Court Opinion

ID: 816152
Source: CourtListenerOpinion
Date Created: 2013-01-28 22:11:43.809604+00
Date Added: 2024-06-11T08:04:12.629740
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

DICHTER -MAD FAMILY PARTNERS,             No. 11-55577
LLP; PHILIP JAY DICHTER ; CLAUDIA
GVIRTZMAN DICHTER ; RICHARD M.               D.C. No.
GORDON ,                                  2:09-cv-09061-
               Plaintiffs-Appellants,       SVW-FMO

                 v.
                                            OPINION
UNITED STATES OF AMERICA ,
              Defendant-Appellee.

      Appeal from the United States District Court
          for the Central District of California
      Stephen V. Wilson, District Judge, Presiding

                Argued and Submitted
        January 10, 2013—Pasadena, California

                 Filed January 28, 2013

   Before: Stephen Reinhardt, Kim McLane Wardlaw,
          and Richard A. Paez, Circuit Judges.

                  Per Curiam Opinion
2 DICHTER -MAD FAMILY PARTNERS V . UNITED STATES

                           SUMMARY*

                    Federal Tort Claims Act

    The panel affirmed the district court’s dismissal of an
action alleging claims under the Federal Tort Claims Act.

    The panel held that the district court correctly concluded
that it lacked jurisdiction to entertain appellants’ claims
because they fell within the “discretionary function”
exception to the United States’ waiver of sovereign immunity
in the Federal Tort Claims Act. The panel affirmed the
district court’s judgment of dismissal for lack of subject
matter jurisdiction, and adopted Parts I through V of the
district court’s April 20, 2010 opinion, Dichter-Mad Family
Partners, LLP v. United States, 707 F. Supp.2d 1016 (C.D.
Cal. 2010). The panel also held that the additional allegations
made in the Second Amended Complaint were insufficient to
overcome the discretionary function exception to the Act’s
waiver of sovereign immunity. Finally, the panel held that
the district court did not abuse its discretion in denying
appellants’ request for additional discovery.

                            COUNSEL

Richard H. Gordon (argued), Beverly Hills, California and
Philip J. Dichter, Malibu, California, for Appellants.

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
     DICHTER -MAD FAMILY PARTNERS V . UNITED STATES 3

Sparkle Sooknanan (argued), Lindsey Powell, Mark B. Stern,
and Tony West, United States Department of Justice,
Washington, D.C.; and André Birotte, Jr., United States
Attorney, Los Angeles, California, for Appellee.

                           OPINION

PER CURIAM:

    After careful de novo review of the record in this appeal,
we conclude that the district court correctly concluded that it
lacked jurisdiction to entertain Appellants’ claims because
they fall within the “discretionary function” exception to the
United States’ waiver of sovereign immunity in the Federal
Tort Claims Act. 28 U.S.C. § 2680(a). Thus, we affirm the
district court’s judgment of dismissal for lack of subject
matter jurisdiction and adopt Parts I through V of the district
court’s comprehensive and well-reasoned April 20, 2010
opinion, Dichter-Mad Family Partners, LLP v. United States,
707 F. Supp. 2d 1016 (C.D. Cal. 2010), as our own, and
attach it to this opinion as an Appendix.

    We further hold, as the district court also concluded in an
unpublished order dismissing Appellants’ claims with
prejudice, that the additional allegations made in the Second
Amended Complaint1 are insufficient to overcome the
discretionary function exception to the Federal Tort Claims
Act’s waiver of sovereign immunity. Virtually all of the
newly alleged mandatory duties are not in fact mandatory

 1
   The duties alleged in the Second Amended Complaint are taken from
the SEC Enforcement Manual, which the district court ordered the
government to produce.
4 DICHTER -MAD FAMILY PARTNERS V . UNITED STATES

directives that would deprive the United States of its
discretionary function immunity. See Terbush v. United
States, 516 F.3d 1125, 1138 (9th Cir. 2008); Sabow v. United
States, 93 F.3d 1445, 1453 (9th Cir. 1996) (“[T]he presence
of a few, isolated provisions cast in mandatory language does
not transform an otherwise suggestive set of guidelines into
binding agency regulations.”). Those policies that are
arguably mandatory lack the causal relationship to the
plaintiffs’ alleged injuries required to establish jurisdiction,
even under a generous reading of the complaint. “Where, as
here, the harm actually flows from the prosecutor’s exercise
of discretion, an attempt to recharacterize the action as
something else must fail.” Gen. Dynamics Corp. v. United
States, 139 F.3d 1280, 1286 (9th Cir. 1998).

    Finally, the district court did not abuse its discretion in
denying Appellants’ request for additional discovery. “As we
have explained, ‘broad discretion is vested in the trial court
to permit or deny discovery, and its decision to deny
discovery will not be disturbed except upon the clearest
showing that denial of discovery results in actual and
substantial prejudice to the complaining litigant.’” Hallett v.
Morgan, 296 F.3d 732, 751 (9th Cir. 2002) (alteration
omitted) (quoting Goehring v. Brophy, 94 F.3d 1294, 1305
(9th Cir. 1996)). A plaintiff seeking discovery must allege
“enough fact to raise a reasonable expectation that discovery
will reveal” the evidence he seeks. Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 556 (2007); see also Gager v. United
States, 149 F.3d 918, 922 (9th Cir. 1998) (“It is
well-established that the burden is on the party seeking to
conduct additional discovery to put forth sufficient facts to
show that the evidence sought exists.”) (internal quotation
marks and alterations omitted). The district court’s reasoned
   DICHTER -MAD FAMILY PARTNERS V . UNITED STATES 5

finding that the plaintiffs failed to meet this burden was a
proper exercise of its discretion. See Hallett, 296 F.3d at 751.

   AFFIRMED.
6 DICHTER -MAD FAMILY PARTNERS V . UNITED STATES

        APPENDIX
 Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 1 of 79 Page ID #:734

1

2

3

4

5

6
7
                             UNITED STATES DISTRICT COURT
8
                            CENTRAL DISTRICT OF CALIFORNIA
9
10
     DICHTER-MAD FAMILY PARTNERS, LLP;     )     CV 09-9061 SVW (FMOx)
11   PHILIP DICHTER; CLAUDIA GVIRTZMAN     )
     DICHTER; and RICHARD H. GORDON,       )     ORDER GRANTING DEFENDANTS’
12                                         )     MOTIONS TO DISMISS FOR LACK OF
                                           )     JURISDICTION [6,7]
13                          Plaintiffs,    )
                                           )
14                  v.                     )
                                           )
15   UNITED STATES OF AMERICA;             )
     SECURITIES EXCHANGE COMMISSION,       )
16   and Does 1-10,                        )
                                           )
17                          Defendants.    )
                                           )
18

19
20   I.   INTRODUCTION
21
22        A.   BACKGROUND
23        Plaintiffs were investors in Bernard Madoff’s Ponzi scheme.1
24   Plaintiffs are bringing a Federal Tort Claims Act (“FTCA”) action
25

26
      1
        The plaintiffs are:
27          -Dichter-Mad Family Partners, LLP (a Florida partnership represented
      by attorney Philip Dichter, an investor in the partnership),
28          -Philip Dichter (who is a lawyer representing himself),
            -Claudia Gvirtzman Dichter (represented by Philip Dichter), and
            -Richard M. Gordon (who is a lawyer representing himself).
 Case 2:09-cv-09061-SVW-FMO Document 17     Filed 04/20/10 Page 2 of 79 Page ID #:735

1    against the Securities and Exchange Commission (“SEC”) and the United
2    States (“Government” or “Defendant”).       Plaintiffs assert that the SEC
3    “owes a duty of reasonable due care to all members of the general
4    public including all investors in U.S. financial markets who are
5    foreseeably endangered by its conduct.”        (Compl. ¶ 163.)      Plaintiffs
6    also assert that the SEC’s negligent acts and omissions “caused
7    Madoff’s scheme to continue, perpetuate, and expand,” and that the SEC
8    “fail[ed] to terminate Madoff’s Ponzi scheme despite its multiple
9    opportunities to do so.”   (Compl. ¶ 2; see also Compl. ¶ 164.)
10   Plaintiffs further assert that “Plaintiffs here were among those
11   victimized by Madoff.   Plaintiffs made their investments in reliance on
12   Madoff’s reputation, clean regulatory record, and the SEC’s implied
13   stamp of approval.”    (Compl. ¶ 8.)     Because of the SEC’s alleged
14   negligence, Plaintiffs seek to recover their losses from their
15   investments with Madoff.
16        Defendants have brought a pair of Motions to Dismiss, arguing that
17   the Court lacks jurisdiction to hear the claims under the FTCA, 28
18   U.S.C. § 2674 et seq.    Under the “discretionary function exception” to
19   the FTCA, federal courts are barred from adjudicating tort actions
20   arising out of federal officers’ discretionary acts.           28 U.S.C. §
21   2680(a).   In brief, officers are only liable if (1) the officers’
22   actions were prescribed by statute, regulation, or policy, or (2) the
23   officers’ conduct was not susceptible to analysis on social, economic,
24   or political policy grounds.   See United States v. Gaubert, 499 U.S.
25   315, 322 (1991).   2

26
      2
27     There are, of course, various other requirements and exceptions in the
      FTCA. This brief summary only relates to the matter at issue here — the
28    discretionary function exception.

                                             2
 Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 3 of 79 Page ID #:736

1         The Complaint contains over fifty pages of allegations summarizing
2    the SEC’s failure to uncover Madoff’s fraud.       The Complaint also
3    attaches five exhibits, the most substantial of which is the SEC Office
4    of Inspector General’s 450-page Investigation of Failure of the SEC to
5    Uncover Bernard Madoff’s Ponzi Scheme - Public Version [hereinafter
6    “the Report”], which was released in August 2009.        (Compl., Ex. A.)3
7    Plaintiffs purport to adopt the “factual allegations or determinations
8    made in the report” by “fully incorporat[ing] by reference” the Report
9    as a part of the Complaint.    (Compl. ¶ 1 n.3.)     This request is
10   technically impermissible under Fed. R. Civ. P. 10(c), which only
11   permits the incorporation of a legally operable “written instrument”
12   such as a contract, check, letter, or affidavit.        See, e.g., Rennie &
13   Laughlin, Inc. v. Chrysler Corp., 242 F.2d 208, 209 & n.209 (9th Cir.
14   1957); see also Wright & Miller, 5A Federal Practice & Procedure § 1327
15   n.1 (3d ed. 2009 update).   In contrast, items such as “newspaper
16   articles, commentaries and editorial cartoons” are not properly
17   incorporated into the complaint by reference.       Perkins v. Silverstein,
18   939 F.2d 463, 467 n.2 (7th Cir. 1991); see also Wright & Miller, 5A
19   Federal Practice & Procedure § 1327 n.2.
20        That said, Defendants have not objected to Plaintiffs’ attempt to
21   incorporate the Report by reference into the Complaint.         (See generally
22   Defs.’ Motion; Defs.’ Reply.)    Additionally, Fed. R. Civ. P. 8(e)
23   requires the Court to “construe[] pleadings so as to do justice.”            In
24   order for the Court to comply with Rule 8(e) and give Plaintiffs the
25   benefit of any plausible inferences contained in the Report (as
26
27
      3
        This Order refers to the Office of Inspector General’s report as “the
28    Report,” and pin-citations to the Report are abbreviated as “Ex. A.”

                                           3
 Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 4 of 79 Page ID #:737

1    Plaintiffs repeatedly urged the Court to do, see, e.g. Compl. ¶ 1 n.3,
2    Sur-reply at 5 n.1), the Court has reviewed the full Report and treats
3    it as though it were fully included in Plaintiffs’ Complaint.           Although
4    this is an unusual procedure, there is clear legal authority permitting
5    the Court to do so: Plaintiffs’ Complaint “reference[s]” the Report
6    “extensively,” and the factual allegations contained in the Report are
7    “integral to [their] claim.”   United States v. Ritchie, 342 F.3d 903,
8    908 (9th Cir. 2003) (citations omitted).      Thus, it is appropriate in
9    this particular instance to consider the Report as part of Plaintiffs’
10   allegations for purposes of the present Motion to Dismiss.
11        Although the inclusion of the Report results in an unusually long
12   Complaint, the Ninth Circuit has counseled that an overly detailed
13   complaint is acceptable under Fed. R. Civ. P. 8(a) if, for example, it
14   is “organized, [and is] divided into a description of the parties, a
15   chronological factual background, and a presentation of enumerated
16   legal claims, each of which lists the liable Defendants and legal basis
17   therefor.”   Hearns v. San Bernardino Police Dept., 530 F.3d 1124, 1132
18   (9th Cir. 2008).   In the present case, both the Complaint and the
19   Report satisfy these criteria.   Accordingly, because the Report is both
20   attached to and incorporated-by-reference into the Complaint, it is
21   properly considered on the Motion to Dismiss.       (See also infra Part
22   III.A.)
23        Many of Plaintiffs’ allegations (including the factual averments
24   contained in the Report) identify decisions that, in hindsight, could
25   have and should have been made differently.       Other allegations reveal
26   the SEC’s sheer incompetence in regulating Madoff’s broker-dealer,
27   market-making, and investment-management operations.         What is lacking
28
                                           4
 Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 5 of 79 Page ID #:738

1    in the present Complaint, however, is any plausible allegation
2    revealing that the SEC violated its clear, non-discretionary duties, or
3    otherwise undertook a course of action that is not potentially
4    susceptible to policy analysis.
5           B.    FACTUAL ALLEGATIONS
6           The facts of the Madoff fraud need little introduction.         A
7    thorough summary of Madoff’s operations can be found in the recent
8    decision In re Bernard L. Madoff Inv. Secs. LLC, 424 B.R. 122, 127-32
9    (Bkrtcy. S.D.N.Y. 2010) (order affirming trustee’s determination of
10   former investors’ net equity).
11          In the present case, Plaintiffs’ central allegations are largely
12   drawn from the Inspector General’s Report, which Plaintiffs have
13   incorporated by reference into the Complaint.       (Compl. ¶ 1 n.3.)      The
14   Complaint alleges the following.
15          The first warning sign of Madoff’s fraud came in 1992, when
16   Avellino & Bienes, a firm that invested exclusively through Madoff’s
17   brokerage, was exposed as a Ponzi scheme.      (Compl. ¶¶ 29-40; Ex. A at
18   42-61.)     Plaintiffs explain that the SEC’s investigators were “woefully
19   inexperienced” in the area of Ponzi schemes (Compl. ¶ 32) and failed to
20   obtain trading records from the Depository Trust Corporation that could
21   have revealed that Madoff’s operations were fraudulent.         (Compl. ¶¶ 35,
22   37.)   Because the SEC was focused on Avellino & Bienes rather than
23   Madoff, the SEC staff failed to make a number of other “common sense”
24   inquiries into Madoff’s operations that “should have” been done.
25   (Compl. ¶¶ 34, 37, 39.)
26          The second warning sign came in May 2000, when industry analyst
27   Harry Markopolos provided an eight-page complaint to the Boston SEC
28
                                           5
 Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 6 of 79 Page ID #:739

