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Media Alerts - Molchatsky, et al. v. United States - Second Circuit
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April 10, 2013
  Molchatsky, et al. v. United States - Second Circuit
Headline: Second Circuit Affirms That SEC Cannot Be Sued for Its Failure to Investigate the Madoff Ponzi Scheme

Area of Law: Administrative Law

Issue(s) Presented: Whether Defendant is liable under the Federal Tort Claims Act for neglecting to address complaints against Bernard Madoff over a sixteen-year period, eventually resulting in lost investments for Plaintiffs when Madoff's Ponzi scheme collapsed.

Brief Summary: Plaintiffs filed a complaint against the United States Securities and Exchange Commission (the "SEC") in the United States District Court for the Southern District of New York, claiming that the SEC is liable for negligence under the Federal Tort Claims Act ("FTCA") because it failed to uncover Bernard Madoff's ("Madoff") fraud, despite receiving several complaints about Madoff during a sixteen-year period. Plaintiffs had invested with Bernard I. Madoff Investment Securities LLC, and lost their money after Madoff's Ponzi scheme collapsed and was exposed in 2008. The district court granted the United States' motion to dismiss the complaints. The Second Circuit affirmed, agreeing that the SEC is shielded from liability under the FTCA by the statute's Discretionary Function Exception, pursuant to which government agencies cannot be sued for the performance (or non-performance) of their discretionary duties. To read the full opinion, please go to: http://www.ca2.uscourts.gov/de...734edc6fd45/2/hilite/

Extended Summary: Plaintiffs filed a complaint against the United States Securities and Exchange Commission (the "SEC") in the United States District Court for the Southern District of New York claiming that the SEC is liable for negligence under the Federal Tort Claims Act ("FTCA") because they failed to uncover Bernard Madoff's fraud. Their claim centered on an extensive report from the SEC's Office of the Inspector General pointing out approximately eight complaints received by the SEC about Madoff during a sixteen-year period, none of which resulted in a response by the SEC. They asserted that the SEC's failure to act on complaints made against Madoff resulted in missed opportunities for the SEC to uncover Madoff's fraudulent Ponzi scheme, which eventually resulted in Plaintiffs losing their investments made with Madoff after the scheme collapsed in 2008.

The FTCA provides an exception to the rule that the United States is generally immune from suit. The FTCA states that federal courts "shall have exclusive jurisdiction of civil actions on claims against the United States, for money damages, accruing on and after January 1, 1945, 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 circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred." However, the FTCA also includes a Discretionary Function Exception ("DFE"), which provides that "[a]ny claim based upon an act or omission of an employee of the Government, exercising due care, in the execution of a statute or regulation, whether or not such statute or regulation be valid, or based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused." The district court dismissed the plaintiffs' complaint on this basis, and the Second Circuit affirmed.

Citing its own precedent, the Second Circuit emphasized that "the DFE bars suit only if two conditions are met: (1) the acts alleged to be negligent must be discretionary, in that they involve an 'element of judgment or choice' and are not compelled by statute or regulation and (2) the judgment or choice in question must be grounded in 'considerations of public policy' or susceptible to policy analysis." Here, the court found that the SEC's failure to uncover Madoff's Ponzi scheme was intertwined with discretionary decisions which Congress intended to shield from liability. It explained that the SEC has the discretion to determine whether to investigate an individual or entity, regardless of whether complaints have been lodged against that party, because decisions related to the allocation of resources and SEC staff's time is "sufficiently grounded in economic, social and policy considerations."

To read the full opinion, please go to: http://www.ca2.uscourts.gov/de...734edc6fd45/2/hilite/

Panel:
Circuit Judges Wesley and Droney; District Judge Nathan

Argument: 03/14/2013

Date of Issued Opinion: 04/10/2013

Docket Number: 11-2510-cv(L)

Decided: Affirmed

Case Alert Author: Jesse Glickstein

Counsel : PATRICIA M. GRAHAM (Howard Elisofon, David R.King, on the brief), Herrick, Feinstein LLP, New York, NY, for Plaintiff-Appellant Phyllis Molchatsky; DR. GAYTRI D. KACHROO, Kachroo Legal Services, P.C., Cambridge, MA, for Plaintiff-Appellant Charles Mederrick; Howard Kleinhendler, Sara Spiegelman, Wachtel Masyr & Missry LLP, New York, NY, for Plaintiff-Appellant Allan H. Applestein. SARAH S. NORMAND, Assistant United States Attorney (Neil M. Corwin, Assistant United States Attorney, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for Defendants-Appellees; Lawrence R. Velvel, Massachusetts School of Law, Andover, MA; David Bernfeld, Bernfeld, DeMatteo & Bernfeld LLP, New York, NY, for Amicus Curiae Network for Investor Action and Protection.

Author of Opinion: Per Curiam

Supervisor: Professor Emily Gold Waldman

    Posted By: Emily Waldman @ 04/10/2013 05:01 PM     2nd Circuit  

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