But it’s a fool’s errand to sue the SEC, a federal agency rightly immune from private lawsuits. What’s next, suing President Johnson posthumously for not ending the war in Vietnam sooner? Or how about Alan Greenspan for looking the other way (or tacitly supporting) the explosion of sub-prime debt in the 1990s? Where would it end?
The Litwin Foundation recently sued the SEC for negligence in failing to detect Bernie Madoff’s Ponzi scheme earlier than it did. The Foundation, which supports important medical research into Crohn’s disease and Alzheimer’s, alleges the negligence cost it $19 million. Unfortunately, this is not the first time that investors in Madoff’s scheme have seen fit to sue the SEC for lack of oversight. But if they really want to know who to blame, these groups need only look in the mirror. In the first instance, it was their lack of diligence, not the SEC’s, which allowed years of Ponzi fraud to occur.
The blame-the-other-guy-in-the-room attitude will only lead us down the very same road we are trying to escape, especially if the “other guy in the room” is the government agency in charge of oversight. Should the SEC have done a better job? Absolutely. Could Madoff have been caught earlier, saving investors millions of dollars that they will never recover? Likely. But it’s a fool’s errand to sue the SEC, a federal agency rightly immune from private lawsuits. What’s next, suing President Johnson posthumously for not ending the war in Vietnam sooner? Or how about Alan Greenspan for looking the other way (or tacitly supporting) the explosion of sub-prime debt in the 1990s? Where would it end?
If the Litwin Foundation is spending charitable assets in the form of attorney’s fees they should be investigated by their State Attorney General and fined. Filing frivolous lawsuits is not a proper use of charitable funds. Enhanced diligence must come from us as individuals and from groups like the Litwin Foundation that are supposed to invest money wisely so it has more to provide to its noble causes.
The lesson from Madoff’s scheme should be twofold.
Lesson One: Investors need to realize that a substantial amount of individual diligence must go into every decision. Just like free lunches, there is no such thing as a “risk-free investment.” It is the duty of every investor to investigate her own financial opportunities and if necessary, bring any suspect behavior to the attention of the authorities.
Lesson Two: The SEC and other financial regulators cannot operate successfully under the system and attitudes that we had five years ago. Elizabeth Warren’s Consumer Financial Protection Bureau is a major step forward, but we must continue to empower overseers and encourage enforcement from outside Wall Street and from those working within.
Until we complete the alteration to our rules and our attitudes, the blame game will continue while investors pay the price.
Assisted by David Martin