1    office.   (Compl. ¶¶ 42-46; Ex. A at 61-67.)      The complaint provided
2    evidence “questioning the legitimacy of Madoff’s reported returns.”
3    (Compl. ¶ 42.)   Markopolos presented his findings to an unqualified
4    senior staff member (Compl. ¶ 44), and although the staffer stated that
5    he forwarded the matter to the New York office, he did not actually do
6    so.    (Compl. ¶ 45.)
7           The third warning sign came in March 2001, when Markopolos
8    submitted a second complaint to the Boston office containing new,
9    simplified information.    (Compl. ¶¶ 47-50; Ex. A at 67-74.)        This time,
10   the matter was forwarded to New York, but “after just one day” the lead
11   enforcement attorney in New York “rejected it out of hand.”          (Compl. ¶
12   49.)   Although Markopolos’s complaint was more detailed than the
13   average complaint, the attorney wrote a short email stating “I don’t
14   think we should pursue this matter further.”       (Compl. ¶¶ 49-50.)4
15          The fourth warning sign came in May 2001, when industry
16   publications MARHedge and Barron’s published articles discussing the
17   secrecy of Madoff’s operations and the improbability of his
18   consistently strong returns.    (Compl. ¶¶ 51-57; Ex. A at 74-77, 80-81,
19   86.)   An SEC staff member in the Boston office asked the New York team
20   reviewing Markopolos’s complaint if they were interested in reading the
21   articles.   (Compl. ¶ 55.)   The New York team apparently did not read
22   the articles.    (Id.)   At the same time, the articles piqued a
23   Washington supervisor’s interest.     (Compl. ¶ 56.)     Although the
24
25
      4
       In full, the email stated: “As we discussed, after reviewing the complaint
26    received (via the [Boston office]) from Harry Markopol[o]s of Rampart
      Investments about purported performance claims for funds managed by Bernard
27    Madoff, and some information about Madoff and others identified in the
      complaint, I don’t think we should pursue this matter further.” (Ex. A at
28    72.)

                                           6
 Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 7 of 79 Page ID #:740

1    supervisor wrote a note on the article stating that “[t]his is a great
2    exam[ination] for us!,” no further actions were taken in the Washington
3    office.   (Compl. ¶ 56; Ex. A at 86.)
4           The first major investigative event came in May 2003, when a hedge
5    fund manager provided a complaint to the SEC’s Office of Compliance
6    Inspections and Examinations in Washington D.C.        (Compl. ¶¶ 58-81; Ex.
7    A at 77-145.)   The fund manager’s complaint summarized a number of red
8    flags that suggested that Madoff was running a Ponzi scheme.           (Compl. ¶
9    59.)   The Investment Management team in Washington, which was more
10   qualified to handle an investigation into a Ponzi scheme, referred the
11   matter to the Washington office’s Broker-Dealer team.         (Compl. ¶¶ 61-
12   62.)   The two teams never conferred on the investigation.         (Compl. ¶
13   62.)   Compounding this failure to confer, the Broker-Dealer team
14   employed a number of inexperienced staff members at that time.           (Compl.
15   ¶¶ 63-64.)   One team member explained that “[a]t the time . . . we were
16   expanding rapidly,” (Compl. ¶ 63, quoting Ex. A, at 90) and various
17   staff members recalled that they received little-to-no formal training.
18   (Compl. ¶¶ 63-64.)
19          Upon receiving the case, the Washington Broker-Dealer team
20   inexplicably failed to begin its investigation for nine months and
21   failed to log its investigation into the SEC’s Super Tracking and
22   Reporting System (STARS), a computer database used to track
23   examinations.   (Compl. ¶¶ 65-67; Ex. A at 85 n.54.)        This failure to
24   log the investigation was consistent with the SEC’s regular practice at
25   the time.    (Id.)   Once the investigation commenced, the team focused
26   ///
27   ///
28
                                           7
 Case 2:09-cv-09061-SVW-FMO Document 17    Filed 04/20/10 Page 8 of 79 Page ID #:741

1    its attention on potential front-running5 – with which it was more
2    familiar — rather than a Ponzi scheme.       (Compl. ¶¶ 65-67.)      The team
3    created a written plan, but the plan was “too narrowly focused” (Ex. A
4    at 142) and the team did not follow through by obtaining relevant
5    information from third parties.      (Compl. ¶ 70.)     At one point, the
6    Broker-Dealer team drafted a letter “to the [National Association of
7    Securities Dealers] to confirm Madoff’s trading activity,” but
8    refrained from sending the letter because, according to one staff
9    member, “it would have been too burdensome and time-consuming for the
10   staff to review the documents that the [National Association of
11   Securities Dealers] would have supplied in response.”          (Compl. ¶¶ 69-
12   70, paraphrasing Ex. A at 98.)    Similarly, “the team failed to consult
13   the Chicago Board Options Exchange,” even though Madoff’s purported
14   options trades were being processed through it.         (Compl. ¶ 74.)
15   Instead of receiving this information from third parties that “would
16   have assisted in independently verifying [Madoff’s] trading activity,”
17   the team “rel[ied] solely on verbal answers” from Madoff, which,
18   according to the Office of the Inspector General’s consultants, “is not
19   an appropriate method of examination.”       (Compl. ¶¶ 70, 72, quoting Ex.
20   A at 111 n.74, 206 n.143.)   The team supervisor admitted that it was
21   “asinine” for the team not to obtain a proper audit trail, which
22   Plaintiffs characterize as a “common-sense procedure” in such an
23   investigation.   (Compl. ¶ 77, quoting Ex. A at 109.)
24   ///
25

26
      5
        Front-running is the practice in which a “broker execut[es] orders on a
27    security for its own account while taking advantage of advance knowledge of
      pending orders from its customers.” (Compl. ¶ 66.) See also Black’s Law
28    Dictionary 739 (9th ed. 2009) (defining term in similar manner).

                                            8
 Case 2:09-cv-09061-SVW-FMO Document 17    Filed 04/20/10 Page 9 of 79 Page ID #:742

1         The Washington team stopped its investigation in April 2004
2    because SEC supervisors “determined that a new investigation probing
3    mutual funds was more important than following up on Madoff.”            (Compl.
4    ¶ 78.)   6
                  At the end of the investigation, the team failed to produce a
5    final report, which according to the Report was a “critical error” that
6    later led to unnecessary duplication of efforts.         (Compl. ¶ 78, quoting
7    Ex. A at 144.)
8         The second major investigation started in the Northeast Regional
9    (New York) Office in April 2004, just as the Washington investigation
10   was being put on indefinite hold.      (Compl. ¶¶ 82-109.)      The New York
11   investigation was prompted by the SEC’s discovery of internal emails
12   from a hedge fund that had invested with Madoff through a feeder fund
13   that invested directly in Madoff’s funds.       Upon conducting due
14   diligence, the hedge fund had decided to withdraw its investments from
15   the Madoff feeder fund.      (Compl. ¶¶ 82-83.)    The emails summarized the
16   investor’s concerns about Madoff’s activities, and essentially tracked
17   the issues raised in the Markopolos reports and the articles that had
18   appeared in MARHedge and Barron’s.      (Compl. ¶¶ 83-84.)
19        The New York investigation proceeded in a similar manner as the
20   Washington investigation.      (Compl. ¶ 86.)   The case was transferred
21   from an Investment Management team to an ill-equipped Broker-Dealer
22   team; the Broker-Dealer team was not even assembled for seven months,
23   and did not begin working for yet another three months; and, once the
24   investigation commenced, the Broker-Dealer team never consulted the
25

26    6
        One examiner later wrote that “[i]n early 2004, [the Office of Compliance
      Inspections and Examinations] made it a priority to examine mutual funds’
27    undisclosed payments to broker-dealers,” (Ex. A at 125, quoting July 1, 2009
      letter from Lori Richards to Inspector General David Kotz), and contemporary
28    records confirm this. (Ex. A at 125-26.)

                                            9
Case 2:09-cv-09061-SVW-FMO Document 17     Filed 04/20/10 Page 10 of 79 Page ID #:743

1    Investment Management team for guidance and advice.          (Compl. ¶¶ 86,
2    88.)   Unlike the team that conducted the Washington investigation, the
3    New York Broker-Dealer team failed to even draft a planning memorandum,
4    let alone follow it.   (Compl. ¶ 87.)       When conducting the
5    investigation, the team accepted Madoff’s assertions at face value,
6    even though they knew or should have known that Madoff was lying – for
7    example, by saying that he was no longer trading options (which was
8    contradicted by readily available records, see Ex. A at 172, 207) and
9    that he was satisfied with foregoing hundreds of millions of dollars in
10   potential management fees and receiving only brokerage commissions
11   instead.   (Compl. ¶¶ 90-92.)   The team focused its investigation on
12   their own area of expertise (front-running and “cherry-picking”7), while
13   ignoring other potential areas of investigation such as looking for a
14   Ponzi scheme.   (Compl. ¶¶ 88-89.)8     They generally failed to corroborate
15   information with third parties or follow up on red flags such as
16   Madoff’s auditor’s conflict of interest and obvious inadequacy to audit
17   a complex operation like Madoff’s.      (Compl. ¶¶ 94-96.)
18          In spite of these failings, the New York investigation came
19   remarkably close to uncovering Madoff’s fraud in June 2005.            The team
20   conducted a two-to-three month on-site investigation (see Ex. A at 179)
21
      7
22     “[C]herry-picking is generally a scheme in which trades, once they
      are determined to be favorable, are allocated to a favored account at
23    the expense of other accounts.” (Ex. A at 146 n.92.)

24    8
        One of the investigators explained that he interpreted the initial
      complaint and referral as suggesting that the investigation “focus
25    exclusively on whether Madoff was using his market making capability to
      cherry pick trades or to front run market making trades for the benefit of
26    his hedge fund clients.” (Ex. A at 167, paraphrasing testimony of John
      Nee.) Another team members explained that “he focused on abusive trading
27    practices rather than the other issues raised in the [referral] e-mail, in
      part, because order leakage was a prominent issue at the time of the
28    examination.” (Ex. A at 168, paraphrasing testimony of Robert Sollazzo.)

                                            10
Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 11 of 79 Page ID #:744

1    and had a formal interview with Madoff in late May (Ex. A at 193-95).
2    Embarrassingly for the SEC, it was during the May meeting that the New
3    York team first learned — from Madoff himself — about the prior
4    Washington investigation.   (Compl. ¶¶ 102-04.)      Shortly after the
5    interview, the examiners decided that they should contact Madoff’s
6    clients to corroborate his trading activity.       (Ex. A at 219-21.)       The
7    investigators successfully obtained useful information from one
8    relevant third party (Barclays), but they failed to follow up on it
9    because of a mistaken belief that they could not obtain audit-trail
10   data from Barclays’s foreign affiliates.      (Compl. ¶ 101.)     Another
11   staffer stated that, to his understanding, SEC had a general policy of
12   not contacting third parties to follow up on leads.        (Compl. ¶ 100.)
13   The team also planned on requesting written responses to follow-up on
14   their face-to-face meeting with Madoff, but ultimately failed to do so,
15   even though they had drafted such an inquiry letter.        (Compl. ¶ 108;
16   Ex. A at 203-04.)
17        When the New York investigators finally suggested conducting on-
18   site visits of Madoff’s clients, the team supervisor vetoed the
19   suggestion.   (Compl. ¶¶ 97-99.)    A Washington investigator had
20   explained that he “was hesitant to make trouble for someone so ‘well
21   connected’” (Compl. ¶ 97, quoting Ex. A at 194), and the New York
22   supervisor “expressed a fear that he (and the junior staffers) could be
23   sued as individuals if their inquiries to third parties somehow damaged
24   Madoff’s business.”   (Compl. ¶ 98.)      Within days of the decision not to
25   visit Madoff’s clients, the New York investigators began drafting their
26   case-closing memorandum, and the case was closed by September 2005.
27   (Compl. ¶ 107.)   Madoff himself believed that had the investigators
28
                                          11
Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 12 of 79 Page ID #:745

