemerinsky told Securities Docket in late December 2008 that the only statute he could think of that might be relevant is the Federal Tort Claims Act, but that the FTCA has an exception for “discretionary functions.” “The bottom line,” he said, “is that I do not see a viable suit for money damages against the United States. Perhaps there might be claims against other defendants.”

In an article published today in LoHud.com, Molchatsky said she still takes comfort from knowing that her lawyer, Howard R. Elisofon, is trying to help her recover her money, even if the approach is novel. Elisofon states in the article that the SEC has six months to respond to the claim, and if the SEC turns Molchatsky down, she will file a lawsuit. Elisofon believes Molchatsky is the first citizen ever to bring an administrative claim against the SEC.

With respect to the details and theory behind Molchatsky's claim against the SEC, Elisofon points out that:

Although a citizen cannot sue the government for "discretionary" actions, a citizen can hold the government responsible if the agency does not follow the right procedures. "Once you step into the enterprise, you have to do it correctly," he said. "And there were just so many different aspects as to how the SEC was involved in this (Madoff's) enterprise."

As far back as 1999, the SEC staff had information on Madoff that should have prompted actions. The SEC knew the returns Madoff claimed to be producing and that he ran his operation in great secrecy.

The SEC ignored the May 1999 complaint from analyst Harry Markopolos that alleged Madoff was committing fraud, allowing Madoff's alleged fraud to continue for another nine years.

Although Markopolos complained again in 2005, the SEC staff never provided the commission with the evidence that Markopolos provided.

Ms. Molchatsky tells her story in the video below.