A federal appellate court has dismissed a lawsuit filed by two Southern California attorneys against the U.S. government for failing, through the U.S. Securities and Exchange Commission, to stop Ponzi scheme operator Bernard Madoff from bilking investors out of more than $60 billion.

The U.S. Court of Appeals for the Ninth Circuit on January 28 upheld a lower court’s conclusion that it lacked jurisdiction to hear the claims, which attempted to assert a “discretionary function” exemption to the federal government’s waiver of sovereign immunity under the Federal Tort Claims Act. The appeals panel agreed that the plaintiffs failed to overcome that exception in alleging that the SEC violated its mandatory duties by failing to catch Madoff’s fraud.

Justice Department spokeswoman Tracy Schmaler did not respond to a request for comment.

The suit was brought by Richard Gordon, a solo practitioner representing himself, and Philip Dichter, representing himself and his wife, Claudia Gvirtzman Dichter, and their family partnership, Dichter-Mad Family Partners LLP.

Dichter, a solo practitioner in Malibu, Calif., who has been on voluntarily inactive status to practice law in California since January 25, and Gordon said they planned to seek further appellate review, either by an en banc panel of the Ninth Circuit or the U.S. Supreme Court.

“The mandatory duty was not to sit at their computers and watch pornography,” he said. “The report from SEC inspector general was saying that’s what they were doing, and we feel we should be allowed to present their case to the jury.”

The suit, filed on December 10, 2009, relied heavily on the findings of that report, which concluded in August 2009 that the SEC ignored numerous warning signs, beginning in 1992, that Madoff was committing fraud. The report also found that the SEC failed to follow through on numerous complaints about Madoff.

Madoff pleaded guilty in March 2009 to 11 felonies tied to the Ponzi scheme and was later sentenced to 150 years in prison.

“The fraud could have been discovered at any number of points in the previous sixteen years had the SEC ‘performed its everyday, non-discretionary functions with the most basic level of competence,’ ” the complaint says, according to the dismissal order by U.S. District Judge Stephen Wilson. “ At various points, even ‘a single action, performed diligently and ably, or even with the most minimal competence, would have exposed the scheme.’ “

The complaint originally named the U.S. government and the SEC as defendants but the plaintiffs later dropped the SEC from the case.

On April 20, 2010, Wilson dismissed both defendants from the case, but allowed the plaintiffs to amend their complaint. The Ninth Circuit upheld that dismissal.

The torts claims law allows individuals to seek monetary damages “for injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of any employee of the government while acting within the scope of his office or employment.” Under the “discretionary function exception” to that law, federal courts are barred from ruling on actions arising from a federal office’s discretionary acts, as opposed to actions that pertain to statute, regulation or policy.

Wilson ruled that the U.S. government had established that it retained broad authority in deciding how to conduct investigations and enforcement actions.

“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,” Wilson wrote.

Furthermore, he said, the government succeeded in meeting a threshold two-part test set forth in the U.S. Supreme Court’s 1991 ruling in U.S. v. Gaubert for establishing that its actions were discretionary and not covered under the exception.

The plaintiffs argued they had identified five alleged mandatory duties that the SEC ignored: to share information; obtain trading records from third parties; hire, train or deploy qualified staff members; avoid improper personal motivations; and engage in various administrative case-management tasks.

“Many of Plaintiffs’ allegations (including the factual averments contained in the Report) identify decisions that, in hindsight, could have and should have been made differently,” Wilson wrote. “Other allegations reveal the SEC’s sheer incompetence in regulating Madoff’s broker-dealer, market-making, and investment-management operations. What is lacking in the present Complaint, however, is any 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.”

Contact Amanda Bronstad at abronstad@alm.com.