1    contacted third-party trading partners, account holders, and/or trade-
2    clearing and -settlement agencies, they would likely have exposed the
3    fraud.   (Ex. A at 206-07.)
4         Almost immediately after the New York team closed its
5    investigation, Harry Markopolos provided the Boston office with a third
6    version of his report on Madoff’s alleged fraud, sparking off yet
7    another investigation in Madoff’s operations.       (Compl. ¶¶ 110-146.)
8    Markopolos’s report summarized the many warning signs that Madoff was
9    running a Ponzi scheme, and referred the SEC to a handful of industry
10   insiders who could corroborate Markopolos’s suspicions.         (Compl. ¶¶
11   111-16.)   Markopolos even recommended that the SEC simply compare
12   Madoff’s purported over-the-counter options trading to the publicly-
13   reported information regarding exchange-based options trading.          (Compl.
14   ¶ 115; see also Ex. C, at 6-7.)     Markopolos explained that if Madoff
15   were truly trading in options, his high-volume trades would have a
16   visible effect in the market.   (Compl. ¶ 115.).
17        The Boston office referred the matter to the New York office, and
18   emphasized to the New York staff that the report deserved close
19   attention.   (Compl. ¶ 117.)   The New York office, instead of staffing
20   the matter with experts in Ponzi schemes, placed relatively
21   inexperienced staff members on the case.      (Compl. ¶ 118.)     The
22   investigators failed to treat the matter as a Ponzi scheme
23   investigation, and generally refused to credit Markopolos’s report
24   because of interpersonal tensions (Compl. ¶¶ 119-20, 122) and a
25   misguided belief that Markopolos was seeking a reward for uncovering
26   the fraud.   (Compl. ¶ 121.)   The team also relied on the earlier New
27   York team’s incorrect assertion that it had in fact investigated the
28
                                          12
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1    Ponzi-scheme angle, which deterred the new team from fully following up
2    on Markopolos’s suggestions.   (Compl. ¶ 123.)      Additionally, because
3    the new team had failed to file a “matter under inquiry” report for two
4    months, a new tip — this time from an anonymous investor who stated
5    that he had invested with Madoff but withdrew his money when he began
6    suspecting fraud — was improperly ignored.      (Compl. ¶¶ 124-25.)
7    Because the team felt outmatched by the technical aspects of Madoff’s
8    operations, they forwarded certain matters to the SEC’s Office of
9    Economic Analysis, but due to miscommunications running in both
10   directions, these efforts failed to produce useful insights.          (Compl.
11   ¶¶ 128-30.)
12        The unprepared New York investigations team eventually proceeded
13   with its investigation and interviewed Madoff directly.         (Compl. ¶¶
14   132-36.)   At one point, the interview produced potentially
15   incriminating information — Madoff’s account number with the Depository
16   Trust Company — but the investigators failed to properly follow up on
17   the matter.   (Compl. ¶¶ 136-37.)   When a junior staffer contacted the
18   Depository Trust Company, the staffer failed to recognize the
19   significance of the fact that Madoff held his assets in commingled
20   accounts, and the staffer also failed to ask about the size of the
21   account.   (Compl. ¶¶ 138-39; Ex. A at 323-24.)      Madoff himself has
22   acknowledged that had the investigators simply asked to see the size of
23   the account, they immediately would have discovered that Madoff’s
24   trading positions were nowhere near as large as he had claimed.           The
25   staff believed, based on Madoff’s representations, that the Depository
26   Trust Company account held over $2 billion of securities; in fact, the
27   account held only between $10 and $30 million.       (Ex. A at 332-33.)
28
                                          13
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1         The investigators also failed to recognize the significance of the
2    fact that the National Association of Securities Dealers told them that
3    Madoff had no option positions on a particular date, even though
4    Madoff’s purported trading strategy was based on options trades.
5    (Compl. ¶ 140.)    Finally, the investigators made, in the Report’s
6    description, an “inexplicable decision” not to send a letter to obtain
7    information from Madoff’s purported European counterparties.          (Compl. ¶
8    141; Ex. A at 371.)   The team closed the investigation in June 2006,
9    having overlooked various clear indications of Madoff’s fraud.          (Compl.
10   ¶¶ 144-47.)   The team also failed to follow up on possible charges
11   related to Madoff’s various misrepresentations and non-disclosures
12   during the interview and examinations.     (See Ex. A at 322-23.)
13        Following that investigation, the SEC received three more tips
14   that might have uncovered the fraud.      (Compl. ¶¶ 148-53.)     The first
15   was dismissed when Madoff’s attorney told the SEC that the tipster was
16   not actually a Madoff client (Compl. ¶ 150); the second was yet another
17   Markopolos warning that was simply ignored because the staff believed
18   that it had fully examined the Ponzi-scheme allegations (Compl. ¶ 151;
19   Ex. A at 354-55); and the third tip (from the former Madoff investor
20   whose earlier complaint had arrived just prior to the opening of the
21   final investigation) was likewise ignored because the investigation was
22   deemed complete.    (Compl. ¶¶ 152-53.)
23        More than two years after the closure of the final investigation,
24   Madoff’s fraud was exposed.    (Compl. ¶¶ 154-55.)     The fraud could have
25   been discovered at any number of points in the previous sixteen years
26   had the SEC “performed its everyday, non-discretionary functions with
27   the most basic level of competence.”      (Compl. ¶ 158.)    At various
28
                                          14
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1    points, even “a single action, performed diligently and ably, or even
2    with the most minimal competence, would have exposed the scheme.”
3    (Compl. ¶ 159.)
4

5    II.   PRELIMINARY PROCEDURAL ISSUES
6
7          A.   THE SECURITIES AND EXCHANGE COMMISSION IS NOT A PROPER
8               DEFENDANT
9          The three Dichter Plaintiffs (that is, the Dichter-Mad investment
10   partnership, Philip Dichter, and Claudia G. Dichter) voluntarily
11   dismissed the SEC and the Doe Defendants on January 11, 2010.
12         The SEC brings a separate Motion to Dismiss Plaintiff Gordon’s
13   claims against it. [Docket no. 7.]     In its one-page motion, the SEC
14   cites clear controlling authority that bars Gordon’s claims.          See,
15   e.g., FDIC v. Craft, 157 F.3d 697, 706 (9th Cir. 1998) (“The FTCA is
16   the exclusive remedy for tortious conduct by the United States, and it
17   only allows claims against the United States.       Although such claims can
18   arise from the acts or omissions of United States agencies (28 U.S.C. §
19   2671), an agency itself cannot be sued under the FTCA.”); see also
20   Standifer v. SEC, 542 F. Supp. 2d 1312, 1317 (N.D. Ga. 2008) (“The SEC
21   cannot be sued under the FTCA.”)
22         In Gordon’s Opposition,9 he does not even attempt to argue that his
23
24
      9
        Gordon’s “Opposition” brief is 37-pages long, well above the 25-page limit
25    set by this Court. In addition, Gordon did not file his substantive brief
      with this Court until March 1, which was one week later than the deadline
26    set by this Court’s Local Rules. The Court accordingly STRIKES Gordon’s
      Opposition. However, as the document raises the same issues as are raised
27    in Plaintiffs’ joint Opposition and Sur-Reply (which the Court has
      considered despite its procedural irregularities), the Court has addressed
28    all the issues raised in Gordon’s stricken submission.

                                           15
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1    claims against the SEC are viable.    Accordingly, the SEC’s Motion is
2    GRANTED.    Gordon’s claims against the SEC are DISMISSED.
3         B.     THE DOE DEFENDANTS ARE PERMISSIBLE
4         As for the Doe Defendants, Gordon properly points out that the
5    Government does not necessarily have standing to object to their
6    presence.   For purposes of this motion, then, the Doe Defendants’
7    liability is linked with that of the United States.
8

9    III. LEGAL STANDARDS
10

11        A.     MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION
12        In order to comply with the notice pleading standards of Fed. R.
13   Civ. P. 8(a), a plaintiff’s complaint “must contain sufficient factual
14   matter, accepted as true, to ‘state a claim to relief that is plausible
15   on its face.’”   Ashcroft v. Iqbal, __ U.S. __, 129 S.Ct. 1937, 1949
16   (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)).
17   “A claim has facial plausibility when the plaintiff pleads factual
18   content that allows the court to draw the reasonable inference that the
19   defendant is liable for the misconduct alleged.”       Id.    A complaint that
20   offers mere “labels and conclusions” or “a formulaic recitation of the
21   elements of a cause of action will not do.”      Id.; see also Moss v. U.S.
22   Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) (citing Iqbal, 129
23   S.Ct. at 1951).10
24
25    10
         Although the present motion is a motion to dismiss for lack of
      jurisdiction under Fed. R. Civ. 12(b)(1) rather than a motion to dismiss for
26    failure to state a claim under Fed. R. Civ. P. 12(b)(6), motions to dismiss
      on jurisdictional grounds are governed by the standard pleading rules of
27    Fed. R. Civ. P. 8(a). See Doe v. Holy See, 557 F.3d 1066, 1074 (9th Cir.
      2009) (per curiam) (citing Twombly, 127 S.Ct. at 1964-65), cert. filed (June
28    25, 2009). In addition, it should be noted that Twombly and Iqbal, while

                                          16
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1         Generally, the Court’s analysis is limited to the contents of the
2    complaint.   See Schneider v. Cal. Dept. Of Corrections, 151 F.3d 1194,
3    1197 n.1 (9th Cir. 1998) (citations omitted).        However, “[w]hen a
4    plaintiff has attached various exhibits to the complaint, those
5    exhibits may be considered in determining whether dismissal [i]s
6    proper.”   Parks School of Business, Inc. v. Symington, 51 F.3d 1480,
7    1484 (9th Cir. 1995) (citation omitted).       Likewise, the Court “may . .
8    . consider certain materials — documents attached to the complaint,
9    documents incorporated by reference in the complaint, or matters of
10   judicial notice — without converting the motion to dismiss into a
11   motion for summary judgment.”   United States v. Ritchie, 342 F.3d 903,
12   907 (9th Cir. 2003).
13        When a motion to dismiss is granted, ordinarily “any dismissal[,]
14   . . . except one for lack of jurisdiction, improper venue, or failure
15   to join a party under Rule 19[,] operates as an adjudication on the
16   merits.”   Fed. R. Civ. P. 41(b) (emphasis added).
17        B.    FEDERAL TORT CLAIMS ACT
18        The Federal Tort Claims Act (“FTCA”) “gives federal courts
19   jurisdiction over claims against the United States for money damages
20   ‘for injury or loss of property, or personal injury or death caused by
21
      technically brought under Fed. R. Civ. 12(b)(6), focused their analysis on
22    the notice pleading requirements of Fed. R. Civ. P. 8(a). Twombly and Iqbal
      therefore state the proper standard for addressing the sufficiency of
23    Plaintiffs’ allegations with respect to the Court’s subject matter
      jurisdiction.
24         In the only post-Twombly circuit court to address pleading standards
      in the FTCA context, the Fifth Circuit cited Twombly as the operative
25    standard governing a jurisdictional dispute like the present one. Castro v.
      United States, 560 F.3d 381, 386 (5th Cir. 2009) (citing Lane v.
26    Halliburton, 529 F.3d 548, 557 (5th Cir. 2008)). In addition, the Ninth
      Circuit has explicitly applied Twombly when analyzing a complaint under the
27    discretionary function exception caselaw, but only had occasion to do so
      under the Foreign Sovereign Immunities Act, not the FTCA. Doe v. Holy See,
28    557 F.3d at 1073-74, 1084-85.

                                           17
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1    the negligent or wrongful act or omission of any employee of the
2    Government while acting within the scope of his office or employment,
3    under circumstances where the United States, if a private person, would
4    be liable to the claimant in accordance with the law of the place where
5    the act or omission occurred.’”     Sheridan v. United States, 487 U.S.
6    393, 398 (1988) (quoting 28 U.S.C. § 1346(b)).        The FTCA provides,
7    however, that the government shall not be liable for “[a]ny claim based
8    upon an act or omission of an employee of the Government . . . based
9    upon the exercise or performance or the failure to exercise or perform
10   a discretionary function or duty on the part of a federal agency or an
11   employee of the Government, whether or not the discretion involved be
12   abused.”   28 U.S.C. § 2680(a).     This statutory provision, known as the
13   “discretionary function exception,” lies at the heart of the present
14   motion.    Because the FTCA is jurisdictional, it must be emphasized that
15   the present analysis is focused on jurisdictional considerations rather
16   than the merits of Plaintiffs’ Complaint.
17        C.    DISCRETIONARY FUNCTION EXCEPTION
18        The discretionary function exception provides the government with
19   immunity from suit for “[a]ny claim . . . based upon the exercise or
20   performance of the failure to exercise or perform a discretionary
21   function or duty on the part of a federal agency or employee of the
22   Government, whether or not the discretion involved be abused.”           28
23   U.S.C. § 2680(a).   “In this way, the discretionary function exception
24   serves to insulate certain governmental decision-making from ‘judicial
25   second guessing of legislative and administrative decisions grounded in
26   social, economic, and political policy through the medium of an action
27   in tort.’”   Terbush v. United States, 516 F.3d 1125, 1129 (9th Cir.
28
                                           18
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1    2008) (quoting United States v. S.A. Empresa de Viacao Aerea Rio
2    Grandense (Varig Airlines), 467 U.S. 797 (1984)); accord Marbury v.
3    Madison, 5 U.S. (1 Cranch) 137, 170 (1803) (“The province of the court
4    is, solely, to decide on the rights of individuals, not to inquire how
5    the executive, or executive officers, perform duties in which they have
6    discretion.”).
7          Whether a given action by a government employee is protected by
8    the discretionary function exception involves a two-part inquiry.
9          First, the court must determine whether the challenged action
10   involves an “element of judgment or choice.”       United States v. Gaubert,
11   499 U.S. 315, 322 (1991).   If “a federal statute, regulation, or policy
12   specifically prescribes a course of action for the employee to follow,”
13   then the employee can be held liable for failing to follow the
14   prescribed directive.   Id. (emphasis added).
15         Second, “even assuming the challenged conduct involves an element
16   of judgment, it remains to be decided whether that judgment is of the
17   kind that the discretionary function exception was designed to shield.”
18   Id.   “Because the purpose of this exception is to prevent judicial
19   second-guessing of legislative and administrative decisions grounded in
20   social, economic, and political policy . . . , the exception protects
21   only governmental actions and decisions based on considerations of
22   public policy.”   Id. at 323.
23         In assessing the second step, it is important to keep in mind that
24   “if a regulation allows the employee discretion, the very existence of
25   the regulation creates a strong presumption that a discretionary act
26   authorized by the regulation involves consideration of the same
27   policies which led to the promulgation of the regulations.”          Id. at 324
28
                                          19
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1    (emphasis added).    Thus, “[w]hen established governmental policy, as
2    expressed or implied by statute, regulation, or agency guidelines,
3    allows a Government agent to exercise discretion, it must be presumed
4    that the agent’s acts are grounded in policy when exercising that
5    discretion.”   Id.   In contrast, if the applicable statute or regulation
6    does not give the employee discretion, no presumption attaches, and the
7    court must determine whether the decisions were “of the kind” that are
8    “susceptible to policy analysis.”    Gaubert, 499 U.S. at 323, 325.
9         Where there is no statute, regulation, or policy on point (either
10   conferring discretion or limiting discretion), the relevant question is
11   not whether the decision was the result of an actual policy-based
12   decision-making process.    As the Ninth Circuit has repeatedly
13   explained, “we do not need actual evidence that policy-weighing was
14   undertaken.”   Terbush, 516 F.3d at 1136 n.5 (citing Gaubert, 499 U.S.
15   at 324-25).    Instead, “[t]he focus of the inquiry is . . . on the
16   nature of the actions taken and on whether they are susceptible to
17   policy analysis.”    See Gaubert, 499 U.S. at 325 (emphasis added); see
18   also GATX/Airlog Co., 286 F.3d at 1178 (“[T]he question is not whether
19   policy factors necessary for a finding of immunity were in fact taken
20   into consideration, but merely whether such a decision is susceptible
21   to policy analysis.”); Nurse v. United States, 226 F.3d 996, 1001 (9th
22   Cir. 2000) (“the challenged decision need not actually be grounded in
23   policy considerations so long as it is, by its nature, susceptible to a
24   policy analysis.”); Childers v. United States, 40 F.3d 973, 974 n.1
25   (9th Cir. 1994) (“The application of the exception does not depend,
26   however, on whether federal officials actually took public policy
27   considerations into account.   All that is required is that the
28
                                          20
Case 2:09-cv-09061-SVW-FMO Document 17   Filed 04/20/10 Page 21 of 79 Page ID #:754

