11-2510-cv L Molchatsky v. United States UNITED STATES COURT OF APPEALS 1 2 FOR THE SECOND CIRCUIT 3 4 5 6…

11-2510-cv(L)
Molchatsky, et al. v. United States
UNITED STATES COURT OF APPEALS 1
2
FOR THE SECOND CIRCUIT 3
4
5
6
August Term, 2012 7
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(Argued: March 14, 2013 Decided: April 10, 2013) 9
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Docket Nos. 11-2510-cv(L), 11
11-2532-cv(con), 11-3142-cv(con),11-3304-cv(con), 12
11-3306-cv(con), 11-3310-cv(con),12-472-cv(con), 13
12-476-cv(con),12-502-cv(con), 12-511-cv(con), 14
12-518-cv(con), 12-533-cv(con). 15
16
17
PHYLLIS MOLCHATSKY, CHARLES MEDERRICK, INDIVIDUALLY AND ON 18
BEHALF OF ALL THOSE PERSONS SIMILARLY SITUATED, 19
ALAN GOLDMAN, THE LITWIN FOUNDATION, INC., 20
THE MICHAEL AND RUTH SLADE FOUNDATION, STEVEN SCHNEIDER, 21
M.D., JUDITH WELLING, INDIVIDUALLY AND ON BEHALF OF ALL 22
THOSE PERSONS SIMILARLY SITUATED, BLAYNE GOLDMAN, 23
ALLAN H. APPLESTEIN, AS TRUSTEE FOR THE BENEFIT OF D.C.A. 24
GRANTOR TRUST, GEORGE R. MARKS, ROBERT MICK, INDIVIDUALLY 25
AND ON BEHALF OF ALL THOSE PERSONS SIMILARLY SITUATED, 26
GEORGE R. MARKS, AS BENEFICIARY FOR THE BENEFIT OF GEORGE R. 27
MARKS I.R.A., HAROLD SCHWARTZ, AS TRUSTEE FOR THE BENEFIT 28
OF HAROLD SCHWARTZ 1997 IRREVOCABLE TRUST, AS BENEFICIARY 29
FOR THE BENEFIT OF HAROLD SCHWARTZ I.R.A. AND AS TRUSTEE OF 30
THE BENEFIT OF HAROLD SCHWARTZ 1998 LIVING TRUST, 31
ROSENMAN FAMILY, LLC, ROBERT I. LAPPIN, AS TRUSTEE FOR THE 32
BENEFIT OF SHETLAND PROPERTIES EMPLOYEE SAVINGS AND 33
RETIREMENT PLAN, DANIEL SILNA, AS TRUSTEE FOR THE BENEFIT OF 34
O.D.D. INVESTMENTS L.P. PROFIT SHARING PLAN, 35
36
Plaintiffs-Appellants, 37
38
-v.- 39
40
41
42
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UNITED STATES OF AMERICA, JOHN DOES 1-10, 1
2
Defendants-Appellees. *
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Before: 8
W ESLEY , D RONEY , Circuit Judges, N ATHAN , District Judge. **
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10
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Appeal from the April 19, 2011 Opinion and Order by the 12
United States District Court for the Southern District of 13
New York (Swain, J.) granting the United States’ motion to 14
dismiss Plaintiffs-Appellants’ claims against the United 15
States Securities and Exchange Commission (the “SEC”) for 16
lack of subject matter jurisdiction pursuant to Federal Rule 17
of Civil Procedure 12(b)(1), and from the January 24, 2011 18
Memorandum Order denying Plaintiffs-Appellants’ motion for 19
relief from judgment under Federal Rule of Civil Procedure 20
60(b). Plaintiffs-Appellants argue that the district court 21
erred by dismissing their complaints pursuant to the 22
Discretionary Function Exception to the Federal Tort Claims 23
Act because the SEC negligently failed to adequately 24
investigate Bernard Madoff despite numerous warnings and, in 25
doing so, violated federal statutes and regulations, as well 26
as internal agency policies. We AFFIRM because the 27
Discretionary Function Exception shields the SEC’s conduct 28
from Plaintiffs-Appellants’ claims. 29
30
A FFIRMED . 31
32
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35
36
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* The Clerk of Court is directed to amend the official
caption to conform to the listing of the parties stated above.
