By Ron Stein, Madoff-Help.Com

Howard R. Elisofon, partner in the New York law firm Herrick, Feinstein LLP is the securities attorney known most recently for his willingness to go after the SEC. Representing Madoff victim Phyllis Molchatsky and several others in this action, Elisofon has spoken at great length about his efforts in this case, and has been interviewed on many broadcasts and been quoted extensively in the press about this action and other issues pertinent to Madoff victims. We’re fortunate to have an opportunity to get some insight as to what motivates an attorney to take on the US government, and how.

Madoff-Help: Howard, tell us something about your Madoff victim clients – what they’re going through right now?

Elisofon: Their emotions are running the gamut — from anger and  boldness  to sorrow  and fear. There’s a lot of fear about their futures — they’ve been victimized once and some are wondering if they’ll be victimized again through clawbacks.  On a practical level, many have made or are planning to make drastic changes in their lifestyles. That could mean selling a house — at the worst time in recent history to do so — going back to work after having retired, and generally learning to live on a lot less money.

Madoff-Help: You’ve gotten considerable fame because you’re the attorney who is choosing to sue the SEC. Why are you taking this route?

Elisofon: I respect the SEC and many of the professionals there, but  I believe in this case the SEC clearly dropped the ball — badly. And that’s not just me saying so. Chairman Cox said so publicly.

Madoff-Help:But you’re talking about suing the US Government. Which means you’re talking about Sovereign Immunity. Don Quixote comes to mind. What hope is there in this situation?

Elisofon: We have always acknowledged that this is an uphill battle. There’s a political layer that might work against us. The government has vast resources to defend  itself . There will be pressure on the judge not to hold the SEC accountable  because  to do so would commit taxpayer money to compensate the victims. Judges are assigned randomly, and a lot here is riding on whether we get a judge with the fortitude to withstand that pressure.

Madoff-Help: Give us a short background on Sovereign Immunity.

Elisofon: Historically, governments are immune from lawsuits without their consent. But the U.S. government has consented to being sued under certain circumstances, which is what the Federal Tort Claims Act is all about. Under this law, the government remains immune from lawsuits about whether and how it exercises its discretion. But it allows the government to be sued if it chooses to do something, and does it negligently.  In other words, the government and its agencies have discretion in whether to take on functions, but not the discretion to perform those functions negligently if they choose to perform them at all. 

Madoff-Help: How about a real life example?

Elisofon: For instance, in a suit against the Coast Guard, a private citizen recovered money damages when a court found that the Coast Guard operated a lighthouse negligently by allowing the light to burn out and not replacing it. Had the Coast Guard, in its discretion, not built the lighthouse, the court probably would have ruled that the Coast Guard had the discretion not to build it.  But since it chose to build it, it had to exercise due care in maintaining it. There’s a similar case in which an air traffic controller allowed a plane to land in heavy fog — contrary to the FAA’s own policies –  and the plane crashed. A private citizen prevailed in litigation. If the FAA hadn’t established the air traffic control system, it would be tough to make a case because  the government had the discretion to control air traffic or let it be a free-for-all. But once they established the system and established policies, they are bound to follow them and not perform negligently.

The analogy here is that the SEC could have said it was using its resources on market timing cases, for instance, or insider trading cases, and not entered the Madoff endeavor at all . But the SEC received credible information about the Madoff operation and – in its discretion – chose to get involved and audit. It was then obligated to do so in a non-negligent manner. Chairman Cox, in his public statements, has acknowledged that the SEC dropped the ball on this.

Madoff-Help: Doesn’t our Constitution say or imply that no one is above the law? Doesn’t that make this whole notion – Sovereign Immunity — unconstitutional?

Elisofon: It’s not a question of whether sovereign immunity is unconstitutional. It’s a question of how sovereign immunity is applied. The doctrine dates back to a time when the king could do no wrong and therefore could not be held accountable. It’s an anachronism, but the Federal Tort Claims Act addresses that problem and, we will argue, allows our case to proceed .

Madoff-Help: So getting back to reality… Has anyone successfully sued the SEC, and how many have tried?

Elisofon: Not that we know of. But the important thing to consider is that people have successfully sued other government agencies for negligence and recovered money damages.

Madoff-Help: How about other branches of government? What kinds of matters? Were they successful? Did they get past motion practice? Did they recover damages?

