Court Bars Madoff Investor Lawsuits Against SEC

Apr 11 2013 | 11:09am ET

The Securities and Exchange Commission got a tongue-lashing from a New York federal appeals court yesterday, but that will be all it will have to suffer from a lawsuit filed by victims of Bernard Madoff's Ponzi scheme.

The U.S. Second Circuit Court of Appeals said that federal law prohibits claims related to government agencies' use of their investigative authorities. The ruling upholds the trial court's 2011 dismissal of the case.

But the court appears to have made its ruling reluctantly, noting its "sympathy for plaintiffs' predicament" and its "antipathy for the SEC's conduct."

"Plaintiffs allege in detail approximately eight separate complaints the SEC received regarding Madoff and the SEC's inadequate and often incompetent response to each," the three-judge panel wrote. "As a result of the SEC's repeated failure to alert other branch offices of ongoing investigations, properly review complaints and staff subsequent inquiries, the follow up on disputed facts elicited in interviews, the SEC missed many opportunities to uncover Madoff's multibillion-dollar fraud."

The ruling is the second by a federal appeals court to find that the "discretionary function" exemption applies to the SEC in the Madoff case, following one in January by the U.S. Ninth Circuit Court of Appeals in San Francisco.

"We believed that our clients were wronged (both by Madoff and the SEC), and their rights needed to be vindicated," a lawyer for some of the suing investors, Howard Elisofon, said. "We recognized that challenging the SEC would be difficult, but this was a case that needed to be fought."

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