Despite the 'regrettable inaction' by the Securities and Exchange Commission ("SEC") in failing to detect Bernard Madoff's historic $65 billion Ponzi scheme, a federal appeals court ruled that those victimized by Madoff's fraud could not hold the SEC accountable for negligence. Citing a law that protects federal agencies in the exercise of their discretionary powers, a three-judge appellate panel of the Second Circuit Court of Appeals upheld a lower court's dismissal of the lawsuit.
Investors brought the lawsuit after a highly critical report by the SEC's inspector general that highlighted a myriad of missed opportunities to detect Madoff's fraud at an earlier stage that could have prevented billions of dollars in losses. This included several reports by Harry Markopolos, an independent financial fraud investigator who raised questions regarding the legitimacy of Madoff's operation. These claims went largely unheeded, aided by an inter-office communication system that effectively impeded the flow of information between various SEC branch offices. This disconnect between branch offices was highlighted in the Second Circuit's opinion, which noted:
"As a result of the S.E.C.'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 S.E.C. missed many opportunities to uncover Madoff's multibillion-dollar fraud."
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For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.
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