Elisofon: There are plenty of cases in which people successfully sued branches of the federal government and received money damages. Many of them were in negligence actions, similar to this one. The Coast Guard and FAA cases are just two. But it happens frequently enough.

Madoff-Help: What are you charging the SEC with doing, or not doing?

Elisofon: At its heart, this is a negligence action. We’re alleging that the SEC was negligent, didn’t follow its own procedures and guidelines and, as a result, injured our clients and others. They did not have to get involved in this — that’s where discretion comes in — but once they did, they cannot perform negligently, as we allege they did.

Madoff-Help: Let’s get specific here. What exactly did the SEC do to screw up? Where did they fall apart in their auditing process?

Elisofon: We don’t want to show all our cards or risk jeopardizing our case. Suffice it to say, however, that the SEC fell down in a number of areas.  They performed audits, but missed the obvious – that there were no trades at all.  They had credible complaints — Harry Markopoulos spoon-fed them accurate information as far back as 1999 — and were negligent in  pursuing them and/or not pursuing them properly. They were negligent in their investigative function, among other things taking sworn testimony from Madoff and concluding that he had engaged in no wrongdoing, because they simply, and negligently, believed him.

Madoff-Help: Can you give us a sense of what specific actions the SEC should have done, could have done, but didn’t? What might have been the basic audit criteria to reveal front-running or a ponzi scheme?

Elisofon: Without getting into all the details, it is incomprehensible that the SEC did not confirm whether trades were made. I’ve been part of many audits, and I can’t fathom that the SEC did not perform that rudimentary task of even checking if the tickets were time-stamped.

Madoff-Help: Now, as we understand it, you’ve chosen not to pursue FINRA, the self-regulatory organization of the broker-dealer industry, and formerly NASD. These folks – NASD, that is — had been charged by the government with the responsibility of regularly auditing its broker-dealers, including Madoff. After all, NASD and recently FINRA were conspicuously listed on each Madoff confirmation. What’s their role in this and how come you’re sparing them?

Elisofon: It’s accurate to say that at this time we have chosen not to pursue FINRA for various reasons. But we never say never, and because we have concerns about FINRA’s actions and non-actions, this matter might be addressed in the courts in the future. Because of that, we can’t say any more about FINRA right now.

Madoff-Help: Realistically, how would you assess your chances of recovering money damages for victims and how long will this process take? Any prospects for a settlement?

Elisofon: We cannot imagine the government will settle with us at this juncture due to, among other things, the unprecedented monetary exposure. If we succeed in getting past the inevitable motion to dismiss, it is anyone’s guess if the government will be willing to come to the table.

Madoff-Help: What is the process for suing the SEC?

Elisofon: The Federal Tort Claims Act requires that before you sue in federal court, you serve the offending agency with an administrative claim for relief. The agency then has six months to settle, reject or ignore your claims. Here, the SEC will no doubt either reject or ignore us, and both have the same effect: they allow us to file a lawsuit in federal court. Our first claim for administrative relief was filed in late December, so that six-month window expires in late June.

Madoff-Help: So the next step is to file suit in Federal court in June?

Elisofon: It depends upon our clients’ individual dates – when they filed administrative claims and when the six months run for each of them. We’ll make a strategic decision on when exactly we’ll move forward.

Madoff-Help: As of now, you’re not only the first firm to sue the SEC, but it seems that you’re the only one. Why haven’t the other firms followed suit?

Elisofon: The initial reaction when someone suggests suing the federal government is: ‘You can’t do that. They enjoy sovereign immunity.’ But we spent hours and hours going over the statutes and case law, and we eventually arrived at the opposite conclusion: you can sue the federal government and have a chance to recover money damages. But I have to admit that even at my firm, the initial reaction was one of skepticism.

Madoff-Help: Wouldn’t actions against Madoff’s estate be a more fruitful path?

Elisofon: There are a lot of possible paths to recompense other than commencing an action against the SEC. But in most of those cases, although it might be more fruitful in the sense that our clients would face less of an uphill battle, at the end of the day, what would they recover? Most of the other possible actions are likely to recover, at best, pennies on every dollar that victims lost. That goes for the third-party lawsuits, which are seeking class action status; SIPC relief for those who are eligible, such as direct investors in Madoff’s brokerage arm; and even lining up in front of the trustee once he has liquidated assets and enlarged the Madoff bankruptcy estate.