1    applicable statute or regulation gave the government agent discretion
2    to take policy goals into account.”); Lesoeur v. United States, 21 F.3d
3    965, 969 (9th Cir. 1994) (“[Appellants] argue that the discretionary
4    function exception cannot apply in the absence of a ‘conscious
5    decision.’   The statute is not so limited. . . .      The language is
6    directed at the nature of the conduct, and does not require an analysis
7    of the decision-making process.”) (quoting In re Consol. United States
8    Atmos. Testing Litig., 820 F.2d 982, 988-89 (9th Cir. 1987)).
9         The Ninth Circuit has noted that “the distinction between
10   protected and unprotected decisions can be difficult to apprehend, but
11   this is the result of the nature of government actions – they fall
12   ‘along a spectrum, ranging from those totally divorced from the sphere
13   of policy analysis, such as driving a car, to those fully grounded in
14   regulatory policy, such as the regulation and oversight of a bank.’”
15   Soldano v. United States, 453 F.3d 1140, 1145 (9th Cir. 2006) (quoting
16   Whisnant v. United States, 400 F.3d 1177, 1181 (9th Cir. 2005)).           This
17   distinction is drawn in part from the Supreme Court’s discussion in
18   Gaubert, in which the Court explained:
19        There are obviously discretionary acts performed by a Government
20        agent that are within the scope of his employment but not within
21        the discretionary function exception because these acts cannot be
22        said to be based on the purposes that the regulatory regime seeks
23        to accomplish.   If one of the officials involved in this case
24        drove an automobile on a mission connected with his official
25        duties and negligently collided with another car, the exception
26        would not apply.   Although driving requires the constant exercise
27

28
                                          21
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1         of discretion, the official’s decisions in exercising that
2         discretion can hardly be said to be grounded in regulatory policy.
3    Gaubert, 499 U.S. at 325 n.7.
4         In addition to these general principles, it should also be noted
5    that the courts have rejected “a rigid dichotomy between ‘planning’ and
6    ‘operational’ decisions and activities.”      Terbush, 516 U.S. at 1130
7    (citing Gaubert, 499 U.S. at 324).    The courts have likewise rejected
8    the argument that the government is per se immune when conducting
9    “uniquely governmental functions,” as such an analysis would “push the
10   courts into the ‘non-governmental’-‘governmental’ quagmire that has
11   long plagued the law of municipal corporations.”       Indian Towing Co v.
12   United States, 350 U.S. 61, 64 (1955); see also United States v. Olson,
13   546 U.S. 43, 46 (2005) (reaffirming Indian Towing).
14        D.   PROCEDURAL CONSIDERATIONS RELATING TO THE DISCRETIONARY
15             FUNCTION EXCEPTION
16        In deciding whether to grant Defendant’s Motion to Dismiss for
17   lack of subject matter jurisdiction, the Court “must accept as true the
18   factual allegations in the complaint.”     Terbush v. United States, 516
19   F.3d 1125, 1128 (9th Cir. 2008) (citing GATX/Airlog Co. v. United
20   States, 286 F.3d 1168, 1173 (9th Cir. 2002)).       “The United States bears
21   the burden of proving the applicability of the discretionary function
22   exception.”   Id. (citing Prescott v. United States, 973 F.2d 696, 702
23   (9th Cir. 1992)).   The government must prove that each of the allegedly
24   wrongful acts, by each allegedly negligent actor, is covered by the
25   discretionary function exception.    GATX/Airlog, 286 F.3d at 1174
26   (“[W]hen determining whether the discretionary function exception is
27   applicable, ‘the proper question to ask is not whether the Government
28
                                          22
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1    as a whole had discretion at any point, but whether its allegedly
2    negligent agents did in each instance.’”) (citing In re Glacier Bay, 71
3    F.3d 1447, 1451 (9th Cir. 1995)) (alterations omitted).         In examining
4    each of the government’s particular acts, “the question of how the
5    government is alleged to have been negligent is critical.”          Whisnant v.
6    United States, 400 F.3d 1177, 1185 (9th Cir. 2005) (emphasis added)
7    (citing Glacier Bay, 71 F.3d at 1451).      The central question is
8    whether, “at this stage of the case” — and under the standard of proof
9    applicable at this stage — “the government has [or has] not established
10   that choices exercised by government officials involved policy
11   judgments.”   Prescott, 973 F.2d at 703.
12        These considerations can be summarized succinctly by reference to
13   the two-step analysis set forth in Gaubert, 499 U.S. at 322-25.           The
14   government can meet its initial burden in one of two ways, and the
15   plaintiffs can respond to each showing in one of two ways.
16        First, the government may show that a statute, regulation or
17   policy confers discretion on the government actor; this gives rise to a
18   “strong presumption” that the alleged harmful act was guided by policy
19   judgment.   Id. at 324.   Second, the government may show that the
20   actor’s course of action was “of the kind” that is “susceptible to
21   policy analysis.”   Id. at 323, 325.      Either of these showings will
22   satisfy the government’s “burden of proving application of the
23   discretionary function exception.”     Blackburn v. United States, 100
24   F.3d 1426, 1436 (9th Cir. 1996).
25        “[O]nce the Government met its burden, . . . the party opposing
26   [the application of the discretionary function exception] ha[s] to
27   present sufficient evidence to withstand dismissal” for lack of
28
                                          23
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1    jurisdiction.   Id.   Under Gaubert, the plaintiffs may meet their the
2    burden by showing either (1) that there are mandatory rules prescribing
3    the actor’s course of action, or (2) that the actor’s course of action
4    was not “of the kind” that is “susceptible to policy analysis.”
5    Gaubert, 499 U.S. at 323-25.
6          E.   ILLUSTRATIVE CASELAW
7          As explained by a leading treatise, “cases under the [Federal Tort
8    Claims] Act can be roughly grouped into there categories: (1) claims
9    based upon [non-regulatory] determinations or decisions or other acts
10   of choice or judgment of government officials and administrators; (2)
11   claims based upon the regulatory activities of regulatory agencies or
12   officials; and (3) claims arising from the design or execution of
13   public works and other authorized governmental programs.” Lester S.
14   Jayson & Robert C. Longstreth, 2 Handling Federal Tort Claims, §
15   12.05[1] (2009 update).
16         “Whatever else the discretionary function exception may include, .
17   . . it plainly was intended ‘to encompass the discretionary acts of the
18   Government acting in its role as regulator of the conduct of private
19   individuals.’” Jayson & Longstreth, Federal Tort Claims, § 12.07
20   (quoting United States v. Varig Airlines, 467 U.S. 797, 813-14 (1984)).
21   That is not to say that regulatory actions enjoy blanket immunity: the
22   “uniquely government functions” approach was rejected by the Supreme
23   Court over half-a-century ago.      See Indian Towing, 350 U.S. at 64.        But
24   at the very least, it appears from the caselaw and secondary
25   authorities that regulatory actions are more likely to be deemed
26   “discretionary functions” than non-regulatory actions are.
27   ///
28
                                           24
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1            A leading case involving government regulators is United States v.
2    Gaubert, 499 U.S. 315 (1991).     In that case, the plaintiff alleged that
3    the Federal Home Loan Bank Board and the Federal Home Loan Bank Dallas
4    branch “had been negligent in carrying out their supervisory
5    activities” following their take-over of a failing Texas savings-and-
6    loan.    Id. at 318.   The plaintiff, who was the chairman and largest
7    shareholder of the thrift, sought to recover the lost value of his
8    shares and the value of his personal guarantee of the corporation’s
9    debts, amounting to $100 million in total.      Id. at 319-20.      In
10   particular, the plaintiff alleged that the Federal Home Loan Bank
11   Dallas branch had pressured the failed thrift’s sitting officers and
12   directors to resign and then recommended their replacements.          Id. at
13   319.    The Dallas branch then became significantly involved in the
14   thrift’s day-to-day operations.     Id. at 319-20.    The plaintiff’s
15   allegations centered on the “alleged negligence of federal officials in
16   selecting the new officers and directors and in participating in the
17   day-to-day management of” the thrift.     Id. at 320.
18           The Supreme Court, after restating the basic two-part test for the
19   discretionary function exception, held that “[d]ay-to-day management of
20   banking affairs, like the management of other businesses, regularly
21   requires judgment as to which of a range of permissible courses is the
22   wisest.”    Id. at 325.   In this regard, the Court rejected the proposed
23   distinction between “policymaking” and “operational” functions.           Id.
24   In order to determine whether the alleged acts were discretionary or
25   not, the Court reviewed the complaint’s allegations of the government’s
26   involvement in the thrift’s day-to-day affairs.       These allegations
27   focused on the government’s involvement in day-to-day management
28
                                          25
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1    decisions, hiring and salary decisions, operational matters, financial
2    matters, asset management, and legal affairs.        Id. at 327-28.     The
3    government became involved in strategic planning, for example by
4    recommending that the thrift change from being state-chartered to
5    becoming federally-chartered, and by giving advice regarding a
6    potential bankruptcy filing.   Id. at 328.
7         Ultimately, the Court rejected the plaintiff’s argument “that the
8    challenged actions fall outside the discretionary function exception
9    because they involved the mere application of technical skills and
10   business expertise.”   Id. at 331.    The Court explained that the day-to-
11   day operations of a bank require more than mere “mathematical
12   calculations” that “involve no choice or judgment in carrying out the
13   calculations.”   Id.   Importantly, the Court also noted that “neither
14   party has identified formal regulations governing the conduct in
15   question.”   Id. at 329 (emphasis added).        The Court identified broad
16   statutory grants of discretion to the Federal Home Loan Bank to engage
17   in formal supervisory actions, and found no prohibition on the agency’s
18   use of less formal supervisory tools.      Id.     The Court also identified a
19   formal policy statement from the government in which the agency
20   explained its policy “that supervisory actions must be tailored to each
21   case,” ranging from “informal supervisory guidance and oversight,” to
22   implementation of a “supervisory agreement,” and, in the most
23   problematic cases, an immediate “cease-and-desist order.”          Id. at 330-
24   31 (quoting FHLBB Resolution No. 82-381 (May 26, 1982)).
25        Notably, the Court approvingly quoted from the lower court’s
26   explanation that the agency undertook its day-to-day role in an effort
27   to further “social, economic, or political policies”:
28
                                           26
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1         First, they sought to protect the solvency of the savings and loan
2         industry at large, and maintain the public’s confidence in that
3         industry.     Second, they sought to preserve the assets of [the
4         thrift] for the benefit of depositors and shareholders, of which
5         [plaintiff] was one.
6    Id. at 332 (quoting 885 F.2d 1284, 1290 (5th Cir. 1989)).         In this
7    regard, the Supreme Court highlighted the fact that “[t]here are no
8    allegations that the regulators gave anything other than the kind of
9    advice that was within the purview of the policies behind the
10   statutes.”    Id. at 333.   For example, the plaintiff admitted “the
11   regulators replaced [the thrift’s] management in order to protect the
12   [federal savings and loan insurance corporation’s] insurance fund.”
13   Id. at 332.
14        “In the end,” the Court concluded, “Gaubert’s amended complaint
15   alleges nothing more than negligence on the part of the regulators.”
16   Id. at 334.     The Court explained that even day-to-day regulatory
17   decisions were protected by the discretionary function exception: “If
18   the routine or frequent nature of a decision were sufficient to remove
19   an otherwise discretionary act from the scope of the exception, then
20   countless policy-based decisions by regulators exercising day-to-day
21   supervisory authority would be actionable.      This is not the rule of our
22   cases.”   Id.
23        Gaubert, then, is a guidepost for two reasons: one, because it is
24   the most recent Supreme Court authority in this area, and two, because
25   it involved a roughly analogous factual scenario — the conduct of
26   financial regulators in their day-to-day regulatory activities.
27   (Additional cases that specifically discuss the SEC are discussed
28
                                          27
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1    infra.)   It is worth noting, then, that Gaubert’s reasoning weighs
2    heavily in favor of Defendant’s position.
3         A pair of other cases are worth discussing at length.              These cases
4    set forth principles that have guided the Ninth Circuit’s analysis
5    where cases involve a combination of discretionary and non-
6    discretionary duties.
7         In Glacier Bay, the Ninth Circuit held that hydrographers for the
8    National Oceanic and Atmospheric Administration could be sued for their
9    non-discretionary actions made while preparing nautical charts.               71
10   F.3d at 1452-54.       The government had argued that its supervising
11   hydrographers retained discretion when reviewing and approving the
12   charts, and that this final level of discretion immunized all of the
13   allegedly negligent conduct during the oceanic surveys and drafting of
14   the charts.    Id. at 1451.     The court explained that the final review
15   was indeed discretionary, because the supervisors had to decide whether
16   the survey was sufficiently accurate and whether the social, economic,
17   and political benefits of conducting further surveys outweighed the
18   costs of doing so.       Id. at 1454.   However, the court also determined
19   that the discretionary final review could not insulate the surveying
20   staff’s negligent acts that violated the surveyors’ mandatory duties.
21   Id. at 1451.    Instead, the court explained that the relevant question
22   is whether “each person taking an allegedly negligent action had
23   discretion,” not whether “the Government as a whole had discretion at
24   any point.”    Id.11
25
      11
26       The court also noted, however, that the presence of a discretionary final
      review might affect the merits of the claim because the plaintiff would be
27    unable to show that the negligent acts proximately caused the plaintiff’s
      harm. Id. (citing Routh v. United States, 941 F.2d 853, 855 (9th Cir.
28    1991).)

