Investor tries to hold SEC liable for Madoff losses

By Martha Graybow

NEW YORK (Reuters) - A woman who says she gave accused swindler Bernard Madoff $2 million to manage is trying to hold U.S. regulators responsible for her losses, a case that shows how widely investors are casting their net in trying to find potential defendants in the scandal.

The claim by retiree Phyllis Molchatsky is believed to be the first attempt by an investor to recover investment losses from the U.S. Securities and Exchange Commission. Since Madoff was arrested, other investors have sued hedge funds they say improperly entrusted their money to him.

Molchatsky's lawyer said on Tuesday the SEC failed to protect investors from Madoff, who has been charged with securities fraud by federal prosecutors but has yet to formally respond to the accusations in court.

"We believe in this particular instance that the SEC has fallen down on the job," said attorney Howard Elisofon, a former SEC lawyer who represents Molchatsky. "They should be held responsible for these catastrophic losses."

The SEC declined to comment.

Molchatsky brought an administrative claim on Monday against the commission, contending the agency was negligent in failing to detect the alleged $50 billion fraud at Madoff's money management operation.

Molchatsky, 61, of New City, New York, is seeking $1.7 million in damages from the agency.

She could face an uphill battle because the doctrine of sovereign immunity historically has limited the types of cases that could be brought against the SEC and other federal agencies.