SEC Dodges Negligence Suit Over Madoff Scheme

WASHINGTON (CN) - The Securities and Exchange Commission may have let Bernie Madoff's massive Ponzi scheme go on too long, but it is not responsible for the multibillions fraud, a federal judge ruled.

"The financial losses suffered by the plaintiffs and other victims of Bernard Madoff's fraud are undeniably tragic, and a desire to hold the government accountable for the SEC's egregious and well-documented missteps is understandable," U.S. District Judge Paul Friedman wrote. "But were the plaintiffs to prevail, 'the SEC would become the guarantor of the investment decisions of individuals who choose to participate in regulated markets,' ... a result not in keeping with the FTCA and its statutorily imposed limits."

Three investors who lost more than $2 million combined in Madoff's scheme filed suit after the SEC's Office of the Inspector General issued a 2009 report that catalogued the myriad of failures in investigating Madoff over the years.

"Drawing on the OIG Report, the plaintiffs allege that between 1992 and 2008 the SEC received numerous complaints and other indications related to Madoff's brokerage firm that credibly indicated he may have been engaged in fraud," the decision states.

Madoff's victims said the report showed that the SEC investigation could have uncovered the massive fraud well before Madoff's confession, but for critical errors. They said the SEC assigned critical tasks to inexperienced junior staffers, failed to contact third parties about Madoff's claimed trading activities, and "allowed 'inter-office rivalries' and awe of Madoff's prestige to impair its investigations," according to the court's summary.

Friedman dismissed these claims for lack of jurisdiction, as many other judges have done with similar cases.

The federal government is immune under the discretionary function of the Federal Tort Claims Act, the decision states

"The plaintiffs have not identified any 'mandatory obligations' violated by SEC employees during the performance of their discretionary responsibilities, nor have they alleged facts 'demonstrating that the challenged actions are not grounded in public policy considerations,'" Friedman wrote.

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