Securities: Circuit Court Blasts SEC While Ruling in Its Favor over Madoff Case

On April 10, 2013, the United States Court of Appeals for the Second Circuit upheld the lower court's dismissal of a law suit brought by victims of convicted Ponzi schemer Bernard Madoff's fraud.  Plaintiffs in the case of Molchatsky, et al., v. United States, alleged that the Securities and Exchange Commission was negligent in its failure to uncover Madoff's fraud for more than 16 years.  The plaintiffs based their action on the Federal Tort Claims Act ("FTCA").

 

The FTCA is a statutory exception to the principal of "sovereign immunity," which provides that the government is immune from suits arising from governmental functions.  The FTCA allows suits against the government for negligence.  Nevertheless, it contains what is known as the "discretionary function exception."  The Second Circuit held that the SEC's decision to investigate or not investigate Madoff was "too intertwined with purely discretionary decisions" of the agency.  Thus, the court denied the plaintiffs the opportunity to proceed with the suit.

 

While the decision is a victory for the SEC against Madoff's victims, the Second Circuit added it prestigious voice to those condemning the SEC for its fail to investigate and uncover Madoff's massive fraud.  The court stated the following:  "Plaintiffs allege in detail approximately eight separate complaints the SEC received regarding Madoff and the SEC's inadequate and often incompetent response to each."  Additionally, the court characterized the SEC's inaction as "regrettable."

 

Please click on the following for the full text of the Second Circuit's opinion:  http://brokeandbroker.com/Madoff2Cir.pdf.  For the Forbes article on the decision, please click, http://www.forbes.com/sites/billsinger/2013/04/10/second-circuit-pounds-last-nail-in-madoff-plaintiffs-coffin/.  The New York Times "DealBook" section also has an article about the decision, http://dealbook.nytimes.com/2013/04/10/court-expresses-antipathy-for-s-e-c-in-handling-of-madoff-case/?hpw.