Second Circuit Affirms Dismissal of Negligence Suit Against SEC Because of Madoff

The Second Circuit today affirmed a district court's dismissal of investors' claims against the SEC for failing to adequately investigate Bernard Madoff despite numerous warnings.  The appeals court affirmed because the Discretionary Function Exception (DFE) of the Federal Tort Claims Act shields the SEC's conduct from plaintiffs' claims.  Molchatsky v. US (11-2510-cv(L), decided Apr. 10, 2013Download Molchatsky v US)

The court noted that:

The DFE is not about fairness, it “is about power”... .; the sovereign “reserve[s] to itself the right to act without liability for misjudgment and carelessness in the formulation of policy,” ... “[T]he  DFE bars suit only if two conditions are met: (1) the acts alleged to be negligent must be discretionary, in that they involve an ‘element of judgment or choice’ and are not compelled by statute or regulation and (2) the judgment or choice in question must be grounded in ‘considerations of public policy’ or susceptible to policy analysis.”.... Plaintiffs bear the initial burden to state a claim that is not barred by the DFE....
Here, Plaintiffs have failed to make the necessary showing.