** The Honorable Alison J. Nathan, of the United States
District Court for the Southern District of New York, sitting by
designation.
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PATRICIA M. GRAHAM (Howard Elisofon, David R. 1
King, on the brief), Herrick, Feinstein LLP, 2
New York, NY, for Plaintiff-Appellant Phyllis 3
Molchatsky. 4
5
DR. GAYTRI D. KACHROO, Kachroo Legal Services, 6
P.C., Cambridge, MA, for Plaintiff-Appellant 7
Charles Mederrick. 8
9
Howard Kleinhendler, Sara Spiegelman, Wachtel Masyr 10
& Missry LLP, New York, NY, for Plaintiff- 11
Appellant Allan H. Applestein. 12
13
SARAH S. NORMAND, Assistant United States Attorney 14
(Neil M. Corwin, Assistant United States 15
Attorney, on the brief), for Preet Bharara, 16
United States Attorney for the Southern 17
District of New York, New York, NY, for 18
Defendants-Appellees. 19
20
Lawrence R. Velvel, Massachusetts School of Law, 21
Andover, MA; David Bernfeld, Bernfeld, 22
DeMatteo & Bernfeld LLP, New York, NY, for 23
Amicus Curiae Network for Investor Action and 24
Protection. 25
26
27
28
29
P ER C URIAM : 30
Plaintiffs-Appellants Phyllis Molchatsky, et al. 31
(“Plaintiffs”) appeal from an April 19, 2011 Opinion and 32
Order by the United States District Court for the Southern 33
District of New York (Swain, J.) granting Defendant-Appellee 34
the United States’ motion to dismiss Plaintiffs’ complaints 35
against the United States Securities and Exchange Commission 36
(the “SEC”) for lack of subject matter jurisdiction pursuant 37
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to Federal Rule of Civil Procedure 12(b)(1). Plaintiffs 1
also appeal from the district court’s January 24, 2011 2
Memorandum Order denying Plaintiffs’ motion for relief from 3
judgment under Federal Rule of Civil Procedure 60(b). 4
Plaintiffs seek to hold the United States liable for SEC 5
employees’ failure to detect Bernard Madoff’s Ponzi scheme 6
and for the financial losses that Plaintiffs claim they 7
suffered as a result. Because we find that the SEC’s 8
actions, along with its regrettable inaction, are shielded 9
by the Discretionary Function Exception, we affirm the 10
district court’s dismissal of Plaintiffs’ claims for lack of 11
subject matter jurisdiction. 12
Background 13
Plaintiffs are investors who lost money they had 14
entrusted to Bernard Madoff (“Madoff”) and his firm, Bernard 15
L. Madoff Investment Securities LLC, after Madoff’s massive 16
Ponzi scheme exploded in 2008. Plaintiffs’ principal 17
allegation is that the SEC negligently failed to uncover 18
Madoff’s fraud despite receiving numerous complaints over a 19
sixteen-year period. Relying on an extensive report from 20
the SEC’s Office of the Inspector General, Plaintiffs allege 21
in detail approximately eight separate complaints the SEC 22
received regarding Madoff and the SEC’s inadequate and often 23
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incompetent response to each. As a result of the SEC’s 1
repeated failure to alert other branch offices of ongoing 2
investigations, properly review complaints and staff 3
subsequent inquiries, and follow up on disputed facts 4
elicited in interviews, the SEC missed many opportunities to 5
uncover Madoff’s multi-billion-dollar fraud. 6
Discussion 7
Plaintiffs claim that the SEC’s clear negligence 8
exposes the agency to liability under the Federal Tort 9
Claims Act (“FTCA”). The district court disagreed, as do 10
we. The FTCA provides in relevant part that federal courts 11
shall have exclusive jurisdiction of 12
civil actions on claims against the 13
United States, for money damages, 14
accruing on and after January 1, 1945, 15
for injury or loss of property, or 16
personal injury or death caused by the 17
negligent or wrongful act or omission of 18
any employee of the Government while 19
acting within the scope of his office or 20
employment, under circumstances where the 21
United States, if a private person, would 22
be liable to the claimant in accordance 23
with the law of the place where the act 24
