Madoff investors' SEC lawsuit rejected by appeals court

A federal appeals court has rejected a lawsuit

A federal appeals court has rejected a lawsuit by those who lost money in Bernard Madoff's Ponzi scheme, saying they cannot hold the Securities and Exchange Commission responsible for failing to expose the scam. (Credit: Getty Images, 2009)

A federal appeals court in Manhattan on Wednesday shot down lawsuits that victims of Bernard Madoff filed against the Securities and Exchange Commission for its failure to follow up on tips and leads about the Ponzi scheme.

In its eight-page ruling, the Second U.S. Circuit Court of Appeals expressed "sympathy" for the victims and criticized the SEC for its "regrettable inaction" and "repeated failure" to follow leads and staff investigations.

"The SEC missed many opportunities to uncover Madoff's multi-billion dollar fraud," the court wrote.


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But the three-judge panel found that there was no way around statutes limiting the right of citizens to sue government agencies over the flawed execution of a discretionary function or duty.

"The discretionary function exception is not about fairness, it is about power," the judges wrote. "Despite our sympathy for plaintiffs' predicament (and our antipathy for the SEC's conduct), Congress's intent to shield regulatory agencies' discretionary use of specific investigative powers . . . is fatal to the claims."

A lawyer for plaintiffs in the case said he was disappointed and would try to appeal to the Supreme Court.

"We don't think the SEC did its job in protecting the investor community," said Howard Kleinhendler. "If they can get away with it here, they'll never have to be accountable."

After Madoff's multibillion-dollar fraud surfaced in 2008, an investigation by the SEC's inspector general found the agency received six substantive complaints dating to 1992 that raised "significant red flags" about Madoff, but had never conducted a "thorough and competent investigation."

Kleinhendler said the appeals court gave the SEC too much credit by concluding it exercised discretion in not investigating Madoff, because it never even got that far."We don't think they exercised any discretion," he said. "Their investigation was so flawed that they never reached the point where they could make a subjective, discretionary decision."

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