Tuesday, January 29, 2013
Court Upholds Ruling That Madoff Victims Cannot Sue SEC
By KENNETH OFGANG, Staff Writer
The “discretionary function” exception to the Federal Tort Claims Act precludes investors who lost money in Bernard Madoff’s massive Ponzi scheme from recovering damages from the government based on the alleged negligence of the Securities and Exchange Commission, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
In a per curiam opinion, the panel—made up of Judges Stephen Reinhardt, Richard A. Paez, and Kim M. Wardlaw—largely adopted the opinion of U.S. District Judge Steven V. Wilson of the Central District of California. Wilson, in a 2010 ruling, dismissed an action by several investors, including a family partnership that includes Malibu attorney Phillip J. Dichter.
The plaintiffs filed suit in December 2009, several months after the SEC inspector general released a 450-page report detailing the agency’s failings, over a number of years, to recognize red flags that should have raised suspicions of fraud. Eight SEC employees were subsequently disciplined, although none were fired.
The investors who sued here said the SEC failed to coordinate its investigations, failed to follow up with third parties who could have shed light on the business practices of Madoff, now serving a 150-year sentence at the Federal Correctional Institution in Butner, N.C. They also accused the commission of assigning inexperienced staffers to the case and failing to follow the commission’s own internal procedures.
A similar suit was rejected by a U.S. district judge in Manhattan last year. That case, Molschatsky v. United States, is presently on appeal to the Second Circuit.
The Ninth Circuit panel yesterday agreed with Wilson that while the inspector general report identified “decisions that, in hindsight, could have and should have been made differently,” and that the plaintiffs had alleged “sheer incompetence” on the part of the SEC, there was no “plausible allegation revealing that the SEC violated its clear, non-discretionary duties, or otherwise undertook a course of action that is not potentially susceptible to policy analysis.”
Wilson cited several cases, including United States v. Gaubert (1991) 499 U.S. 315, a case growing out of the savings and loan crisis of the 1980s.
The plaintiff in that case was the chairman of a failed thrift institution taken over by the Federal Home Loan Bank Board. He alleged that the board, and its Dallas branch, had cost him $100 million—the amount of his investment, plus his liability on personal guarantees of the thrift’s debts—by insisting the thrift’s directors be replaced and by interfering in day-to-day management.
The Supreme Court said the plaintiff alleged nothing more than negligence on the part of the regulators, and could not show a breach of mandatory duties.
As it had in Gaubert, Wilson wrote, the government had identified statutes, regulations, and cases illustrating that the SEC has broad discretion, as a matter of policy, in how it conducts its investigations and enforcement actions.
“[Plaintiffs’] Complaint and their moving papers do not contain any attempt to rebut the Government’s preliminary showing that the SEC retained discretion to decide when to investigate, how to investigate, and whether or not to take enforcement actions,” the district judge wrote.
The case was argued in the Ninth Circuit by Richard Gordon for the plaintiffs and Sparkle Sooknanan for the government.
The case is Dichter-Mad Family Partners v. United States, 11-55577.
Copyright 2013, Metropolitan News Company