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Strike Four: Another Federal Court Dismisses Madoff Investor Lawsuit Against SEC

Bruce Carton | June 20, 2012

Yesterday, U.S. District Judge Paul Friedman became at least the fourth judge to dismiss a case (opinion available here) filed by victims of Bernard Madoff against the SEC for the agency's negligence in handling and investigating the Madoff Ponzi scheme.

The National Law Journal reports that as in several similar prior lawsuits brought by other Madoff investors, the plaintiffs in Donahue v. U.S. alleged that the SEC's failings were responsible for their losses. "The SEC's failure to follow basic investigative procedures and practices, or even to observe simple common sense, allowed Madoff to perpetuate his scheme, drawing in innumerable new victims who were totally unaware that the government agency sworn to protect them had fallen down on the job," the plaintiffs alleged in their complaint. The plaintiffs alleged combined losses of over $2 million.

Judge Friedman wrote that while an agency's negligence leading directly to a plaintiff's injury theoretically may serve as the basis for liability, "it is difficult to conjure up a set of facts that would trigger such liability...."  While he viewed the plaintiffs desire to hold the government accountable for the SEC's "egregious and well-documented missteps" as understandable, Judge Friedman agreed with prior court decisions holding that the agency cannot be held liable for the Madoff victims' losses because there was no allegation that the SEC violated any "mandatory obligations." Rather, he ruled, the SEC's actions and inactions during its admittedly flawed Madoff investigation fell within its "discretion and professional judgment." 

The Donahue decision follows similar decisions in Baer v. United States;  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). The National Law Journal reports that the Donahue plaintiffs, who are proceeding pro se, have now appealed to the U.S. Court of Appeals for the D.C. Circuit.