Madoff-Help: Bailout fatigue has hit government big time. If the SEC is held liable and has to pay money damages to victims, the taxpayers will foot that bill. Does that give you pause? How do you justify that?

Elisofon: We didn’t come up with that idea. Congress did. Before it enacted the Federal Tort Claims Act, claims of negligence against government agencies were handled by special legislation that was designed to compensate the victims. That was extremely unwieldy and inefficient, in that Congress actually had to pass legislation to compensate each victim of a tort by the government. This is exactly the mechanism that Congress contemplated when it passed the law. The law fits this like a glove, and it strikes me that if the law is not applied here, Congress ought to consider repealing it.

Madoff-Help: Congress has been in an uproar about the SEC. Why not ask them to just come out and waive immunity for the SEC?

Elisofon: In passing the Tort Claims Act, Congress has already handed that decision over to the courts, and that’s where the fight will be, but there are other things Congress can do.

Madoff-Help: Like what?

Elisofon: There are a host of legislative efforts they can consider. For starters, increasing SIPA coverage makes a lot of sense given that the current dollar amount of coverage — $500,000 – dates back to the ‘70s and is antiquated. $500,000 then is worth about $1,600,000 today. And Congress would be well within its rights retroactively.

Madoff-Help: Will this action vs the SEC turn on statutory law, case law, the proclivities of the judge or some other?

Elisofon: All of the above. We believe that statutory law and case law are on our side, and if we get a judge with the courage to do what might be unpopular, it will help our clients’ cause.

Madoff-Help: You’re a former SEC enforcement attorney, and you appear before the SEC on behalf of clients routinely. Why sue them in this matter?

Elisofon: The real question is: why shouldn’t the SEC be held accountable? Statutory law and case law support our position here, which is that the SEC is liable and should compensate the victims. The Federal Tort Claims Act allows private citizens to sue the government in certain situations, and our reading of the law is that this is precisely the kind of situation that the statute covers.

Madoff-Help: What do you say to skeptics who believe this action is a non-starter?

Elisofon: You have to read the statutes and case law and, if you’re not an attorney, consult with one who has done the research. Eliminate preconceptions about sovereign immunity, what it means and how it works. Uphill battle? Yes. Non-starter? Absolutely not.

Madoff-Help: How is your firm charging? Is your firm filing actions against the SEC on a contingency arrangement? If not, what is the fee arrangement in general terms?

Elisofon: We are not filing these actions on a contingency basis. People who are interested in commencing an action against the SEC — or even discussing the merits of such an action — should contact us and we’ll include the fee arrangement as part of the discussion.  Our fee arrangements are in accordance with the Code of Professional Responsibility.

Madoff-Help: Let’s talk about clawback – a huge issue. What is your firm’s view of the clawback landscape? Who seems to vulnerable? Who, not so much?

Elisofon: The clawback landscape is just starting to take shape, and there are still more questions than answers. We are defending clawback targets and potential clawback targets. As a general rule, we believe that the more you redeemed, the more recently you redeemed it, the more it was “profit” rather than principal, and the greater the percentage of your investment the redemptions represent, the more likely you are to be a clawback target. In any event, we view the overall clawback issue as one of the most crucial to Madoff victims. The other efforts — the ones to recover money — are important in all respects, including psychologically, but with representation, good planning and a favorable set of facts, holding on to what you still have strikes us as at least as important.
Madoff-Help: What are the best defenses to clawback actions in general? Is settlement a possibility?

Elisofon: There are some defenses in instances where the redemption was clearly principal, but even they are an uphill fight because you have to show good faith in redeeming. It’s not up to the receiver to show bad faith, so the burden is actually on the victim, as perverse as that may seem. With profit — even illusory profit, such as in this case — it borders on the impossible to defend against. Your ability to show good faith in redeeming principal is crucial. As an example, one way to do that is to show that you used the redemptions for pre-existing obligations,  such as  living expenses, rather than purchases of high-end items. Early settlement with the trustee is a possibility and depends largely on each victim’s unique set of circumstances.  Victims who receive clawback letters should discuss  that  with counsel.