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1         The court then engaged in a close analysis of the surveyors’
2    actions to determine if they violated any non-discretionary duties.
3    Id. at 1452-54.   To find these mandatory duties, the court looked to
4    “the Department of Commerce’s ‘Hydrographic Manual’ and [] the 1964 and
5    1975 Project Instructions specifically drafted for the two surveys [at
6    issue].’” Id. at 1452.     The court noted that, contrary to the
7    government’s assertion, such internal guidelines were in fact “binding
8    for purposes of the discretionary function inquiry.”          Id. at 1452 n.1.
9    The court found that the Hydrographic Manual and Project Instructions
10   established a number of mandatory procedures for conducting oceanic
11   surveys.   Id. at 1451-52.    Much of the “discretion” available to the
12   surveyors involved purely scientific judgments, not judgments based on
13   “economic, political and social policy” that would be shielded from
14   scrutiny under the FTCA.     Id. at 1453.       Notably, the court contrasted
15   the 1964 survey instructions with the 1975 survey instructions and
16   found that the former contained mandatory language -– “[a]ll
17   indications of shoals shall be thoroughly investigated” –- whereas the
18   latter did not contain such language, and instead stated that surveys
19   “should be guided by [27 different] considerations . . . and [the
20   surveyor’s] past experience in similar areas.”         Id. at 1453 (quoting
21   Hydrographic Manual and 1964 Survey Instructions).         Accordingly, the
22   earlier 1964 survey was deemed non-discretionary, whereas the 1975
23   survey — requiring surveyors to carefully balance 27 different
24   considerations – was discretionary.       Id.
25        Three years later, the Ninth Circuit clarified its holding in
26   Glacier Bay, explaining that in some instances, an underlying violation
27   of a mandatory duty will be immune from suit if another government
28
                                          29
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1    agent’s own exercise of discretion intervened prior to the plaintiff’s
2    injury.   The court explained that the discretionary function exception
3    applies whenever a “robust exercise of discretion intervenes between an
4    alleged government wrongdoer and the harm suffered by a plaintiff.”
5    General Dynamics Corp. v. United States, 139 F.3d 1280, 1285 (9th Cir.
6    1998).    The court proceeded to distinguish the case at hand from
7    Glacier Bay.     The plaintiff in General Dynamics alleged that government
8    auditors had negligently performed an audit that led prosecutors to
9    indict the plaintiff for defrauding the United States, a charge which
10   the plaintiff successfully defended.        Id. at 1282.    The court held that
11   the plaintiff, by attempting to recover for the auditors’ professional
12   negligence rather than the prosecutors’ clearly discretionary decision
13   to prosecute, was improperly attempting to plead around the
14   discretionary function exception.      Id. at 1283-84.      The court refused
15   to “accord amaranthine obeisance to a plaintiff’s designation of
16   targeted employees” when, in sum and substance, the complaint was
17   alleging prosecutorial misconduct.      Id. at 1283.
18        The General Dynamics court distinguished Glacier Bay by
19   emphasizing that the central focus is the nature of the allegedly
20   harmful act.     Id. at 1284-85.   Obviously, “many actions within an
21   agency pass through the hands of somebody with some discretion at some
22   stage”; the mere presence of discretion at one stage in the process
23   does not automatically immunize the non-discretionary negligent conduct
24   that precedes.    Id. at 1284.     Accordingly, when an oceanic chart is
25   negligently investigated and drafted in violation of mandatory rules,
26   the presence of a discretionary final review does not immunize the
27   negligent investigations and drafting.       Id.   In this regard, the court
28
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1    noted that Glacier Bay involved a “tight coupling between
2    hydrographers, reviewers, charts, and results.”       Id. at 1284.
3           But when an actor with “broad based discretion” such as the
4    prosecutor in General Dynamics undertakes “a totally separate exercise
5    of discretion” that is independent of the underlying negligent act, all
6    of the government’s acts are immunized — including the earlier actions
7    that may have violated mandatory duties.      Id. at 1285.     The court
8    explained that prosecutors have “access to a great deal of information
9    beyond that submitted by any one agency” such as the negligent
10   auditors.     Because “the prosecutors could have had even more
11   information if they had chosen to pursue it,” the prosecutor’s decision
12   to prosecute the plaintiff was a sufficiently “robust exercise of
13   discretion” to trigger application of the discretionary function
14   exception.    Id.   As a result, all of government’s negligent acts were
15   immunized — even the ones that violated non-discretionary auditing
16   principles.
17          Although they are factually distinguishable from the present case,
18   two out-of-circuit decisions are also worth noting in order to show
19   that the reasoning in General Dynamics has been adopted in other
20   circuits.12    In Sloan v. United States Dept. of Housing and Urban
21   Development, 236 F.3d 756 (D.C. Cir. 2001), a contractor sued the
22   Department of Housing and Urban Development under the FTCA for
23   negligently conducting an audit of his construction site and for
24   suspending him from government contract work based on the erroneous
25   audit.   236 F.3d at 758-59.   On appeal from the district court’s
26
27
       12
         The summaries of these cases are drawn from Jerome Stevens Pharma., Inc.
28     v. Food & Drug Admin., 402 F.3d 1249, 1254-55 (D.C. Cir. 2005).

                                           31
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1    dismissal of the complaint for lack of subject matter jurisdiction, the
2    contractor contended that while the suspension of his government
3    contract work was a discretionary function, the audit was not a
4    discretionary function because it was governed by standards of
5    professional practice.   Id. at 761.      The court rejected that
6    contention, holding that there was “no meaningful way in which the
7    allegedly negligent investigatory acts could be considered apart from
8    the totality of the prosecution.”    Id. (quoting Gray v. Bell, 712 F.2d
9    490, 516 (D.C. Cir. 1983)) (internal quotation marks omitted).          The
10   court noted that “[t]he complaint does not allege any damages arising
11   from the investigation itself, but only harm caused by the suspension
12   to which it assertedly led.”   Id. at 762.
13        In Fisher Bros. Sales, Inc. v United States, 46 F.3d 279 (3d Cir.
14   1995) (en banc), Chilean fruit growers sued the Food and Drug
15   Administration under the FTCA for banning the importation of Chilean
16   fruit based on a negligently conducted laboratory test concluding that
17   the fruit contained cyanide.   46 F.3d at 282-83.      Recognizing that the
18   Commissioner’s decision to ban the fruit was a discretionary function,
19   the fruit growers alleged injury “based upon” the negligence of the
20   laboratory technicians, who were bound by the agency’s Regulatory
21   Procedures Manual.   Id. at 286.    The Third Circuit rejected this
22   characterization of the claim, reasoning that “[t]he reality here is
23   that the injuries of which the plaintiffs complain were caused by the
24   Commissioner’s decisions and, as a matter of law, their claims are
25   therefore ‘based upon’ those decisions.”      Id.   The court concluded that
26   “a claim must be ‘based upon’ the exercise of a discretionary function
27   whenever the immediate cause of the plaintiff’s injury is a decision
28
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1    which is susceptible of policy analysis and which is made by an
2    official legally authorized to make it.”      Id. at 282.
3          F.     UNDERLYING POLICIES OF THE DISCRETIONARY FUNCTION EXCEPTION
4          Before analyzing the parties’ specific arguments, it is also
5    helpful to explain the policies that animate the discretionary function
6    exception.    As summarized succinctly in Gray v. Bell, 712 F.2d 490
7    (D.C. Cir. 1983), cert. denied, 465 U.S. 1100 (1984):
8          The modern policy basis justifying sovereign immunity from suit
9          has three principal themes.   First, and most important, under
10         traditional principles of separation of powers, courts should
11         refrain from reviewing or judging the propriety of the
12         policymaking acts of coordinate branches.      Second, consistent with
13         the related doctrine of official immunity, courts should not
14         subject the sovereign to liability where doing so would inhibit
15         vigorous decisionmaking by government policymakers.        Third, in the
16         interest of preserving public revenues and property, courts should
17         be wary of creating huge and unpredictable governmental
18         liabilities by exposing the sovereign to damage claims for broad
19         policy decisions that necessarily impact large numbers of people.
20         Framed in different fashions, each of these themes appears again
21         and again, alone or in combination, as a modern justification for
22         retaining a form of immunity, under the general rationale that
23         courts should not “interfere” with government operations and
24         policymaking.
25   Id. at 511 (emphasis added, internal footnotes omitted).
26   ///
27   ///
28
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1          Notably absent from this rationale is any mention of “fairness.”
2    As explained in National Un. Fire Ins. v. United States, 115 F.3d 1415
3    (9th Cir. 1997):
4          Private actors generally must pay for the harm they do by
5          carelessness.    The government’s power to tax enables it, better
6          than any private actor, to perform its conduct with reasonable
7          care for the safety of persons and property, and to spread the
8          cost over all the beneficiaries if its conduct negligently causes
9          harm.    Fairness might seem to suggest that the government should
10         be liable more broadly than private actors.       But at its root, the
11         discretionary function exception is about power, not fairness.
12   Id. at 1422.
13         As a result of these underlying policies and principles,
14   Plaintiffs are misguided when they argue that “there is no oversight at
15   all available to the taxpaying citizens, as well as the nation, to
16   insure that the SEC does its job.”     (Opp. at 15.)      This broad policy
17   argument is unavailing.
18

19   IV.   ANALYSIS AND DISCUSSION
20

21         A.      RELEVANT LEGISLATIVE HISTORY
22         It is often remarked that Congressional intent is particularly
23   relevant to the Federal Tort Claims Act because “no action lies against
24   the United States unless the legislature has authorized it.”           E.g.,
25   Dalehite v. United States, 346 U.S. 15, 30 (1953) (collecting cases).
26   As a result, “the basic inquiry concerning the application of the
27   discretionary function exception is whether the challenged acts of a
28
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1    Government employee - whatever his or her rank - are of the nature and
2    quality that Congress intended to shield from tort liability.”           United
3    States v. S.A. Empresa de Viacao Aerea Rio Grandense (Varig Airlines),
4    467 U.S. 797, 813-814 (1984) (emphasis added).
5         It is notable, then, that Congress, when drafting and debating the
6    Federal Tort Claims Act, repeatedly and explicitly suggested that the
7    discretionary function exception was intended to apply to the SEC.           See
8    Dalehite v. United States, 346 U.S. 15, 29 & n.21(1953) (noting that
9    this particular “paragraph [] appears time and again” in the
10   legislative history).   Congress explained that the discretionary
11   function exception was:
12        designed to preclude application of the bill to a claim against a
13        regulatory agency, such as the Federal Trade Commission or the
14        Securities and Exchange Commission, based upon an alleged abuse of
15        discretionary authority by an officer or employee, whether or not
16        negligence is alleged to have been involved.        To take another
17        example, claims based upon an allegedly negligent exercise by the
18        Treasury Department of the blacklisting or freezing powers are
19        also intended to be excepted.    The bill is not intended to
20        authorize a suit for damages to test the validity of or provide a
21        remedy on account of such discretionary acts even though
22        negligently performed and involving an abuse of discretion.
23   Dalehite, 346 U.S. at 29 n. 21 (quoting H.R.Rep.No. 2245, 77th Cong.,
24   2d Sess., p. 10; S.Rep.No. 1196, 77th Cong., 2d Sess., p. 7;
25   H.R.Rep.No. 1287, 79th Cong., 1st Sess., pp. 5-6; Hearings before
26   H.Com. on Judiciary on H.R. 5373 and H.R. 6463, 77th Cong., 2d Sess.,
27

28
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1    p. 33); see also Defs.’ Mot. at 10 & n.29 (quoting House Rep. 79-1287,
2    at 5-6).
3         B.     THE GOVERNMENT HAS SATISFIED ITS THRESHOLD BURDEN BY
4                IDENTIFYING STATUTES, REGULATIONS, AND CASES DISCUSSING THE
5                SEC’S GENERAL POWERS AND DUTIES
6         In its Motion, the Government sets forth a number of general,
7    broad principles governing the SEC’s duties and functions.          These legal
8    assertions establish that the alleged wrongs were done in the course of
9    the SEC’s exercise of its discretion, both in terms of conducting its
10   investigations and deciding whether or not to bring enforcement
11   proceedings.     These basic conclusions are supported by statutes,
12   regulations, and caselaw.    Defendant has therefore satisfied its
13   threshold burden under Gaubert of establishing that the relevant
14   statutes and regulations “allow[] the employee[s] discretion.”
15   Gaubert, 499 U.S. at 323.     Accordingly, there is “a strong presumption”
16   that the alleged acts were “based on considerations of public policy,”
17   and Plaintiffs bear the burden of rebutting this presumption.          Id.
18        This section discusses the Government’s threshold showing that its
19   actions were discretionary and are presumed to be susceptible to policy
20   analysis.   The following section discusses Plaintiffs’ attempt to rebut
21   this strong presumption.
22               1.    SEC’s Investigative Powers
23        Section 21 of the Securities and Exchange Act of 1934, codified at
24   15 U.S.C. § 78u, establishes the SEC’s investigatory powers.          The
25   statute explicitly provides discretion to the SEC:
26        The Commission may, in its discretion, make such investigations as
27        it deems necessary to determine whether any person has violated,
28
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1         is violating, or is about to violate any provision of this
2         chapter, [or] the rules or regulations thereunder, . . . and may
3         require or permit any person to file with it a statement in
4         writing, under oath or otherwise as the Commission shall
5         determine, as to all the facts and circumstances concerning the
6         matter to be investigated.     The Commission is authorized in its
7         discretion, . . . to investigate any facts, conditions, practices,
8         or matters which it may deem necessary or proper to aid in the
9         enforcement of such provisions. . . .
10   15 U.S.C. § 78u(a)(1) (emphasis added).
11        Little discussion is necessary.      The statute repeatedly uses
12   permissive language rather than mandatory language.        The SEC has
13   discretion to decide both the timing of when it “make[s] such
14   investigations,” and the manner and scope of how to “investigate any
15   facts, conditions, practices, or matters,” whether through “a statement
16   in writing, under oath or otherwise.”      Id. (emphasis added).      All of
17   these decisions are framed in permissive language (“[t]he Commission
18   may . . .”) and the SEC is permitted to proceed “as it deems
19   necessary.”   Id.   In other words, the statute is discretionary — the
20   SEC retains discretion over when and how to conduct its investigations.
21   This leads to a strong presumption that the SEC’s actions were
22   discretionary.   Gaubert, 499 U.S. at 324; see also Vickers v. United
23   States, 228 F.3d 944, 951 (9th Cir. 2000) (“[T]he discretionary
24   function exception protects agency decisions concerning the scope and
25   manner in which it conducts an investigation so long as the agency does
26   not violate a mandatory directive.”).
27

