The Securities and Exchange Commission cannot be sued for failing to detect Bernard Madoff’s massive Ponzi scheme, the U.S. Court of Appeals for the Second Circuit said yesterday. Plaintiff investors claimed the SEC was liable and could be sued under the Discretionary Function Exception to the Federal Tort Claims Act because the agency negligently failed to investigate Bernard L. Madoff Investment Securities after being warned in a number of complaints about the business over a 16-year period, a violation of federal statutes and regulations as well as internal agency policies.
The investors’ arguments were rejected by Southern District Judge Laura Taylor Swain (See Profile) and again on appeal in Molchatsky v. United States, 11-2510-cv, an unsigned decision by Judges Richard Wesley (See Profile), Christopher Droney (See Profile) and, sitting by designation, Southern District Judge Alison Nathan (See Profile). "Because we find that the SEC’s actions, and its regrettable inaction, are shielded by the Discretionary Function Exception," the panel said it was affirming dismissal for lack of subject matter jurisdiction. "Congress’s intent to shield regulatory agencies’ discretionary use of specific investigative powers" via the exception "is fatal to plaintiffs’ claims" the panel decided.
