Madoff Victims’ Suit against the SEC Suffers Another Setback
The U.S. Court of Appeals for the Ninth Circuit has affirmed a federal district court’s decision dismissing claims against the Securities and Exchange Commission brought by victims in Bernard Madoff’s Ponzi Scheme.
The circuit court, in Dichter-Mad Family Partners, LLP v. U.S., No. 11-55577 (9th Cir. Jan. 28, 2013), held that the Madoff victims’ claims fell within the “discretionary function” exception to the United States’ waiver of sovereign immunity in the Federal Tort Claims Act.
In their complaint, the Madoff victims asserted that the SEC “owes a duty of reasonable due care to all members of the general public including all investors in U.S. financial markets who are foreseeably endangered by its conduct.” They also asserted that the SEC’s negligent acts and omissions “caused Madoff’s scheme to continue, perpetuate, and expand,” and that the SEC “fail[ed] to terminate Madoff’s Ponzi scheme despite its multiple opportunities to do so.” The victims further asserted that they “were among those victimized by Madoff. Plaintiffs made their investments in reliance on Madoff’s reputation, clean regulatory record, and the SEC’s implied stamp of approval.” Because of the SEC’s alleged negligence, the plaintiffs sought to recover their losses from their investments with Madoff.
In its decision, the district court acknowledged that many of the victims’ allegations identified decisions that, in hindsight, “could have and should have been made differently” and that other allegations revealed “the SEC’s sheer incompetence in regulating Madoff’s broker-dealer, market-making, and investment-management operations.” However, the district court ruled that what was lacking was “any plausible allegation revealing that the SEC violated its clear, non-discretionary duties.”
Now, the Ninth Circuit has affirmed that ruling.