Court deplores SEC neglect in Madoff case, bars investors suit - NYTimes.com

A group of investors in Bernard Madoff's  ponzi scheme sought to recover from the United States because the Securties and Exchange Commission ignored signs that Madoff's fund was a fraudulent scheme.   In Molchatsky v. United States of America (2d Circuit April 10, 2013)The  plaintiffs alleged that

 the SEC negligently failed to uncover Madoff’s fraud despite receiving numerous complaints over a sixteen-year period. Relying on an extensive report from the SEC’s Office of the Inspector General, Plaintiffs allege in detail approximately eight separate complaints the SEC received regarding Madoff and the SEC’s inadequate and often incompetent response to each. As a result of the SEC’s repeated failure to alert other branch offices of ongoing  investigations, properly review complaints and staff  subsequent inquiries, and follow up on disputed facts  elicited in interviews, the SEC missed many opportunities to uncover Madoff’s multi-billion-dollar fraud.

Standing in their way was the discretionary function exception to the Federal Torts Claims Act which retains governmental immunity for decisions whether to prosecute or not.  - GWC

Court Expresses Antipathy for S.E.C. in Handling of Madoff Case - NYTimes.com:
by Peter Lattman

A federal appeals court ruled on Wednesday that  Bernard L. Madoff‘s investors cannot sue the Securities and Exchange Commission for not uncovering his fraud, but at the same time blasted the agency for its failings.“Despite our sympathy for plaintiffs’ predicament (and our antipathy for the S.E.C.’s conduct),” the investors claims are barred because of a law protecting government agencies from lawsuits related to their use of investigatory powers, the United States Appeals Court for the Second Circuit said.
Notwithstanding the S.E.C.’s “regrettable inaction,” the court added, the commission is shielded from a negligence suit. The ruling upheld the 2011 dismissal of the case by the trial court judge in 2011.
The S.E.C. and other government agencies are protected by an exception to a law — the Federal Tort Claims Act — that allows citizens to sue the United States. The exception, in fact, is an “exception to an exception,” because the act is an exception to sovereign immunity law that typically immunizes the United States from suit.

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