A federal judge has thrown out a lawsuit alleging that the U.S. Securities and Exchange Commission is liable to investors for failing to detect Bernard Madoff's $50 billion Ponzi scheme.
The judge ruled on Tuesday that the agency acted within its discretion.
"Plaintiffs in this case largely fail to identify any mandatory 'policies' or 'practices' that were violated in this case," wrote U.S. District Judge Stephen V. Wilson of the Central District of California. "Their 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 investors sued in December under the Federal Tort Claims Act (FTCA), alleging that the SEC "owes a duty of reasonable care to all members of the general public including all investors in U.S. financial markets who are foreseeably endangered by its conduct." The suit cited the SEC Office of Inspector General's report last year detailing how the agency failed to uncover Madoff's scheme.
The investors asserted in their complaint that SEC investigators ignored numerous red flags and tips regarding Madoff. When they finally launched investigations, they failed to communicate among one another about their conclusions, the investors alleged.
Specifically, they claimed that the SEC failed to coordinate its investigations, failed to follow up with third parties about Madoff's practices, assigned inexperienced staffers to the case and failed to follow its own internal procedures.
The Department of Justice moved to dismiss, arguing that the court lacked jurisdiction to hear FTCA claims under the statute's "discretionary function exemption," which bars tort actions against federal officers who commit discretionary acts in the course of their jobs.
In granting dismissal of the case, Wilson relied on court precedent as well as statutory and regulatory language.
One of the investors, Richard Gordon, a solo practitioner in Beverly Hills, Calif., representing himself in the case, did not return a call for comment. The other, Philip J. Dichter of Philip J. Dichter Law Offices in Malibu, Calif., who represents his family's investment partnership in the case, declined to comment about the judge's order or whether he planned to file an amended complaint within the next 30 days.
He said that his family lost a "significant sum" investing with Madoff. He also said his case is one of three alleging similar claims against the U.S. government over the SEC's failure to discover Madoff's Ponzi scheme.
Justice Department spokesman Charles Miller declined to comment.
For more coverage on the Madoff case, visit Law.com's Madoff Watch.
