The Ninth Circuit recently affirmed a judgment – from the Central District of California – that the victims of Bernard Madoff’s Ponzi scheme lack subject matter jurisdiction to sue the Securities and Exchange Commission as an agency of the United States under the Federal Tort Claims Act.
The SEC compiled a 450-page public report highlighting its failure to uncover Madoff’s problematic investment activities. The allegations posed by the victim plaintiffs centered on decisions made by the SEC which the district court acknowledged “should have and could have been made differently” and “reveal[ed] the SEC’s sheer incompetence.” Nevertheless, the court held that the United States was protected from suit because the Securities and Exchange Commission was engaged in a discretionary function. An exception is set aside in the Federal Tort Claims Act (“FTCA”) whereby employees of the Government cannot be held liable for failures relating to purely “discretionary” functions of that employee.
The district court, considering the legislative history of the FTCA, noted that Congress “repeatedly and explicitly suggested” that the SEC should be shielded by the discretionary function exception. The FTCA only allows a claim where statutory language mandates a particular course of action. By contrast, the duties and functions of the SEC allow it discretion in choosing who to investigate and when to bring enforcement proceedings. Because the plaintiffs could not demonstrate that the SEC violated a specific and mandatory policy directive that related to the investigation, the court held they failed to overcome an FTCA claim’s threshold requirement.
In affirming the decision of the lower court, the Ninth Circuit centered its analysis on the absence of any violations of mandatory directives. Requirements on the SEC introduced by the plaintiff (appellants) in their amended complaint and brief lacked a causal relationship to the harms they suffered. Furthermore, the court emphasized that the existence of a few mandatory directives does not establish a presumption that all policies are also mandatory.
The Ninth Circuit also upheld the district court’s decision to refuse additional discovery to the plaintiffs. Relying on the standards for properly stating a claim established in Bell Atlantic v. Twombly (2007) and Ashcroft v. Iqbal (2009), the three-judge panel determined that the district court acted properly in concluding that the plaintiffs have not presented enough facts to raise a reasonable expectation that discovery will reveal the evidence needed to proceed.
The Ninth Circuit has effectively sounded a caveat emptor. Though by its own admission, the SEC did an unacceptable job in failing to recognize and interrupt Bernie Madoff’s deceptive practices, the agency is not liable (under the FTCA) for its failure. According the Ninth Circuit, the SEC has the discretion to take action where it sees fit and is not liable where it falls short.
Read the opinion here.
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