On Thursday this week The Wall Street Journal reported that a couple of Madoff investors are suing the SEC for negligence (Two Investors Sue SEC Over Madoff Probe). This will be an extraordinary case.
The defense the SEC will seek to invoke is "Sovereign Immunity" - a concept based in English law that essentially prevents people from suing the state or king because "the king can do no wrong". It's roll today is to prevent the state from being sued for damages that may result from policy decisions.
The Madoff case will present an interesting challenge here because the SEC was alerted to possible fraud multiple times and they repeatedly failed in their mission to discover what has been made quite obvious - Madoff's fraudulent investment business, not his legitimate market-making business - failed to do any trading at all in his alleged "split-strike conversion" strategy; something anybody who worked in a Wall Street back-office could have discovered. Their repeated incompetence and ineptitude was so egregious that it prompted a Congressman to admonish them in a hearing with the words, "You couldn't find your asses with both hands if you were standing!"
If the SEC made some policy decision that created some sort of market disruption that was unforeseen, "sovereign immunity" could be a good shield from frivolous lawsuits for damages. However, when your dereliction in your duty leads to circumstances that helps to perpetuate and enable a fraud you need to be held accountable and liable for your failures.
The defense the SEC will seek to invoke is "Sovereign Immunity" - a concept based in English law that essentially prevents people from suing the state or king because "the king can do no wrong". It's roll today is to prevent the state from being sued for damages that may result from policy decisions.
The Madoff case will present an interesting challenge here because the SEC was alerted to possible fraud multiple times and they repeatedly failed in their mission to discover what has been made quite obvious - Madoff's fraudulent investment business, not his legitimate market-making business - failed to do any trading at all in his alleged "split-strike conversion" strategy; something anybody who worked in a Wall Street back-office could have discovered. Their repeated incompetence and ineptitude was so egregious that it prompted a Congressman to admonish them in a hearing with the words, "You couldn't find your asses with both hands if you were standing!"
If the SEC made some policy decision that created some sort of market disruption that was unforeseen, "sovereign immunity" could be a good shield from frivolous lawsuits for damages. However, when your dereliction in your duty leads to circumstances that helps to perpetuate and enable a fraud you need to be held accountable and liable for your failures.
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