or omission occurred. 25
26
28 U.S.C. § 1346(b)(1). 27
The FTCA is an exception to the rule that the United States 28
is typically immune from suit. The district court 29
determined that the Discretionary Function Exception 30
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(“DFE”), an exception to the exception, barred Plaintiffs’ 1
claims. The DFE suspends the FTCA from applying to 2
3
[a]ny claim based upon an act or omission 4
of an employee of the Government, 5
exercising due care, in the execution of 6
a statute or regulation, whether or not 7
such statute or regulation be valid, or 8
based upon the exercise or performance or 9
the failure to exercise or perform a 10
discretionary function or duty on the 11
part of a federal agency or an employee 12
of the Government, whether or not the 13
discretion involved be abused. 14
15
28 U.S.C. § 2680(a). 16
17
The DFE is not about fairness, it “is about power,” 18
National Union Fire Insurance v. United States, 115 F.3d 19
1415, 1422 (9th Cir. 1997); the sovereign “reserve[s] to 20
itself the right to act without liability for misjudgment 21
and carelessness in the formulation of policy,” id. “[T]he 22
DFE bars suit only if two conditions are met: (1) the acts 23
alleged to be negligent must be discretionary, in that they 24
involve an ‘element of judgment or choice’ and are not 25
compelled by statute or regulation and (2) the judgment or 26
choice in question must be grounded in ‘considerations of 27
public policy’ or susceptible to policy analysis.” 28
Coulthurst v. United States, 214 F.3d 106, 109 (2d Cir. 29
2000) (quoting United States v. Gaubert, 499 U.S. 315, 322- 30
23 (1991)). Plaintiffs bear the initial burden to state a 31
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claim that is not barred by the DFE. See Gaubert, 499 U.S. 1
at 324-25. Here, Plaintiffs have failed to make the 2
necessary showing. 3
Plaintiffs’ harm ultimately stems from the SEC’s 4
failure to investigate Madoff and uncover his Ponzi scheme. 5
As a result, the conduct Plaintiffs seek to challenge is 6
“too intertwined with purely discretionary decisions” made 7
by SEC personnel. Gray v. Bell, 712 F.2d 490, 515 (D.C. 8
Cir. 1983); see generally id. at 515-16. Despite our 9
sympathy for Plaintiffs’ predicament (and our antipathy for 10
the SEC’s conduct), Congress’s intent to shield regulatory 11
agencies’ discretionary use of specific investigative powers 12
via the DFE is fatal to Plaintiffs’ claims. See Berkovitz 13
by Berkovitz v. United States, 486 U.S. 531, 538 & 538 n.4 14
(1988) (quoting H.R.Rep. No. 1287, 79th Cong., 1st Sess., 6 15
(1945)). In satisfaction of the first prong of the DFE, the 16
SEC retains complete discretion over when, whether and to 17
what extent to investigate and bring an action against an 18
individual or entity. See 15 U.S.C. § 78u(a)(1); 17 C.F.R. 19
§ 202.5(a)-(b). The conduct in question here meets the 20
second prong of the DFE by virtue of the SEC’s choices 21
regarding allocation of agency time and resources being 22
sufficiently grounded in economic, social and policy 23
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considerations. See Bd. of Trade of City of Chicago v. SEC, 1
883 F.2d 525, 531 (7th Cir. 1989); cf. Coulthurst, 214 F.3d 2
at 108-11. 3
We find additionally that the district court did not 4
abuse its discretion in denying Plaintiffs’ Rule 60(b) 5
motion for relief from judgment, or in denying Plaintiffs’ 6
request for jurisdictional discovery. Boule v. Hutton, 328 7
F.3d 84, 95 (2d Cir. 2003) (we review denials of Rule 60(b) 8
motions for abuse of discretion); Best Van Lines, Inc. v. 9
Walker, 490 F.3d 239, 255 (2d Cir. 2007) (we review district 10
court’s refusal to permit jurisdictional discovery for abuse 11
of discretion). We have considered Plaintiffs’ remaining 12
arguments and find them to be without merit. 13
Conclusion 14
For the foregoing reasons, the order of the district 15
court is hereby AFFIRMED. 16
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