Understandably, defrauded victims of Ponzi schemes are
angry - angry at the perpetrators, angry at everyone associated which the
scheme, and angry at the government for failing to stop the scheme before they
were victimized and lost their life savings. Occasionally that anger at the
government is expressed in a suit against the government. The Ponzi Scheme Blog
has been following these cases (see the September 11, 2012 blog:
Finger-Pointing at the SEC: Whose Fault Is It That Ponzi Schemes Thrive?) and,
so far, no case against the government on this basis has succeeded.
The latest to fail is Dichter-Mad
Family Partners, LLP v. United States, 707 F. Supp. 2d 1016 (C.D. Cal.
2010), aff'd, 2013 U.S. App. LEXIS 2900 (9th Cir. Feb. 12, 2013). In that case,
the plaintiffs, who were investors in Madoff's Ponzi scheme, filed a claim for
damages under the Federal Tort Claims Act ("FTCA"), asserting that the
Securities and Exchange Commission was negligent in failing "to terminate
Madoff's Ponzi scheme despite its multiple opportunities to do so." The fifty
page complaint reviews in detail the warning signs about Madoff that the SEC
had and its several failed investigations of him. The complaint also
incorporates by reference the SEC Office of Inspector General's 450 page
Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi
Scheme--Public Version, released in August 2009.
The FTCA, 28 U.S.C. § 1346(b), grants the federal courts
jurisdiction over claims:
for injury or loss of property, or personal injury or
death caused by the negligent or wrongful act or omission of any employee of
the Government while acting within the scope of his office or employment, under
circumstances where the United States, if a private person, would be liable to
the claimant in accordance with the law of the place where the act or omission
occurred.
The district court, however, readily dismissed the claim,
concluding that it was barred by the "discretionary function exception" of the
FTCA. Under this exception in 28 U.S.C. § 2680(a), the government is not to be
liable for:
Any claim based upon an act or omission of an employee of
the Government ... based upon the exercise or performance or the failure to
exercise or perform a discretionary function or duty on the part of a federal
agency or an employee of the Government, whether or not the discretion involved
be abused.
In Dichter-Mad
Family Partners, the district court found that "the alleged wrongs were
done in the course of the SEC's exercise of its discretion, both in terms of
conducting its investigations and deciding whether or not to bring enforcement
proceedings." Id. at 1035. For
example, Section 21 of the Securities and Exchange Act of 1934, states, "The
Commission may, in its discretion, make such investigations as it deems
necessary to determine whether any person has violated, is violating, or is
about to violate any provision of this chapter, [or] the rules or regulations
thereunder . . ." 15 U.S.C. § 78u (emphasis added). The district court further
found that the plaintiff's conclusory allegations had failed to rebut the
presumption that discretionary function exception applied. Id. at 1041.
The Ninth Circuit affirmed in a per curiam decision, adopting most of the district court's
"comprehensive and well-reasoned opinion" as its own. Therefore, these Madoff
victims are left without a remedy against the government despite findings of
the SEC Inspector General that the agency had missed several opportunities over
the years to stop Madoff's fraud.
As noted, however, this is not the first such decision
dismissing a negligence suit filed by Madoff victims against the SEC. See Donohue v. United States, 870 F. Supp.
2d 97 (D.D.C. 2012); Baer v. United
States, 2011 U.S. Dist. LEXIS 141243 (D.N.J. Dec. 8, 2011); Molchatsky v. United States, 778 F.
Supp. 2d 421 (S.D.N.Y. 2011).
Similarly, in the Allen Stanford Ponzi scheme, victims
were also unsuccessful in pursuing their negligence claims against the SEC. See
Robert Juan Dartez, LLC v. United States,
824 F. Supp. 2d 743 (N.D. Tex. 2011).
As reported in the September 11, 2102 blog, one case, Zelaya v. United States, 2012 U.S. Dist.
LEXIS 127233 (S.D. Fla. Sept. 7, 2012), does offer a glimmer of hope to
defrauded victims. In that case, the district court dismissed all of the
plaintiffs' negligence claims except the claim that the SEC violated its
nondiscretionary duty to report Stanford to the Securities Investor Protection
Corporation, as required by 15 U.S.C. § 78eee(a)(1). A review of the docket in
that case shows that it is now in the discovery phase. No trial date has been
set.
These cases raise the question of what is fair when the
government is negligent? As a policy matter, should the FTCA be changed to
require the government to compensate Ponzi scheme victims when it negligently
stops a scheme later than it should have if it had exercised due care? If
Congress does decide to do that, which seems highly unlikely, Congress should
then also increase the SEC's resources, both for investigating Ponzi schemes
and for paying victims' claims. The societal cost of increased resources for
better government due diligence may ultimately be far less than the cost to
victims from losses from these types of fraudulent schemes.
Lexis.com
subscribers can access enhanced versions of the opinions and annotated versions
of the statutes cited in this article:
Dichter-Mad Family Partners, LLP v. United States, 707 F. Supp. 2d 1016 (C.D. Cal. 2010)
28 U.S.C. § 1346
28 U.S.C. § 2680
15 U.S.C. § 78u
Donahue v. United States, 870 F. Supp. 2d 97 (D.D.C. 2012)
Baer v. United States, 2011 U.S. Dist. LEXIS 141243 (D.N.J. Dec. 8, 2011)
Molchatsky v. United States, 778 F. Supp. 2d 421 (S.D.N.Y. 2011)
Robert Juan Dartez, LLC v. United States, 824 F. Supp. 2d 743 (N.D. Tex. 2011)
Zelaya v. United States, 2012 U.S. Dist. LEXIS 127233 (S.D. Fla. Sept. 7, 2012)
Read additional articles at The Ponzi Scheme
Blog
Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal
Resource for Unraveling Ponzi Schemes (LexisNexis 2012), along with
Hon. Steven Rhodes. The Ponzi Book, recently reviewed by Commercial Crime International, is
available for purchase at www.lexisnexis.com/ponzibook, and more information about
the book can be found at www.theponzibook.com.
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