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Federal appeals court rejects Madoff victims' suit against SEC

The US Court of Appeals for the Second Circuit [official website] on Wednesday affirmed the dismissal [opinion, PDF] of a suit by victims of the Bernie Madoff [JURIST news archive] Ponzi scheme against the US Securities and Exchange Commission (SEC) [official website]. The Madoff victims had argued that the SEC was liable under the Federal Tort Claims Act (FCTA) [28 USC § 1346(b)] for failing to detect Madoff's Ponzi scheme and the resulting financial damages. The FTCA is an exception to the US government's sovereign immunity. The court found that the Discretionary Function Exemption (DFE) [28 USC § 2680], an exception to the FTCA exception, applied and thus barred the Madoff victims' suit. The DFE applies where the allegedly negligent acts are discretionary and the judgment in choice is grounded in consideration of public policy or susceptible to policy analysis. Since the SEC's decision whether to pursue a case is discretionary and the decision was due to a policy consideration of allocation of SEC resources, the DFE applied. Although the court dismissed the Madoff victims' complaint, the court referred to the SEC's conduct as "regrettable inaction" and stated that was forced to make this ruling "[d]espite our sympathy for Plaintiffs' predicament (and our antipathy for the SEC's conduct)." A similar decision [JURIST report] was made in the US Court of Appeals for the Ninth Circuit [official website] in January in another lawsuit of Madoff victims against the SEC.

Madoff's scheme is believed to have defrauded investors of over $65 billion. Last July the US District Court for the Southern District of New York (SDNY) [official website] approved the first payouts [JURIST report] to Madoff's victims. Madoff trustee Irving Picard filed almost 60 lawsuits [JURIST report] for victims of Madoff's fraud in December 2010, including suits against large banks like JPMorgan Chase and HSBC. Judge Louis Stanton made Picard the trustee of Bernard L Madoff Securities, LLC in December 2008. Madoff was sentenced [JURIST report] in June 2009 to 150 years in prison for securities fraud stemming from his Ponzi scheme. He pleaded guilty [JURIST report] to 11 counts of securities fraud in March 2009.

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