A Third Lawsuit by Madoff Investors Against the SEC Gets Dismissed

The cases were longshots from the beginning, but you can hardly blame the numerous Madoff victims who have pursued lawsuits against the SEC for its alleged gross negligence in its oversight, investigations, and examinations of Bernard Madoff and his firm. To date, however, each of these cases to date has ended in dismissal, including the most recent decision which was issued on December 8, 2011.

The plaintiffs in Baer v. United States were a set of investors defrauded by Bernard Madoff. They alleged that the government was liable for their losses under the Federal Tort Claims Act because the SEC was negligent in its investigations of Madoff. Just as two other district courts had previously ruled in similar cases, however, Judge Stanley R. Chesler of the U.S. District Court for the District of New Jersey concluded that even if the SEC was negligent in its investigations of Madoff, the agency was shielded from liability because the conduct of those investigations--including the agency's "decision not to prosecute or enforce"--falls within the "discretionary function" exception to the FTCA.

The court also noted that if plaintiffs prevailed in this case, 

the SEC would become the guarantor of the investment decisions of individuals who choose to participate in regulated markets. While, undoubtedly, one function of the SEC is to protect the public from people like Madoff, to impose an obligation on the government to expend the resources sufficient to uncover every wrong which could be discovered from a proper investigation is to impose an unlimited obligation on the government to spend its resources on such endeavors, whether or not fiscal policy concerns might require otherwise.

The Baer decision follows dismissals in Dichter-Mad Family Ptnrs, LLP v. United States, 707 F. Supp. 2d 1016, 1018 (C.D. Cal. 2010), and Molchatsky v. United States, 778 F. Supp. 2d 421, 425 (S.D.N.Y. 2011). In both of these cases, the Baer court observed, the district courts similarly found that the discretionary function exception bars claims against the United States in cases involving claims that the SEC failed to properly investigate Madoff.