28
                                          37
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1         The SEC’s own regulations are similarly discretionary.          As
2    explained in the SEC’s formal policies regarding Enforcement
3    Activities, as summarized in 17 C.F.R. § 202.5:
4         Where, from complaints received from members of the public,
5         communications from Federal or State agencies, examination of
6         filings made with the Commission, or otherwise, it appears that
7         there may be violation of the acts administered by the Commission
8         or the rules or regulations thereunder, a preliminary
9         investigation is generally made.     In such preliminary
10        investigation no process is issued or testimony compelled.           The
11        Commission may, in its discretion, make such formal investigations
12        and authorize the use of process as it deems necessary to
13        determine whether any person has violated, is violating, or is
14        about to violate any provision of the federal securities laws or
15        the rules of a self-regulatory organization of which the person is
16        a member or participant. . . .
17   17 C.F.R. § 202.5(a) (emphasis added).     This regulation does not
18   require the SEC to conduct its investigations in any particular manner;
19   rather, the agency retains broad discretion to decide how to conduct
20   its investigations.
21        In light of this statutory and regulatory language, the courts
22   have unanimously rejected challenges to the SEC’s use of its
23   investigatory powers.   In a pre-FTCA case, Justice Vinson, then a
24   member of the District of Columbia Court of Appeals, wrote an opinion
25   that, inter alia, granted official immunity to members of the SEC for
26   their investigatory activities.     Jones v. Kennedy, 121 F.2d 40, 43-44
27   (D.C. Cir. 1941).   In a terse discussion, the court explained:
28
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1         the carrying out of investigations and the turning over of
2         evidence to the Attorney General for presentation to a grand jury
3         come under the authorized duties of the Commission.         And likewise,
4         plaintiff has not met, in these allegations, the task of showing
5         acts which fall outside of the [SEC’s] immunity.
6    Id. at 43-44 (internal footnote omitted) (emphasis added) (citing 15
7    U.S.C. §§ 77h(e), 77s(c), 77t(b)).
8         Numerous subsequent courts have held that the SEC is immune from
9    liability for its investigative actions.      In Schmidt v. United States,
10   198 F.2d 32 (7th Cir. 1952), the court applied the discretionary
11   function exception to bar a claim that the SEC was investigating a
12   corporation and publicizing its investigation for the improper purpose
13   of destroying the company.   Id. at 33, 36.     The court explained that
14   the SEC’s decision to institute an investigation and conduct it in a
15   particular manner “was . . . clearly within the scope of its
16   discretionary authority” under the 1934 Exchange Act.        Id. at 36.
17   Nothing more was said, and nothing more needed to be said.          The point
18   was — and remains to this day — “perfectly clear [] under the terms of
19   the applicable statutes.”    Id.
20        The same point has been stated in subsequent cases including
21   Sprecher v. Von Stein, 772 F.2d 16, 18 (2d Cir. 1985), and other cases
22   discussed infra, subsection 3.
23             2.   SEC’s Enforcement Powers
24        The SEC likewise has discretion regarding the use of its
25   enforcement powers.   Under 15 U.S.C. § 78u(d)(1), the SEC has
26   discretion over decisions to seek an injunction against ongoing
27   violations of the Exchange Act:
28
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1         Whenever it shall appear to the Commission that any person is
2         engaged or is about to engage in acts or practices constituting a
3         violation of any provision of this chapter [or] the rules or
4         regulations thereunder, . . . it may in its discretion bring an
5         action in the proper district court of the United States . . . to
6         enjoin such acts or practices. . . .
7    15 U.S.C. § 78u(d)(1) (emphasis added).
8         The SEC retains similar discretion regarding whether to seek
9    monetary relief or other injunctive relief.      See § 78u(d)(3) (“the
10   Commission may bring an action in a United States district court to
11   seek . . . a civil penalty to be paid by the person who committed such
12   violation.”) (emphasis added); § 78u(d)(5) (“the Commission may seek .
13   . . any equitable relief that may be appropriate or necessary for the
14   benefit of investors.”) (emphasis added).
15        The regulations are similarly discretionary.        Again under 17
16   C.F.R. § 202.5:
17        After investigation or otherwise the Commission may in its
18        discretion take one or more of the following actions: Institution
19        of administrative proceedings looking to the imposition of
20        remedial sanctions, initiation of injunctive proceedings in the
21        courts, and, in the case of a willful violation, reference of the
22        matter to the Department of Justice for criminal prosecution.           The
23        Commission may also, on some occasions, refer the matter to, or
24        grant requests for access to its files made by, domestic and
25        foreign governmental authorities or foreign securities
26        authorities, self-regulatory organizations such as stock exchanges
27

28
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1         or the National Association of Securities Dealers, Inc., and other
2         persons or entities.
3    17 C.F.R. § 202.5 (emphasis added).
4         Again, the courts are unanimous in holding that these statutory
5    powers are discretionary.   In SEC v. Research Automation Corp., 521
6    F.2d 585, 590 (2d Cir. 1975), the court summarily dismissed a
7    defendant’s FTCA-based counterclaim because the SEC had discretion “to
8    institute and maintain the present [enforcement] action.”
9         The same conclusion was reached in S.E.C. v. Better Life Club of
10   America, Inc., 995 F. Supp. 167, 180 (D.D.C. 1998), aff’d, 203 F.3d 54
11   (D.C. Cir. 1999), cert. denied sub nom. Taylor v. S.E.C., 528 U.S. 867
12   (1999).   In that case, a defendant in an SEC enforcement action brought
13   counterclaims for tortious interference with contract and intentional
14   infliction of emotional distress on account of its enforcement actions.
15   The court dismissed these counterclaims under the discretionary
16   function exception because “[i]nvestigation and prosecution under § 21
17   of the Securities Acts is discretionary; therefore the United States is
18   immune to these claims.”    Id. at 180 (citing Board of Trade of City of
19   Chicago v. SEC, 883 F.2d 525, 531 (7th Cir. 1989)).
20              3.   The Unanimous Precedent is Supported by the
21                   Justifications of the Discretionary Function Exception
22        The Better Life Club court relied on an Administrative Procedures
23   Act case decided by the Seventh Circuit, Board of Trade v. SEC, 883
24   F.2d 525, 531 (7th Cir. 1989).      In Board of Trade, the court refused to
25   exercise jurisdiction over two futures exchanges’ claims that SEC had
26   abused its discretion by issuing a no-action order and refraining from
27   prosecuting a competing non-exchange “system” that acted as a clearing
28
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1    agency for options trades.    The court explained that the “[r]efusal to
2    prosecute is a classic illustration of a decision committed to agency
3    discretion,” and under the Securities Exchange Act, “[i]nvestigation
4    and prosecution under § 21 are discretionary, not mandatory.”          883 F.2d
5    at 530-31.    Judge Easterbrook explained at length the reasons why these
6    decisions are discretionary and involve policy judgment:
7                 Doing nothing may be the most constructive use of the
8         Commission’s resources.    Congress gives the SEC a budget, setting
9         a cap on its personnel.    With limited numbers of staff-years, the
10        Commission must enforce several complex statutes.         To do this
11        intelligently the Commissioners must assign priorities.
12        Prosecuting the System means less time for something else --
13        investigating claims of fraud in issuing new stock or conducting a
14        takeover contest, resolving disputes under the Investment Company
15        Act, and so on.    Agencies may find it worthwhile to give short
16        shrift to a particular claim if the aggrieved party can file its
17        own suit (as the [plaintiff] futures markets may), for turning the
18        subject over to private litigation frees up time without
19        necessarily diminishing the enforcement of the statute.          Yet even
20        when the aggrieved party cannot vindicate its own rights, as with
21        the National Labor Relations Act - indeed, even when the person
22        complaining about failure to prosecute is a defendant whose
23        business is going down the tubes - decisions about the best use of
24        the staff’s time are for the prosecutor’s judgment.
25                Courts cannot intelligently supervise the Commission’s
26        allocation of its staff’s time, because although judges see
27        clearly the claim the Commission has declined to redress, they do
28
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1         not see at all the tasks the staff may accomplish with the time
2         released.   Agencies must compare the value of pursuing one case
3         against the value of pursuing another; declining a particular case
4         hardly means that the SEC’s lawyers and economists will go twiddle
5         their thumbs; case-versus-case is the daily tradeoff.          Judges
6         compare the case at hand against a rule of law or an abstract
7         standard of diligence and do not see the opportunity costs of
8         reallocations within the agency.     That fundamental difference in
9         the perspectives of the two bodies is why agencies (and other
10        prosecutors) rather than courts must make the decisions on
11        pursuing or dropping claims.    Resource allocation is not a task
12        governed by “law”.    It is governed by budgets and opportunities.
13        Agencies “take Care that the Laws be faithfully executed” (Art.
14        II, § 3) by doing the best they can with the resources Congress
15        allows them.   Judges could make allocative decisions only by
16        taking over the job of planning the agency’s entire agenda,
17        something neither authorized by statute nor part of their
18        constitutional role.
19   Id. at 531 (internal citations omitted).
20        Thus, even if the plain language of the Securities Exchange Act
21   were insufficient to bar Plaintiffs’ claims, Judge Easterbrook’s policy
22   analysis explains the various reasons that the discretionary function
23   exception applies to the SEC’s actions in the present case.          Little
24   more needs to be said, except that numerous other court decisions
25   support this conclusion.
26        A large number of courts have held that SEC decisions are
27   unreviewable under the FTCA and/or the Administrative Procedures Act.
28
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1    See, e.g., Block v. SEC, 50 F.3d 1078, 1084 (D.C. Cir. 1995) (rejecting
2    an Administrative Procedures Act action seeking to compel SEC action,
3    because “[s]o far, it appears, the Commission has found [its chosen
4    means] sufficient to induce compliance with the law.        That the
5    petitioners prefer a different means of enforcement is irrelevant. . .
6    . [T]he agency alone, and neither a private party nor a court, is
7    charged with the allocation of enforcement resources.”); Sprecher v.
8    Von Stein, 772 F.2d 16, 18 (2d Cir. 1985) (claims arising out of
9    agency’s investigative operations are barred by FTCA immunity);
10   Sprecher v. Graber, 716 F.2d 968, 975 (2d Cir. 1983) (claims arising
11   out of agency’s investigative operations are barred by common law
12   immunity); Treats Intern. Ents., Inc. v. S.E.C., 828 F. Supp. 16, 18-19
13   (S.D.N.Y. 1993) (SEC’s investigative decisions are unreviewable under
14   Administrative Procedures Act); Standifer v. SEC, 542 F. Supp. 2d 1312,
15   1318 (N.D. Ga. 2008) (dismissing FTCA claims against SEC for numerous
16   reasons, including the fact that “[t]he SEC is granted broad discretion
17   by Congress to investigate possible violations of the securities laws
18   and to determine whether to bring civil or criminal actions to remedy
19   those violations.”); Leytman v. New York Stock Exchange, No. 95 CV 902,
20   1995 WL 761843, at *3 (E.D.N.Y. Dec. 6, 1995) (“Plaintiff [] seeks
21   damages from the Commission for its failure to investigate his claims
22   about the [New York Stock] Exchange’s alleged misconduct. . . .           The
23   Securities Exchange Act of 1934 provides that stock exchange records
24   are subject to investigation by the [Securities and Exchange]
25   Commission ‘as the Commission . . . deems necessary or appropriate.’
26   15 U.S.C. 78q(b).   The decision of whether or not to investigate a
27   stock exchange is left in the discretion of the Commission. [Under the
28
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1    FTCA,] [e]ven if the Commission abuses that discretion, the court may
2    not intervene.”); see also Thomas Lee Hazen, 6 The Law of Securities
3    Regulation, § 16.2, at 213 n.313 (6th ed. 2010 supp.) (collecting cases
4    involving SEC and non-governmental regulatory bodies).
5         In addition, courts have repeatedly held in other contexts that
6    the conduct of regulatory investigations are immune from FTCA liability
7    unless there are mandatory directives that limit the investigators’
8    discretion to determine both the scope and the manner of the
9    investigation.   See, e.g., Alfrey v. United States, 276 F.3d 557, 565-
10   66 (9th Cir. 2002) (prison guards had discretion to determine how
11   thoroughly to search prisoners’ cells); Sloan v. U.S. Dept. of Housing
12   and Urban Devel., 236 F.3d 756, 762 (D.C. Cir. 2001) (“[T]he sifting of
13   evidence, the weighing of its significance, and the myriad other
14   decisions made during investigations plainly involve elements of
15   judgment and choice.”); Vickers v. United States, 228 F.3d 944, 951
16   (9th Cir. 2000) (stating that “the discretionary function exception
17   protects agency decisions concerning the scope and manner in which it
18   conducts an investigation so long as the agency does not violate a
19   mandatory directive.”); Gen. Dynamics Corp. v. United States, 139 F.3d
20   1280, 1283-1284 (9th Cir. 1998) (government was immune under the
21   discretionary function exception where its auditors’ allegedly
22   negligent investigations provided the factual basis for the
23   prosecutor’s discretionary decision to prosecute); Sabow v. United
24   States, 93 F.3d 1445, 1452 (9th Cir. 1996) (government was immune under
25   the discretionary function exception for its investigators’ allegedly
26   tortious investigation where “the guidelines promulgated by the
27   [agency] in its investigative manual were meant to be followed at the
28
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1    discretion of [the agency’s] investigating officers in light of the
2    specific circumstances surrounding a particular investigation.”);
3    Fisher Bros. Sales, Inc. v. United States, 46 F.3d 279, 282 (3d Cir.
4    1995) (en banc) (government was immune under the discretionary function
5    exception where laboratory technicians’ allegedly negligent
6    investigations done pursuant to mandatory guidelines provided the
7    factual basis for the Food and Drug Administration to seize allegedly
8    tainted fruit).
9         The weight and logic of this caselaw leads directly to the
10   conclusions proposed by the Government: the decisions of whether and
11   how to conduct investigations and enforcement actions are firmly lodged
12   in the SEC’s discretion.
13             4.      Procedural Effect of SEC’s Statutory and Regulatory
14                     Discretionary
15        As explained in Gaubert, “[w]hen established governmental policy,
16   as expressed or implied by statute, regulation, or agency guidelines,
17   allows a Government agent to exercise discretion, it must be presumed
18   that the agent’s acts are grounded in policy when exercising that
19   discretion.”   499 U.S. at 324.     Because the Government has satisfied
20   this threshold burden the burden shifts to Plaintiffs to identify
21   particular acts and decisions that were either (1) mandatorily
22   prescribed by statute, regulation, or policy, or (2) were not
23   “susceptible to policy analysis.”     Id. at 323, 325.
24        B.   PLAINTIFFS’ BROAD ALLEGATIONS OF MISCONDUCT ARE UNAVAILING
25        At various points in their Complaint and moving papers, Plaintiffs
26   assert that the SEC violated various unidentified “[p]olicies and
27   practices,” and “common-sense.”      (E.g., Compl. ¶ 12 (alleging that the
28
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1    SEC staff “fail[ed] to follow the SEC’s clear policies and
2    practices”)).13
3          To the extent that Plaintiffs rely on conclusory allegations about
4    “policies,” “practices,” and “common-sense,” they have failed to rebut
5    Defendant’s threshold showing.      Broad allegations regarding undefined
6    “policies and practices” are insufficient under clear Ninth Circuit
7    precedent.   In the recent decision in Doe v. Holy See, 557 F.3d at
8    1084-85, the Ninth Circuit examined the adequacy of a plaintiff’s
9    pleadings under the discretionary function exception as articulated by
10   the Supreme Court in Gaubert.14     The court held that the complaint
11   failed to adequately allege the existence of non-discretionary duties
12   imposed on the government’s officials because it only “refer[red]
13   vaguely . . . to the [defendant’s] ‘policies, practices, and
14   procedures.’” Id. at 1084 (quoting complaint).        The court explained
15   that “nowhere does [plaintiff] allege the existence of a policy that is
16   ‘specific and mandatory’ on the [defendant].        He does not state the
17   terms of this alleged policy, or describe any documents, promulgations,
18   or orders embodying it.”   Id. (quoting Kennewick Irrig. Dist. v. United
19   States, 880 F.2d 1018, 1026 (9th Cir. 1989)).        In addition, the alleged
20   harmful acts were plainly susceptible to policy judgment, and under
21
      13
22       Plaintiffs explain that “‘policies’ refer[s] to formal or informal
      policies, rules, standards, guidelines, procedures, codes, routines or other
23    directives implemented by the SEC to govern the conduct of its agents.”
      (Compl. ¶ 4 n.4.) “‘Practices’ refers to common-sense standards of conduct
24    required of SEC agents in the course of exercising their duties with
      reasonable due care, regardless of whether the SEC had promulgated any
25    formal or informal policies with respect to that conduct.” (Id.)
             Under Gaubert, Plaintiffs’ “practices” are clearly an inadequate basis
26    for showing a mandatory SEC duty.
      14
27      Technically, Doe v. Holy See involves the Foreign Sovereign Immunities Act
      rather than the FTCA, but, as noted supra, the court solely examined FTCA
28    caselaw.