Madoff-Help: Do you think Picard is being heavy-handed about the clawback issue? If so, why?

Elisofon: It’s too soon to tell. All we have to go on are media reports of what his intentions are. His intentions — and his methods — will speak for themselves as time goes on. I will say, however, that our clients and I hope fervently that reports that he will not seek disgorgement from people who lost more than they redeemed are accurate.  We do know of victims who received clawback letters even though they lost more than they redeemed, but the trustee is saying that the letters went out based on Madoff’s obviously faulty records, and he will not seek clawback from these people.  

Madoff-Help: How much latitude does Picard have in terms of his clawback efforts?

Elisofon: Quite a bit. He is charged with enlarging the bankruptcy estate for the benefit of all victims. His discretion isn’t absolute, but law and custom seem to indicate that he has a great deal of latitude.

Madoff-Help: What’s your feeling about SIPA’s role here?

Elisofon: SIPA and SIPC have critical roles in that victims who directly invested in Madoff are eligible to receive some recompense, if they qualify. Unfortunately, SIPC has certain statutory limitations that, unfortunately, preclude indirect investors from recovering significant amounts, unless the statute is amended.

Madoff-Help: Several attorneys are making the case that SIPA and SEC law and precedent are being disregarded, that the New Times case based upon the concept of legitimate expectations should be taking precedence in determining values of claims. How do you feel about this?

Elisofon: Mr. Picard appears inclined to use the net-in, net-out calculation. Many of the victims believe that whatever their final statement showed, that should be the key to the calculations. That’s something we’re looking at and is clearly an idea worth further consideration. It might be a tough case to make, but as I noted earlier, we don’t shy away from making tough cases.

Madoff-Help: There’s a strong effort afoot now to lobby Congress and the SEC to limit clawback. Clearly, most victims would agree that in certain cases clawback makes sense, but most victims we’re talking to are opposed to clawback, even if it might benefit them. What changes would be needed to limit Picard’s ability to clawback to those who participated in the fraud or others who benefited?

Elisofon: In certain circumstances, in the Madoff matter and certainly in others, we see the need for clawbacks and support them. But they must be looked at on a case-by-case basis and, most importantly, from a standpoint of what’s fair and equitable. Trustees such as Mr. Picard  have broad latitude to treat the clawback issue, and we are hopeful that he’ll handle it in as equitable fashion as possible. It’s important to note that the law of clawbacks is still emerging. That means we may see new law made in some court decisions that will affect the Madoff matter. Relatively speaking, this is an unsettled area of law. For that reason, and because trustees necessarily  have  great discretion, we must hope that Mr. Picard  exercises good judgment. There are always legislative options as well, either on a state-by-state or federal level. The various states’ legislatures always have the option to pass laws to protect their citizens from harm, and in this case, that harm could be ambiguities and differing interpretations of clawback law.

Madoff-Help: Do you believe Picard is correct in suggesting there is a fairness issue if statement values are used that would unfairly benefit the older investor versus the newer one?

Elisofon: There is an interesting problem here, and although it’s hypothetical, I’d have to believe it will apply to a number of Madoff investors. If you were a long-time Madoff investor for, say, 20 years, and over that time you invested money, and in the last few years, as you aged and saw your income stream diminish, you redeemed more than what you put in, you’re really a possible clawback target. Contrast that fact pattern with someone who invested for only a few years and didn’t redeem, and that person doesn’t appear to be as likely a clawback target. There are certainly issues of equity and fairness there. Older, longtime clients who redeemed recently for perfectly legitimate reasons, such as a mandatory IRA distribution, may be more vulnerable as clawback targets. And any time there’s unfairness of a lack of equity it troubles me.

Madoff-Help: Your firm is working on a number of different areas in this case. Where else do you offer help for Madoff victims?

Elisofon: Besides the action against the SEC, we are assisting clients in SIPC issues and SIPC claims, tax relief, relief through insurance – such as homeowners, and possibly biggest of all, counsel regarding clawback and defense of clawback claims. In many ways we are acting as general counsel to Madoff victims.

Madoff-Help: Why is there so much confusion and lack of clarity about this fraud and possible remedies? IRS, bankruptcy, clawback issues — how can this all be untangled?

