April 10, 2013

SEC Skates in Madoff Case

Swindled investors can’t sue regulatory body, U.S. Appeals Court rules

Bernie Madoff leaving his trial. (Photo: AP) Bernie Madoff leaving his trial. (Photo: AP)

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A three-judge appeals panel ruled Wednesday that Bernard Madoff’s investors can’t sue the U.S. Securities and Exchange Commission for failing to uncover his massive Ponzi scheme. The ruling deals a final blow to investors who claimed negligence on the part of the regulatory body.

Bloomberg reports that while the court said the regulator’s action was “regrettable,” it is also shielded by law, citing the “discretionary function” exception to a law permitting people to sue the U.S. government, which it said applies in cases filed by Madoff victims. In its finding in the case, titled Molchatsky v. U.S., 11-02510, U.S. Court of Appeals for the Second Circuit, the New York-based panel upheld a lower-court decision to the dismiss suits.

 “Despite our sympathy for plaintiffs’ predicament (and our antipathy for the SEC’s conduct), Congress’s intent to shield regulatory agencies’ discretionary use of specific investigative powers” defeats the investors’ claims, the court said, according to the news service.

As Bloomberg notes, in April 2011, U.S. District Judge Laura Taylor Swain in Manhattan threw out a $2.5 million suit filed two years earlier by investors Phyllis Molchatsky and Steven Schneider, who blamed the SEC’s grossly negligent oversight of Madoff’s firm for their losses.

Madoff pleaded guilty to orchestrating what is widely considered one of the largest financial cons in history. He was sentenced to a 150-year term, which he is serving in federal prison in North Carolina.

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