Baer v. United States, No. 12-1319; Third Circuit; opinion by Stark, U.S.D.J.; filed July 1, 2013. Before Judges Hardiman, Aldisert and Stark, District Judge, sitting by designation. On appeal from the District of New Jersey, No. 2-11-cv-01277. [Sat below: Judge Chesler.] [17 pp.]
This case arises from the Ponzi scheme operated by Bernard Madoff. Plaintiffs-appellants were customers of Bernard L. Madoff Investment Securities (BLMIS) and brought suit against the United States under the Federal Tort Claims Act (FTCA) to recover damages for injuries resulting from the alleged failure of the Securities and Exchange Commission (SEC) to uncover and terminate Madoff's Ponzi scheme in a timely manner. The allegations contained in appellants' complaint are derived substantially from a 457-page report prepared by the SEC's Office of Investigations (the OIG report), which describes in detail the SEC's failed multiyear investigation of Madoff's Ponzi scheme.
Appellants contend that had the SEC investigated BLMIS with even the most basic level of competence, Madoff's scheme would have been discovered and appellants' losses would have been prevented. Their complaint alleges three causes of action under the FTCA: (1) that the SEC was negligent in its investigations of BLMIS; (2) that the SEC aided and abetted breaches of fiduciary duty committed by BLMIS; and (3) that the SEC aided and abetted the fraud perpetrated by BLMIS.
The government moved to dismiss for lack of jurisdiction, contending that the alleged misconduct fell within the discretionary function exception (DFE) to the FTCA. The district court agreed with the government and dismissed the complaint.
Held: The discretionary function exception to the Federal Tort Claims Act immunizes the SEC from a lawsuit brought by victims of the Madoff Ponzi scheme.
The FTCA waives the federal government's sovereign immunity with respect to tort claims for money damages. The discretionary function exception limits that waiver, eliminating jurisdiction for claims based on the exercise of a discretionary function on the part of an employee of the government.
To determine whether the DFE applies, courts employ a two-part test. First, a court must consider whether the action is a matter of judgment or choice for the acting employee. Second, a court must determine whether the judgment exercised is of the kind that the discretionary function exception was designed to shield. The DFE protects only governmental actions and decisions based on considerations of public policy. If a regulation allows the employee discretion, the very existence of the regulation creates a strong presumption that a discretionary act involves consideration of the same policies that led to the promulgation of the regulation.
Appellants contend that the SEC is not protected from liability under the DFE. Appellants argue that the SEC conduct challenged by their complaint violated numerous mandatory, nondiscretionary statutes and regulations. Appellants further assert that any discretion exercised by the SEC is not susceptible to policy analysis.
Although appellants contend that the SEC violated several mandatory internal procedures during the BLMIS investigation, they have not demonstrated that those procedures are anything more than discretionary guidelines for SEC personnel. Hence, the circuit panel agrees with the district court, as well as the other federal courts, and concludes that appellants have failed to identify any violation of a mandatory policy or guideline by any SEC employee.
Appellants' principal argument for an outcome different from that in all of the similar lawsuits is that appellants allege the SEC had no discretion to favor Madoff, "a Wall Street bigwig," and for this reason the SEC's conduct is not protected by the DFE. Appellants cite to four SEC regulations as the bases for a mandatory duty that the SEC not be accorded preferential treatment. However, the regulations on which appellanta rely are intertwined with the SEC's discretionary authority to determine the timing, manner and scope of SEC investigations. All of the challenged actions involve government actors' exercise of judgment and choice of the kind the discretionary function was designed to shield.
The regulations also do not prescribe any particular course of action for the SEC to follow. At most, these regulations attempt to limit the scope of discretion afforded the SEC during the course of an investigation. Although a violation of these regulations may amount to an abuse of discretion, that is not sufficient to waive the federal government's sovereign immunity — the discretionary function exception applies whether or not the discretion involved is abused.
Additionally, because SEC regulations afford examiners discretion regarding the timing, manner and scope of investigations, there is a strong presumption that the SEC's conduct is susceptible to policy analysis. Appellants' attempt to rebut this presumption by alleging an SEC intent to protect a "Wall Street bigwig" is unavailing. Whether to pursue a lead, to request a document, or to assign additional examiners to an investigation are discretionary decisions, which necessarily involve considerations of, among other things, resource allocation and opportunity costs. The discretionary function exception immunizes the government from a lawsuit based on such discretionary judgments.
Appellants' other basis for distinguishing this case is the allegation that the SEC does not have discretion to commit misprision of felony. The elements of misprision of felony are "(1) the principal committed and completed the felony alleged; (2) the defendant had full knowledge of that fact; (3) the defendant failed to notify authorities; and (4) the defendant took steps to conceal the crime." There is no dispute that Madoff committed a felony. However, none of the remaining elements of misprision of felony is present. Most important, the SEC did not have "full knowledge" of Madoff's fraud. Lacking such knowledge, the SEC also could not have failed to notify authorities nor taken steps to conceal Madoff's crime.
The circuit panel affirms the judgment of the district court.
For appellants — Helen D. Chaitman (Becker & Poliakoff). For appellee — Stuart F. Delery, Paul J. Fishman, Mark B. Stern and Lindsey Powell (U.S. Department of Justice).