Before Bernie Madoff Ruined Her Life, Phyllis Molchatsky Was Just Another 60-Year-Old Mom Trying to Get By

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Last month, New York's Robert Kolker spoke with some Bernie Madoff investors who were feeling disenfranchised and discouraged by the government's treatment of their claims. Among them was Phyllis Molchatsky, who, along with another investor, filed a lawsuit against the SEC today alleging the entity had "countless opportunities to stop the Ponzi scheme Madoff operated over 16 years, and botched all of them." After the jump, Kolker describes how she got in this situation to begin with.

If anyone can help dispel the image of a Madoff victim as a high-flying billionaire who lost a few spare million in pocket change, it’s Phyllis Molchatsky. Her father, a smoked-fish salesman on the Lower East Side, was diagnosed with a benign brain tumor when she was 4 years old. A year later, he died on the operating table during surgery, and Phyllis and her mother moved from Manhattan to Brighton Beach so that her father’s family could help take care of her while her mother worked. By the time Phyllis finished high school, her mother had had a heart attack and couldn’t work. Phyllis tried going to Brooklyn College at night while working by day, but before long she dropped out. In 1968, when Phyllis was 20, her mother went in for open-heart surgery, and she, like Phyllis's father, died on the operating table table. Phyllis was on her own.

Molchatsky pretty much sat out the seventies. She found work in the reconciliation department of a financial-services company, checking on information on all the bank accounts that the firm had, all these different branches around the country. She didn’t need a degree for that. She could learn on the job. She stayed in her mother’s Mitchell Lama middle-class-subsidized co-op, paying low monthly payments. “I don’t make many changes,” Phyllis says now. She worked her way up to head of the department, then she moved to accounts payable. At home, she never spent much — still living with the mentality of whatever she had, she had to give to her mother. “I wasn’t a big traveler. I mean, I went out on the weekends, on the weekends I’d be in the city, whether it be to a museum, to a play, or to a club or a restaurant. I did what the average person does, I guess. Nothing spectacular.”

In the early eighties, she heard about her company opening a branch in Rockland County. She moved in 1984, using some of what she’d saved over the years to buy an affordable house. She worked in the back office of the branch office. She felt homesick and a little lost out in the wooded suburbs, at least at first. “I always knew it was a better move for me,” she says, “but until I could get used to it, it definitely took a while.” In two years, she had a management position. “At that point I had my exams under my belt that I could also supervise the sales staff. This job was in some ways a coming-up for me. It showed me that I am very capable of doing so many things and learning so many different things.” Then she adds: “I guess I didn’t learn enough.”

In 2001, Phyllis noticed a little tingle in her left elbow that sometimes stretched all the way down to her hand. A few months later, she was diagnosed with Parkinson’s disease. Her doctor told her to avoid any stressful situations that might aggravate her condition. “He said it would add quality, not necessarily years, to my life, but quality to the years that I have.” She thought about all the saving she’d done over the years. She looked at her mutual-fund balances. The nineties had been good to her; she had $2 million. She quit her job. “It took me a while to get the courage to even tell my boss, and I just felt like I was abandoning everyone. And I was afraid — I’d worked my whole life. I was afraid not to work. I mean, you have to work. It was ingrained in me since I was 16, 17: You have to work, you have to work, you have to work. That’s how I was raised, that’s what my family did, that’s what my mother did with a rotten heart. She went to work six days a week barely able to walk. But I said, You know what, I’m not important. Life goes on for these other people: the business will succeed, I’m not that important. That’s what I had to tell myself: I’m not that important, and I’m not irreplaceable.”

