On Wednesday April 10, the Second U.S. Circuit Court of Appeals upheld a lower court’s rejection of claims by a number of former Madoff clients who argued “the SEC negligently failed to adequately investigate Bernard Madoff despite numerous warnings.”
The three judge panel stated that the SEC employees are covered by the Discretionary Function Exception of The Federal Torts Claims Act (FTCA). The FTCA bars claims that are based on performance, or failure to perform a discretionary function or duty of federal government or a federal agency by the employee; even if there is an abuse of discretion. In sum, a personal injury cause of action cannot be filed under the FTCA if the employee’s negligence arises from a discretionary function or the execution of a statute or regulation.
Apparently, the SEC employees who used their individual and group discretion with regard to their handling of the warnings, tips and complaints about Madoff are protected. If their discretion was to simply throw the tips in the trash and look the other way, they may be entitled to do so. They would not be liable for the losses suffered by the defrauded Madoff clients.
The judges said they have “sympathy” for the Plaintiffs, and they called the SEC’s failure to uncover Madoff’s scheme “regrettable,” but “Congress’ intent to shield regulatory agencies’ discretionary use of specific investigative powers…is fatal to the Plaintiff’s claims.”
Madoff pleaded guilty in 2009 to orchestrating an enormous fraud that cost his clients at least $17 billion. He is currently serving what amounts to a life sentence in federal prison in North Carolina.
How do you feel about the Court’s decision?
Author: Jennifer Trowbridge, Stoecklein Law Group, LLP
*Photo Credit: US Department of Justice, 2009