STAFF NEWS & ANALYSIS
Investor Seeks Relief From SEC Over Madoff Losses
By Staff News & Analysis - December 24, 2008

A New York woman who lost nearly $2 million through her investments with Bernard Madoff has filed a claim against the Securities and Exchange Commission seeking relief, according to a report in The Wall Street Journal on Tuesday. Phyllis Molchatsky, a 61-year-old retiree from Valley Cottage, NY, is seeking $1.7 million in damages from the agency, alleging it was negligent in failing to detect the alleged fraud. The claim, filed on Monday, is believed to be the first by an investor seeking to recover money from regulators. An administrative claim for relief is the first step in filing a lawsuit against the government, and a lawsuit can be filed in federal courts if the SEC doesn't negotiate or respond within six months. In 2001, Molchatsky invested $2 million — nearly her entire life savings — in hedge fund American Masters Broad Market Fund LP, which is associated with Madoff, the report said, adding that the SEC has declined to comment on the matter. – Market Watch

Dominant Social Theme: An unusual activity!

Free-Market Analysis: The idea that lawsuits will fly over the Madoff fraud is hardly newsworthy of itself, but the idea that a regulatory body may be sued is news indeed. The Western regulatory structure usually puts regulators beyond the consequences of either actions or results. Bad laws such as agency "mark to market" that may have played a role in aggravating the current financial meltdown rarely see a courtroom and the legislators that are responsible for creating or implementing such laws are rarely if ever held to account.

The idea that the government is fairly inviolable and its legislative process inarguable is well integrated into current law. But why is it that the law and its regulatory structure are not held to the judicial standards of private enterprise? Perhaps it has something to do with size. Human beings are familial and communal; when the group builds something after much discussion and negotiation, it is likely seen as important, even inviolable.

It is the reason that banks and other structures are built to be imposing and that large private and governmental entities seek to be housed in large buildings. But this goes for social structures as well as physical ones. The more complex the private or governmental entity is in terms of structure and personnel, the more likely it is to inspire confidence and repel impertinent questions. And Western governmental entities are nothing if not complex.

Marry complexity to a state power and you likely get a reflexive hands-off approach. But complexity in fact does not guarantee competence. Size does not necessarily equate to excellence. That Western governments generate thousands of laws and regulations every year does not make each law or regulation a good one. The Securities and Exchange Commission is a good example of an agency that is flawed on numerous levels. Investors may think that the SEC is a policing mechanism that will make every effort to get their money back. But the SEC is basically an authority for public disclosure, something that it has made increasingly cumbersome, expensive and difficult to do. Unfortunately, the SEC's regulatory structure is being exported to other countries such as Canada and Britain – not because it has done a good job but because it exists, is well funded and is integrated into the larger securities bureaucracy.

Financial regulation is especially problematic in the current day and age because it never addresses bottom line issues such as monetary inflation and the culpability of those who produce an overabundance of credit.

In fact, there is plenty of blame to go around when economies go sour and large institutions begin to founder. But at root, isn't it the monetary elite itself that is responsible?

After Thoughts

It would doubtless be a step in the right direction to begin to at least contemplate lawsuits aimed at regulatory entities not doing their jobs. One outcome could be a discussion in plain language about what is the job that they are supposed to do – and this might soon give rise to the perception that many of these jobs are conflicting and even make little practical sense. When it comes to monetary inflation, the idea that those who create the inflation and help cause the crashes could be held culpable is an especially interesting concept. Could Alan Greenspan be sued for allowing $500 trillion in derivatives bets to made on his watch? Or more fundamentally, could legislators who tolerate incessant and counter-productive central banking activities be sued for an overproduction of money? Or how about those who patently manipulate the precious metals markets? Interesting cases!

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