Phyllis called a broker at her firm who she knew had been particularly successful. She told him she needed to live off of that $2 million for however long she might last with her Parkinson's. She needed growth, but nothing too risky — the stability of an annual return on her investment, and the certainty that what she was investing in wouldn’t disappear forever. Then a new chapter started in Phyllis’s life. Prompted by her illness, she found herself doing things she never allowed herself to do before. She fell in love, sold her home, moved in with her new love, a lawyer, and started doing volunteer work at a school for disabled children, then was trained to become a counselor for a service run out of a local hospital. Phyllis decided to adopt a child. “I grew up without a father, so I always thought, ‘Nah, I can’t have a child unless this child has a father.’ And that’s kind of narrow-minded, old-fashioned thinking. And luckily my thinking changed before I died.”

She checked with her broker to see if she could afford it. “Don’t worry,” she remembers him saying. “You take care of your adoption, and I’ll take care of your finances. It’s in good hands.” Her fund kicked out a steady 10 percent return most years. ““That’s Bernie,” her broker would say. Over the years, she learned a little bit more about Bernie. “Bernie really knows what he’s doing,” her broker would say, “but nobody knows what Bernie does. Bernie has a strategy.” Whatever it was, it was working. In early 2008, Phyllis became a mother, welcoming a baby boy into her new family. She immediately started planning to adopt another child.

On December 11, 2008, Phyllis was at home, a 60-year-old stay-at-home mom with a crawling baby. The phone rang, and she picked it up. It was her broker, asking if she was watching TV. “No,” said Phyllis. “Why?” Phyllis turned on the TV, waiting to hear about another building bombed, and saw the face of a man she didn’t recognize. Her broker started telling her that Bernie got arrested.

“I’m thinking, Bernie who?” she remembers now. “Oh yeah, Bernie, Bernie! I remember now who Bernie is.” She got it now. Bernie got arrested yesterday for criminal fraud. So nobody died. That’s when she said to her broker, “How much did we lose?”

And that’s when he said, “Everything.”

“And that was it,” she says. “My head exploded, I just went crazy! I could not accept it, I could not accept it! I just fell to the floor, I’m embarrassed to say. I’m not a very overt, emotional person. I am emotional, but I contain it. I went crazy, definitely went crazy. My son was there, screaming. Mom is screaming, he’s screaming. He’s crying, I’m screaming. I don’t raise my voice. I was screaming, banging at the floor. I think I was screaming at … my broker was still on the phone screaming. My partner was on the floor with me, trying to console me. I screamed on the phone, 'This is all I have, this is all I have. I have nothing else. I don’t have any other money. This is it. I’m in the middle of another adoption. I’m getting a sibling for my son,' and just banging the floor and banging the floor. And then I remember being in the other room and sitting down, still mumbling, 'I have nothing. Nothing.'"

Today, Phyllis Molchatsky and one other plaintiff, a physician named Stephen Schneider, became the first people to officially sue the Securities and Exchange Commission for failing to detect the fraud that led to the wiping out of their life savings at the hands of Bernie Madoff. They have an uphill battle: Suing the government for negligence is only allowable under a very narrow set of circumstances. But if anyone has an opening, they might: The bombshell inspector-general report in August that detailed the many ways the SEC let Madoff continue unscrutinized. In fact, many of Madoff’s victims say they wouldn’t have put in nearly as much money as they did had the SEC not given Madoff’s funds a clean bill of health after an investigation in 1992. “This is actually a situation where regulation dramatically by an order of magnitude compounded the problem,” says Ron Stein, an investment adviser whose family lost money with Madoff and who now runs Madoff-help.com, a website that serves as an information clearinghouse for victims. “In financial terms, we use the term ‘transferring of risk.’ And that’s what happened: This transferred the risk to the federal government, theoretically. And it was a terrible failure.”

Molchatsky has been mournful this year, watching the market slowly eke up again, understanding that for the first time in her adult life, she is out of the game. “Other people still have a nest egg to invest. I've got nothing.” Then, over the summer, she marveled at Madoff's first jailhouse interview — the way he flat-out said how surprised he was the SEC never caught him in the act.

As she remembered this, her glassy blue eyes sparked a little; for a moment, her life had some hope, a purpose.

“It's like he was turning in his accomplice!” she said.

Related: The Madoff Exiles [NYM]