Elisofon: A lot of the uncertainty stems from the sheer magnitude of the fraud, the complexity of it, and the as-yet unanswered questions of exactly who was involved and in what way. This is in many ways an unprecedented fraud, and it comes at a time when our nation’s economy is struggling. All those factors seem to contribute to the confusion and lack of clarity about the fraud, its effects and the possible remedies.

Madoff-Help: A year from now, what do you think the landscape of Madoff victims’ efforts will look like?

Elisofon: Things tend to move slowly, so a year is unlikely to be an accurate reflection of where they’ll be in the long term.

Madoff-Help: That’s pretty frightening – I hope we all live long enough to know. Thanks Howard.


If you have more questions for Howard Elisofon, please post them as comments below, and he’ll try to respond to them.

Note: if you would like to contact Herrick, Feinstein LLP, the firm is listed in the Professional Marketplace of Madoff-Help.Com.

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  • you seem to believe that there is no way out of the clawback nightmare at this moment. I am a long term sucker 1993, took out more than I put in, what would you suggest that I do? It seems illogical to have a huge credit balance, even though it was ficticious, and not have usedit. Most victims are sleepless because of this penalty, you seem to offer little solace, is there nothing we can do? Herb Mendelson would have been a little more confident, and I have known you a long time and am surprised at your response.

  • admin

    Question Submitted: To Howard Elisofon. Please comment on the following scenario. Husband dies in 2007 with a negative “net equity” position in his TIC account with wife. In 2008 (more than 90 days before 12/11), his account is closed out (by journal entry) and transferred into three distinct accounts. One account is in the wife’s name. One account is a $2M credit shelter trust account. The third account is the “Estate of husband.” Naturally wife receives four claim forms. How do you think SIPC might treat the three claim forms being filed (there will be no claim form being filed for the original account closed out)? Would this be the course of action you would follow?

    Additional information that can be derived from above. The closed out account could be subject to clawback under current “net equity.” But then the forensic accountants see that three new accounts were spun off from the original. Under current “net equity” it appears that SIPC could deny the SIPC claims of all three new accounts. However, under SIPA that the declaratory judgment is being filed, it would be considered three unique accounts, each qualifying for the maximum ($500K) benefit under SIPA.

    Elisofon“We cannot advise you to file, or not to file, claim forms for any particular accounts and we urge that you seek qualified counsel to evaluate your circumstances. We can say, however, that if claims are not filed prior to the July 2, 2009 deadline, it may be difficult — if not impossible — to take advantage retroactively of any change to the “net equity” rule that could be brought about through the ongoing declaratory-judgment litigation you mentioned. Given that a significant SIPC recovery may be at stake, but that clawback liability may exist, we advise that you seek qualified counsel to make an individualized determination as to an appropriate strategy and course of action.”

  • admin

    Question Submitted: If you are ultimately victorious in your suit against the SEC what will that mean for all of the other victims of Madoff?

    Elisofon: “By the time we know the outcome of the first actions that we filed, it will be too late to file new ones, meaning that the only hope for recompense from the SEC would be a government bailout or compensation fund for all victims. The law gives victims two years to file from the time they knew of the fraud, which was Dec. 11, 2008. So after Dec. 11, 2010 they would be time-barred from filing an action under the Federal Tort Claims Act. I cannot envision a scenario where we would know by December 11, 2010 the outcome of our first actions.”

  • Richard Friedman

    To Howard Elisofon. Please comment on the following scenario. Husband dies in 2007 with a negative “net equity” position in his TIC account with wife. In 2008 (more than 90 days before 12/11), his account is closed out (by journal entry) and transferred into three distinct accounts. One account is in the wife’s name. One account is a $2M credit shelter trust account. The third account is the “Estate of husband.” Naturally wife receives four claim forms. How do you think SIPC might treat the three claim forms being filed (there will be no claim form being filed for the original account closed out)? Would this be the course of action you would follow?

    Additional information that can be derived from above. The closed out account could be subject to clawback under current “net equity.” But then the forensic accountants see that three new accounts were spun off from the original. Under current “net equity” it appears that SIPC could deny the SIPC claims of all three new accounts. However, under SIPA that the declaratory judgment is being filed, it would be considered three unique accounts, each qualifying for the maximum ($500K) benefit under SIPA.

  • Diane

    If you are ultimately victorious in your suit against the SEC what will that mean for all of the other victims of Madoff?