To Act Without Liability for Misjudgment and Carelessness in the Formulation of Policy…

In October, the trial of five former employers of imprisoned former financier Bernard Madoff began. Expected to last months, the trial should bring to light more of the murky details of the largest financial fraud in United States history. Recently, a New York appeals panel dismissed the case of a group of investors who sought to hold the Securities and Exchange Commission (SEC) financially responsible for investment monies lost when the Ponzi scheme run by Mr. Madoff collapsed.

In Molchatsky v United States, plaintiffs in the case alleged the SEC negligently failed to act on information and complaints received over a 16-year period concerning the investment activities of Mr. Madoff. The lawsuit claimed the SEC had multiple opportunities to uncover and stop the fraud perpetrated by Mr. Madoff, but the agency failed to do so.

On appeal from the district court, the Second Circuit court affirmed dismissal of the case for the following reasons:

  • The plaintiffs claimed the negligence of the SEC exposes the agency to the Federal Tort Claims Act (FTCA), which is an exception to the immunity usually granted to agencies of the United States government.
  • The Discretionary Function Exception (DFE) is an exception to the exception of the Federal Tort Claims Act (FTCA).
  • In this case, the DFE suspends the ability of the plaintiffs to sue for negligence under the FTCA.

In this case and those of others seeking to recover lost monies from the handling of the matter by the SEC, the appeals court writes, The DFE is not about fairness, it “is about power.”

In the months to come, more details of power abused by Mr. Madoff and his associates should come to light in court. When you have strategic business litigation or regulatory concerns in New York, speak with an attorney.

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