Madoff investors can't sue SEC -U.S. appeals court

NEW YORK, April 10 Wed Apr 10, 2013 1:35pm EDT

NEW YORK, April 10 (Reuters) - Victims of Bernard Madoff's investment fraud have lost their bid to sue the U.S. Securities and Exchange Commission for negligence in failing to uncover the swindler's Ponzi scheme.

A federal appeals court in New York on Wednesday upheld the dismissal of lawsuits against the U.S. securities regulator brought by Madoff investors. The court said the SEC's actions and "regrettable inaction" were protected by a law that shields federal agencies from liability.

The Madoff case embarrassed the SEC, which had investigated the now-imprisoned money manager but failed to detect his fraud.

The investor lawsuits relied heavily on a 2009 report by the SEC Inspector General's office, which outlined how the agency missed red flags and failed to follow up properly on leads that he was running a massive scam at his firm, Bernard L. Madoff Investment Securities LLC.

Howard Kleinhendler, a lawyer for eight plaintiffs who he said lost $50 million in Madoff's scheme, said he could not envision a better example of a case in which the SEC should be held liable for failing to prevent a fraud.

"It just shows that we spend a lot of money on this agency, and when they screw up, they're not accountable," he said, adding that he would seek U.S. Supreme Court review of the case.

An SEC spokesman did not immediately respond to a request for comment.

In an unsigned opinion, a three-judge panel of the 2nd U.S. Circuit Court of Appeals expressed "sympathy for Plaintiffs' predicament (and our antipathy for the SEC's conduct)," but said Congress' intent was to protect regulators' discretionary use of their investigatory powers.

The ruling upholds an April 2011 decision by U.S. District Judge Laura Taylor Swain in Manhattan, which tossed a lawsuit brought by Madoff investors Phyllis Molchatsky and Steven Schneider.

Several similar cases by other investors that were also dismissed were consolidated for the appeal.

Separately, the 9th U.S. Circuit Court of Appeals earlier this year rejected claims against the SEC by other former Madoff clients.

Madoff pleaded guilty in March 2009 to running what prosecutors say was a $65 billion Ponzi scheme. He was sentenced to a 150-year prison sentence in June 2009.

Irving Picard, a court-appointed trustee, has said he has recovered or reached settlements for $9.32 billion for former Madoff customers.

The case is Molchatsky v. United States, 2nd U.S. Circuit Court of Appeals, No. 11-2510.

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Comments (3)
stonehillady wrote:
No Accountability, No Rule of Law, No More Trust in the System, Why have an agency if it doesn’t do it’s Job ?????
America is now run by crooks for crooks, this is no place to invest anything…..it is Over !
Anyone that is foolish enough to deal with American Companies & Wall Street are playing with fire & deserve to lose because it is a Lawless Place. !

Apr 10, 2013 3:53pm EDT  --  Report as abuse
pattersh wrote:
A government agency that cannot be held liable for its actions (or inaction) is no more trustworthy than any thief granted similar immunity.

Apr 10, 2013 4:10pm EDT  --  Report as abuse
Hamsholm wrote:
Why have regulatory agencies if they aren’t liable for not fulfilling their duties? Inaction is not a excuse otherwise doctors, soldier, engineers, or any professional hired to perform a specific duty could not be held accountable for dereliction of duty.
The only reason would be they are government agencies that aren’t accountable for anything ever.

Apr 10, 2013 4:14pm EDT  --  Report as abuse
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