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1    Circuit precedent, were “the type of discretionary judgments that the
2    [discretion function exception] was designed to protect.”         Id.    Because
3    of these glaring inadequacies, the court held that the discretionary
4    function exception applied.
5          Like the plaintiff in Doe v. Holy See, Plaintiffs in this case
6    largely fail to identify any mandatory “policies” or “practices” that
7    were violated in this case.   (Cf. infra Part IV.C.)       Plaintiffs’
8    “labels and conclusions” are insufficient to satisfy the pleading
9    requirements of Fed. R. Civ. P. 8(a)(2).      See Iqbal, 129 S.Ct. at 1949
10   (quoting Twombly, 550 U.S. 544).
11         Likewise, Plaintiffs have wholly failed to identify any of the
12   SEC’s actions that were not “susceptible to policy analysis.”           See
13   Gaubert, 499 U.S. at 325 (emphasis added).      Their Complaint and their
14   moving papers do not contain any attempt to rebut the Government’s
15   preliminary showing that the SEC retained discretion to decide when to
16   investigate, how to investigate, and whether or not to take enforcement
17   actions.   Plaintiffs attempt to recharacterize the nature of
18   Defendant’s burden, and argue that the Government bears the burden of
19   showing that the SEC’s actions were susceptible to policy analysis.
20   Plaintiffs are misguided.   The Government has in fact satisfied its
21   burden: it has identified specific and discretionary statutes,
22   regulations, and caselaw-based policy arguments.       See Doe v. Holy See,
23   557 F.3d at 1084-85 (where defendant identifies statutes, regulations,
24   and caselaw conferring policy-based discretion on actor, burden shifts
25   to plaintiff to identify allegations to rebut this showing).
26   Plaintiffs have failed to rebut Defendant’s showing.
27   ///
28
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1         In light of the Government’s showing that the SEC retains broad
2    discretion to regulate securities markets through formal and informal
3    means (see supra Part III.A), the Government has sufficiently satisfied
4    its threshold burden of showing that the relevant investigative and
5    enforcement decisions were discretionary and/or susceptible to policy
6    judgments.    Under Gaubert, this threshold showing creates a “strong
7    presumption” that the discretionary function exception is satisfied.
8    Gaubert, 499 U.S at 324.    Plaintiffs’ conclusory allegations regarding
9    “policies and practices” fail to rebut this presumption.         See Doe v.
10   Holy See, 557 F.3d at 1084-85.
11        C.      PLAINTIFFS’ ARGUMENTS ABOUT MANDATORY POLICIES ARE UNAVAILING
12        In an oversized sur-reply,15 Plaintiffs attempt to satisfy their
13   burden of rebuttal by identifying five purportedly mandatory duties
14   imposed on the SEC and its staff.    These are: sharing information;
15   obtaining trading records and other information from third parties;
16   hiring, training, and/or deploying qualified staff members; avoiding
17   improper personal motivations; and engaging in various administrative
18   case-management tasks.
19        As Plaintiffs themselves point out in their sur-reply, “it is
20   important to specifically identify the allegations of the Complaint
21   relating to the SEC’s violation of mandatory policies.”         (Surreply at
22

23    15
         The Court never granted Plaintiffs leave to file a sur-reply. Nor did the
      Court grant Plaintiffs leave to file an oversized brief. In addition, the
24    sur-reply goes far beyond the scope of the arguments raised in the
      Government’s Reply. Even if the Court had granted Plaintiffs leave to file
25    an oversized sur-reply, Plaintiffs would only have been allowed to address
      Defendant’s specific arguments in the Reply. Plaintiffs’ sur-reply is
26    therefore procedurally improper.
             It is therefore well within the Court’s discretion to strike the sur-
27    reply. However, while the Court would ordinarily strike such an improper
      filing, the Court will consider the merits of Plaintiffs’ arguments in order
28    to foreclose certain of these claims in future proceedings.

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1    5.)   Yet Plaintiffs’ factual allegations (which purport to incorporate
2    the Report in its entirety) fail to support these conclusions.
3    Plaintiffs almost wholly fail to allege that SEC’s agents violated any
4    mandatory duties, and where Plaintiffs’ allegations provide an
5    inference that such mandatory duties existed, Plaintiffs’ arguments are
6    defeated by the holding in General Dynamics, 139 F.3d at 1284-85.
7    Plaintiffs therefore have failed to overcome the presumption that the
8    SEC’s investigative and enforcement decisions were discretionary.
9    Accordingly, Plaintiffs’ Complaint must be dismissed for lack of
10   subject matter jurisdiction.
11                1.   Duty to Share Information
12           Plaintiffs’ Complaint alleges that SEC teams failed to coordinate
13   their investigations among themselves and with the National Association
14   of Securities Dealers and Chicago Board of Options Exchange.          (Surreply
15   at 6, citing Compl. ¶¶ 37, 62, 63, 78, 86, 103, 105, 123, 128, 130,
16   131.)    According to Plaintiffs, these “negligent failures to
17   communicate . . . were prohibited by law.” (Id.)
18           Plaintiffs have failed to support their assertions.       Plaintiffs’
19   conclusory allegations fail to establish that SEC examiners were guided
20   by any mandatory duties requiring them to share information and
21   coordinate their activities.
22           Plaintiffs argue that Section 17 of the Securities Exchange Act of
23   1934, codified at 15 U.S.C. § 78q, imposes mandatory duties requiring
24   SEC staff to share information.     The statute reads:
25

26
27

28
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1          The Commission and the examining authorities16 shall share such
2          information [regarding securities exchanges and their members,
3          brokers and dealers, ratings organizations, and clearing
4          agencies], including reports of examinations, customer complaint
5          information, and other nonpublic regulatory information, as
6          appropriate to foster a coordinated approach to regulatory
7          oversight of brokers and dealers that are subject to examination
8          by more than one examining authority.
9    15 U.S.C. § 78q(k)(2) (emphasis added).
10         The statute clearly provides for SEC discretion.        The mandatory
11   “shall” is modified by the discretionary “as appropriate.”          See Sabow,
12   93 F.3d at 1452 (distinguishing between “suggestive (‘should’) [and]
13   mandatory (‘must’) terms”) (collecting cases).       The statute itself
14   describes the nature of “appropriate” information-sharing: the
15   information-sharing must be “appropriate to foster a coordinated
16   approach to regulatory oversight.”    15 U.S.C. § 78q(k)(2) (emphasis
17   added).   When the SEC is tasked with making decisions to “foster a
18   coordinated approach to regulatory oversight,” these decisions are
19   inherently “grounded in social, economic, and political policy.”
20   Gaubert, 499 U.S. at 323.   Accordingly, the discretionary function
21   exception applies to information-sharing under § 78q(k)(2).
22         The legislative history supports this conclusion.        This particular
23   subsection (formerly labeled subsection (i)) was added to the statute
24   in 1996 by the National Securities Markets Improvement Act of 1996,
25

26    16
        “For purposes of this subsection, the term ‘examining authority’ means a
      self-regulatory organization registered with the Commission under this
27    chapter (other than a registered clearing agency) with the authority to
      examine, inspect, and otherwise oversee the activities of a registered
28    broker or dealer.” 15 U.S.C. § 78q(k)(5).

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1    Pub.L. 104-290, § 108.   It is instructive to contrast the statute’s
2    final language with the language of the original House bill.          The
3    House’s bill included a complex set of reporting and coordination
4    requirements for self-regulatory organizations.       See H.R. Rep. 104-622,
5    104th Cong., 2d Sess., 1996 U.S.C.C.A.N. 3877, 3877 (1996).          The
6    original bill required, inter alia: annual meetings between the SEC and
7    self-regulatory organizations, § 108(a)(i)(2), periodic standardized
8    reporting requirements for the SEC and self-regulatory organizations, §
9    108(a)(i)(3), annual evaluations by an SEC-created panel,
10   § 108(a)(i)(7), and annual reports to Congress, § 108(a)(i)(8).            Id.
11   These requirements were mandatory, not discretionary: the SEC and the
12   self-regulatory organizations had no flexibility in implementing these
13   clear congressional directives.
14         However, after some legislative wrangling, see H.R. Conf. Rep.
15   104-864, 1996 U.S.C.C.A.N. 3920, 3920 (1996), the House-Senate
16   conference committee stripped all of the above-mentioned requirements
17   and left intact only a few generalized requirements.17        The central
18   purpose of the final bill, as explained by the conference committee,
19   was to streamline regulation between federal and state authorities.
20   See id. at 3920-21.   The purpose of the remaining portions of the bill
21   — apparently including § 108 — was “to eliminate duplication, promote
22   efficiency and protect investors.”    Id. at 3921.     This broad language
23   sets forth three general policy goals, the balancing of which requires
24
25
      17
         As part of the compromise, the revised law required that the SEC
26    coordinate its activities with the self-regulatory organizations (whereas
      the old bill merely required the self-regulatory organizations to coordinate
27    their activities). Compare 15 U.S.C. § 78q(k)(2) (“The Commission and the
      examining authorities shall share . . .”) with H.R. 3005, § 108(a)(4)(A) in
28    H.R. Rep. 104-622 (“The examining authorities shall share . . .”).

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1    the SEC to make inherently discretionary judgments.        See also Milton R.
2    Schroeder, The Law of Regulation of Financial Institutions, ¶ 8.06[1]
3    (2009 update) (“The Act . . . calls for information sharing between
4    authorities and the elimination of unnecessary and burdensome
5    duplication in the examination process.”); Rutherford B. Campbell, Jr.,
6    Blue Sky Laws and the Recent Congressional Preemption Failure, 22 J.
7    Corp. L. 175, 204 n.156 (1997) (“The Act . . . mandates that federal
8    authorities attempt to eliminate duplication and enhance coordination
9    and cooperation with the states as concerns the regulation of
10   brokers.”).
11         In short, the law cited by Plaintiffs is purely discretionary.
12   Under the well-established requirements of the discretionary function
13   exception, this Court cannot second-guess the SEC’s failure to
14   simultaneously accomplish all three of these competing policy goals set
15   out by Congress.     The goals require policy judgment and resource
16   allocation, and are therefore subject to the discretionary function
17   exception.
18                   b.     Plaintiffs’ factual allegations
19         In addition to these clear statutory rules, Plaintiffs’ Complaint
20   expressly alleges that formal policies did not exist.         The Report
21   (which is incorporated into the Complaint by reference) quotes one
22   staff member as stating that “there was no rule or policy about . . .
23   information-sharing at [the investigative] level between offices.”
24   (Report at 133, 198, quoting testimony of Eric Swanson.)         Taking this
25   allegation as true, Plaintiffs’ Complaint directly contradicts the
26   conclusory assertions in their sur-reply.
27   ///
28
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1                        c.     Summary re: duty to share information
2            Plaintiffs have therefore failed to meet their burden of
3    identifying either a mandatory duty requiring the SEC to share
4    information with other regulators, or plausible allegations that the
5    SEC’s decisions regarding information-sharing were not susceptible to
6    policy analysis.         The SEC retained discretion to determine the manner
7    and scope of its investigations.        See Vickers, 228 F.3d at 951 (“[T]he
8    discretionary function exception protects agency decisions concerning
9    the scope and manner in which it conducts an investigation so long as
10   the agency does not violate a mandatory directive.”).
11                2.     Failing to Request Materials from Third Parties
12           Plaintiffs argue that the SEC violated “formal SEC policies” and
13   “basic auditing principles” by “repeatedly fail[ing] to request
14   materials from third parties to substantiate Madoff’s claimed trading
15   activity.”    (Surreply at 8, citing Compl. ¶¶ 34-36, 67, 74, 77, 101,
16   143.)    Again, Plaintiffs fail to identify any of the “formal SEC
17   policies” upon which they rely.        But Plaintiffs insist that “SEC
18   staffers themselves considered it mandatory [to determine if Madoff was
19   actually making the trades he purported to be making], given one
20   staffer’s characterization of the failure to do so as ‘asinine.’”
21   (Surreply at 10, quoting Compl. ¶ 77.)
22           Plaintiffs’ arguments are not supported by their allegations.            It
23   is unclear why an SEC staff member’s use of the word “asinine” provides
24   evidence of an SEC policy.        “Asinine” means “unintelligent, stupid,
25   silly, [or] obstinate.”        Webster’s Third New International Dictionary
26   128 (1981).       “Asinine” does not mean that a person has violated a non-
27

