I think just about everybody who doesn't get their paycheck from the Securities and Exchange Commission (and probably some who do) believes the SEC was grossly incompetent in failing to spot and prosecute the Madoff frauds years (decades?) ago. Yet, as Barbara Black reports, no action lies against it:
In Molchatsky v. U.S. (S.D.N.Y. Apr. 19, 2011), the federal district court held that two Madoff victims could not sue the U.S. government under the Federal Tort Claims Act for the SEC's "gross negligence" in failing to discover the fraud. The opinion recounts at some length the allegations of the agency's ineptitude, largely taken from the SEC Office of Inspector General's Report, but nevertheless ultimately agrees with the government that the agency's conduct is protected under the Discretionary Function Exception (DFE) of the Federal Tort Claims Act. Because the SEC's decision regarding whom to investigate and how to conduct an investigation are discretionary, any negligence or even abuse of that discretion is shielded from suit by sovereign immunity.
I think that has to be the right answer. After all, if the federal government could be held liable for every act of negligence it commits, the federal budget deficit would be at least twice as big as it is now.
Indeed, the result seems so obviously correct that one is tempted to characterize the lawsuit as frivolous.
Ordinarily, of course, I have no patience for frivolous lawsuits. But I think I'll make an exception in this case. The lawsuit may have been frivolous, but maybe--just maybe--it will have the redeeming virtue of holding the SEC's enforcement failure up to renewed--and well deserved--mockery.
Indeed, the court itself used the lawsuit as a vehicle for ripping the SEC a new one:
Swain excoriated the SEC, calling its behavior “sloppy,” “uninformed,” and “irresponsible.” That said, continued Swain, “that the conduct in question defied common sense and reeked of incompetency does not indicate that any formal, specific, mandatory policy was ‘likely’ violated.” Click here for Swain’s opinion; here for the Dow Jones Newswires story; here for the Bloomberg story.
The other reason I'm giving this suit a pass is that it reminds me of that wonderful scene in Animal House in which Otter concludes that "that this situation absolutely requires a really futile and stupid gesture be done on somebody's part."
Whoever brought this suit were "just the guys to do it."