28
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1    discretionary legal duty; nor does “asinine” mean that the person has
2    made a decision that is not susceptible to policy judgment.
3         Plaintiffs fail to identify any other allegations that state or
4    even imply the existence of mandatory duties to obtain records from
5    third parties.   In fact, the Complaint is replete with factual
6    allegations suggesting that there were no SEC policies regarding
7    requesting information from third parties.      The Report quotes a former
8    SEC staff member as stating that the SEC “always” obtained Depository
9    Trust Company statements “from the firm” being investigated rather than
10   from the Depository Trust Company itself.      (Ex. A at 48, quoting
11   testimony of Demetrios Vasilakis, emphasis added.)        The Report also
12   quotes a supervisor as stating that “most of the time we do not send
13   out [requests for trading] confirmations and do asset verification.”
14   (Ex. A at 206, quoting testimony of Robert Sollazzo.)        As a result of
15   these and other statements, the Report explained it was “common
16   practice” to rely on the firm under investigation, (Ex. A at 48), and
17   that “it was not unusual for [examiners] to rely exclusively on records
18   and data produced by the” firm being investigated.        (Ex. A at 98,
19   emphasis added; see also Ex. A at 191 (noting that “it was not normal
20   practice in the exam program to reach out to entities” that centrally
21   cleared and settled trades).)
22        Because Plaintiffs’ Complaint attempts to incorporate the Report
23   in its entirety, Plaintiffs therefore allege that there was an absence
24   of mandatory duties requiring SEC staff to use specific investigative
25   techniques.   Although it may have been good practice for the SEC to
26   follow up with third parties, it was not required by mandatory SEC
27   policies.   (See Compl. ¶ 35, citing Ex. A, at 290 n.202.)
28
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1            Plaintiffs have therefore failed to plead facts that overcome the
2    discretionary function exception.    The statutes, regulations, and
3    caselaw discussed supra establish beyond peradventure that the SEC
4    retained full discretion to determine the manner and scope of its
5    investigation.    See Vickers, 228 F.3d at 951 (“[T]he discretionary
6    function exception protects agency decisions concerning the scope and
7    manner in which it conducts an investigation so long as the agency does
8    not violate a mandatory directive.”).     Plaintiffs’ allegations fail to
9    rebut this presumption, by identifying either a formal mandatory duty
10   or a specific decision that was not susceptible to policy analysis.
11                3.   Assigning Unqualified Staff Members to Investigative
12                     Teams
13           Plaintiffs argue that “several SEC staffers were inexcusably
14   unqualified for their positions,” and that the SEC “assigned []
15   staffers who had no understanding of securities transactions, and were
16   otherwise unqualified, to the Madoff investigations.”        (Surreply at 8,
17   citing Compl. ¶¶ 32, 37, 46, 61-64, 67, 88-89, 100, 118, 126, 132,
18   134.)
19           It is well-established that “employment, supervision and training”
20   decisions “fall squarely within the discretionary function exception.”
21   Nurse v. United States, 226 F.3d 996, 1001 (9th Cir. 2000); see also
22   Doe v. Holy See, 557 F.3d at 1084 (“the decision of whether and how to
23   retain and supervise an employee . . . [is] the type of discretionary
24   judgments that the exclusion was designed to protect.        We have held the
25   hiring, supervision, and training of employees to be discretionary
26   acts.”); Gager v. United States, 149 F.3d 918 (9th Cir. 1998) (“The
27   [postal service’s] decision not to provide universal training and
28
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1    supervision in mail bomb detection involved judgment or choice grounded
2    in social, economic, and political policy.”).
3         Plaintiffs have failed to identify any allegations that would
4    bring their case outside the purview of the Ninth Circuit’s general
5    caselaw on this question.   Accordingly, Defendant has satisfied its
6    burden of showing that the relevant decisions fall within the
7    discretionary function exception, and Plaintiffs have not alleged any
8    facts to the contrary.
9              4.   Staff Members’ Personally Motivated Acts
10        Plaintiffs argue that SEC “staffers [] acted out of personal
11   animus, unfounded fear of individual liability, and improper deference
12   to Madoff on account of his reputation,” and that “one staffer ignored
13   a whistleblower out of spite.”      (Surreply at 8, citing Compl. ¶¶ 23,
14   97-99, 119, 121-22.)
15        All of these assertions strike at the manner in which the SEC
16   conducted its investigations.    As noted repeatedly in this Order, the
17   SEC retained discretion to make policy-based decisions about the manner
18   and scope of its investigations.      See 15 U.S.C. § 78u(a)(1) (permitting
19   SEC to decide “as it deems necessary” how to “investigate any facts,
20   conditions, practices, or matters,” whether through “a statement in
21   writing, under oath or otherwise.”); see also Vickers, 228 F.3d at 951
22   (“[T]he discretionary function exception protects agency decisions
23   concerning the scope and manner in which it conducts an investigation
24   so long as the agency does not violate a mandatory directive.”).
25        Plaintiffs’ allegations, taken as true, at most establish that the
26   SEC staff abused its discretion when conducting investigations into
27   Madoff’s operations.   However, the FTCA clearly states that the
28
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1    discretionary function applies “whether or not the discretion involved
2    be abused.”      28 U.S.C. § 2680(a).    In addition, Supreme Court precedent
3    requires this Court to examine “the nature of the actions taken and []
4    whether they are susceptible to policy analysis,” not “the agent’s
5    subjective intent in exercising the discretion conferred by statute or
6    regulation.”     Gaubert, 499 U.S. at 324 (emphasis added).          Accordingly,
7    the SEC staff’s subjective reasons for deciding how to investigate
8    Madoff are irrelevant to the present inquiry.18
9         Furthermore, the relevant question is not, as Plaintiffs suggest,
10   whether the agents’ activities were actually “grounded in any
11   legitimate policy considerations.”        (Surreply at 9.)      Rather, the
12   question is whether the agents’ activities were susceptible to policy
13   analysis.   See Gaubert, 499 U.S. at 324; Terbush, 516 F.3d at 1129.
14   Investigative decisions are inherently susceptible to policy analysis,
15   and Plaintiffs fail to identify any mandatory laws, regulations, or
16   policies that prescribe a specific course of action for the staff to
17   follow when conducting investigations.         Accordingly, these decisions
18   are subject to the discretionary function exception.
19               5.     Failing to Follow Case-Management Procedures
20        Plaintiffs next argue that the SEC “violated its own internal
21   policies” regarding case-management by doing the following: (1)
22   “failing to obey rules regarding the filing of reports and the use of
23   the SEC’s STARS [Super Tracking and Reporting System] computer system,”
24   (2) failing to consult the Super Tracking and Reporting System database
25
      18
26       To the extent that SEC staff members were truly acting for personal
      purposes, such activities would not constitute a “negligent or wrongful act
27    or omission of any employee of the Government while acting within the scope
      of his office or employment,” and the FTCA would not provide an avenue for
28    recovery. 28 U.S.C. § 1346(b)(1) (emphasis added).

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1    before beginning examinations, (3) “fail[ing] to submit Matter Under
2    Inquiry [] reports with respect to . . . open investigations,” and (4)
3    failing to file case-opening and case-closing reports.         (Surreply at
4    7.)
5          Plaintiffs have adequately alleged that the SEC teams failed to
6    conduct each of these tasks at one time or another.        Plaintiffs have
7    not, however, adequately alleged that these tasks were mandatory or
8    were not otherwise susceptible to policy judgment.        Because the SEC
9    staff had broad discretion to determine how to conduct its
10   investigations, see supra Part IV.B, Plaintiffs bear the burden of
11   identifying plausible allegations that non-discretionary duties were
12   imposed on the investigators.   See, e.g., Sabow, 93 F.3d at 1452-53
13   (closely examining Naval Investigative Service/Judge Advocate General
14   investigation manuals to determine whether investigators were obligated
15   to conduct investigations in particular manner); Alfrey v. United
16   States, 276 F.3d 557, 563 (9th Cir. 2002) (holding that prison guard’s
17   failure to search a computer database was part of discretionary
18   investigatory decision where there was no policy requiring such a
19   search to be conducted); cf. Franklin Sav. Corp. v. United States, 180
20   F.3d 1124, 1132-33 (10th Cir. 1999) (agency not immune where its
21   employees failed to prepare mandatory case memoranda; however,
22   plaintiff’s claims were dismissed on the merits because no injury
23   flowed from the failure to prepare the memoranda).        Plaintiffs have not
24   met their burden.
25                   a.   Factual Allegations
26         In May 2003, the Washington-based Office of Compliance Inspections
27   and Examinations received a tip and referred the matter to a team in
28
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1    the Broker-Dealer section.    In December 2003, the Washington team
2    received a second tip and opened its investigation into Madoff.
3    According to Plaintiffs, the team failed to file case-opening report in
4    the STARS computer system.    (Compl. ¶ 80.)     There is one allegation
5    suggesting that case-opening report is mandatory: the Report quotes a
6    supervisor’s statement that the staff members were “supposed to” enter
7    their case-opening “information into the tracking system.”           (Ex. A at
8    132, quoting McCarthy testimony.)     The Washington team also failed to
9    follow its case-planning memo.      (Compl. ¶ 69.)    There are no factual
10   allegations, however, that there is a mandatory duty to follow a case-
11   planning memorandum.
12           In April 2004, the Washington team closed its investigation and
13   failed to file a case-closing memorandum.       (Compl. ¶¶ 78, 80.)      There
14   is one allegation that the case-closing memo may have been mandatory:
15   the Report quotes a supervisor’s statement that “[t]ypically, staff is
16   supposed to — when they finish an exam[ination] they’re supposed to
17   close it out and I think there should have been a close-out memo is my
18   understanding.”    (Compl. ¶ 78 & n.15, quoting Ex. A at 136 (quoting
19   McCarthy testimony).)
20           At the same time that the Washington team closed its investigation
21   (April 2004), the first New York enforcement team received a tip, and
22   in December 2004 the New York team opened its investigation.           (Compl. ¶
23   86.)    This team failed to draft a planning memorandum.        (Compl. ¶¶ 87,
24   108.)    Plaintiffs state in a conclusory fashion that there was an SEC
25   “policy or practice” requiring such a memorandum, but support this
26   assertion by citing to a factual statement in the Report that quotes
27

28
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1    staff members saying that there was not such a policy at the time of
2    the investigation.    (Compl. ¶ 87, citing Ex. A at 166.)
3            The New York team failed to consult the STARs computer system to
4    see if any prior case-opening reports had been filed.        (Compl. ¶¶ 103,
5    108.)    There is no specific allegation that there is a mandatory duty
6    to check the computer system; however, Plaintiffs allege that SEC
7    policy required that “there should never be two examinations of the
8    same entity being conducted at the same time without both teams being
9    aware of each other’s examination.”       (Compl. ¶ 103, quoting Ex. A at
10   132.)    In the Ninth Circuit, the word “should” is generally viewed as
11   suggestive rather than mandatory, see, e.g., Sabow, 93 F.3d at 1452,
12   and a person’s subjective belief that something “should” be done is
13   inadequate evidence that there is “in fact [a] mandatory [duty] under
14   some federal regulation or [internal] policy.”       Alfrey, 276 F.3d at
15   563.    However, viewing this quotation in the light most favorable to
16   Plaintiffs, there may be a plausible inference that there was a
17   mandatory policy to check the STARs computer system or that the
18   decision to check the STARs computer was not susceptible to policy
19   analysis.    (See surreply at 12, 25.)     Plaintiffs therefore allege that
20   the Washington and first New York teams violated internal policies
21   and/or made decisions that were not susceptible to policy judgment.
22   These acts and omissions will be examined in greater detail infra.
23           Plaintiffs further allege that the first New York team learned
24   about the previous Washington examination while the New York team was
25   interviewing Madoff in mid-to-late May 2005.       (Ex. A at 195.)     In early
26   June 2005, the Washington team sent its files to the New York team, and
27   the New York team performed a “cursory review” of the Washington team’s
28
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1    findings because the information “seemed so similar to what we [the New
2    York team] were receiving in real time.”      (Compl. ¶ 105, quoting Ex. A
3    at 200.)    Plaintiffs allege that the two teams’ failures to fully
4    communicate “resulted in embarrassment and a waste of Commission
5    resources as two examination teams from two different offices
6    essentially conducted the same examination.”       (Ex. A at 142; see also
7    Compl. ¶ 1 n.3 (incorporating Report in its entirety into Complaint).)
8         In September 2005, the first New York team formally closed its
9    investigation.    In October 2005, after Harry Markopolos’s third report
10   was referred from the Boston office, a different New York team began a
11   new investigation into Madoff’s operations.      In December 2005, this
12   second New York team filed its “Matter Under Inquiry” report.          (Compl.
13   ¶ 124.)    The New York office received another tip about Madoff between
14   the October 2005 opening of the investigation and the December 2005
15   filing of the Matter Under Inquiry report.      (Compl. ¶ 125.)      Plaintiffs
16   allege that, had the Matter Under Inquiry been filed in October, this
17   new tip would have been part of the second New York team’s
18   investigation.    (Compl. ¶ 125.)   However, there are no factual
19   allegations that SEC policy requires that a Matter Under Inquiry form
20   be filed immediately, other than Plaintiffs’ conclusory allegations
21   that this a “required step at the beginning of any Enforcement
22   investigation.”   (Compl. ¶ 124.)   Contradicting this conclusory
23   assertion, Plaintiffs’ Complaint contains specific factual assertions
24   that, although the Matter Under Inquiry “should” have been opened
25   sooner, the SEC’s enforcement manual states that staff members “may”
26   file a Matter Under Inquiry if and when they determine that a complaint
27   is “serious and substantial.”   (Compl. ¶ 125, citing Ex. A at 263
28
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1    (quoting SEC Enforcement Manual) (emphasis added).)        Plaintiffs further
2    allege that “it is unclear whether the tip would have made any
3    difference in the conduct or the result of the [second New York team’s]
4    investigation because . . . of [the investigating attorney’s] view that
5    anonymous tips, ‘on their face’ were not credible.”        (Ex. A at 265; see
6    also Compl. ¶ 1 n.3 (incorporating Report in its entirety into
7    Complaint).)
8         In June 2006, after completing its examination, the second New
9    York team filed its case-closing report despite the fact that it had
10   failed to resolve all of the red flags it identified.        (Compl. ¶ 147.)
11   However, there are no allegations that the SEC staff is required to
12   resolve red flags before deciding to close a case and file a case-
13   closing report.    (See Compl. ¶ 147.)
14                     b.   Discussion and Analysis
15        In short, viewing the plausible inferences of the Complaint’s
16   factual averments in favor of Plaintiffs, the Complaint alleges three
17   acts that violated mandatory duties and/or were not susceptible to
18   policy judgment:
19        (1) the Washington team failed to file a case-opening report;
20        (2) the first New York team failed to consult the STARs computer
21        database to find prior case-opening reports regarding Madoff; and
22        (3) the Washington team failed to file a case-closing memorandum.
23   Plaintiffs’ other assertions are either unsupported by any factual
24   allegations whatsoever19 or are supported by factual allegations that
25

26
      19
         There are no specific allegations stating that there was a requirement to
27    follow a case-planning memorandum. Nor are there specific allegations
      stating that there was a requirement to resolve red flags prior to closing a
28    case and preparing a case-closing memorandum.

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1    plainly contradict Plaintiffs’ conclusory assertions that there was a
2    mandatory duty and/or decision not susceptible to policy analysis.20
3    Plaintiffs further allege that the three specific SEC omissions had an
4    extremely limited impact.   Plaintiffs assert that the New York team,
5    prior to closing its investigation, received and reviewed the
6    Washington files — albeit in a “cursory” manner because the information
7    appeared duplicative of the New York team’s ongoing investigations.
8    (Compl. ¶ 105, citing Ex. A at 200.)
9         Ultimately, then, Plaintiffs are alleging that two SEC offices
10   violated mandatory policies and thereby failed to adequately coordinate
11   their investigations and otherwise conduct their investigations in a
12   thorough and adequate manner.
13        As has been shown repeatedly throughout this Order, the SEC
14   retained discretion to decide how to conduct its investigations — which
15   includes decisions about how to coordinate investigations between
16   offices.   (See supra Parts. IV.B.1, IV.B.3.)      At the risk of being
17   repetitive, it is useful to refer back to 15 U.S.C. § 78u(a)(1), which
18   permits the SEC to decide “as it deems necessary” how to “investigate
19   any facts, conditions, practices, or matters,” whether through “a
20   statement in writing, under oath or otherwise.”       In addition, 15 U.S.C.
21   § 78u(d)(1) permits the SEC “in its discretion” to bring an enforcement
22   action when it detects a securities violation during its
23   investigations.   There are, in short, no mandatory obligations
24
25
      20
         Plaintiffs’ conclusory assertions that there were mandatory duties are
26    contradicted by their specific allegations in the Report that there was no
      policy requiring staff to prepare a case-planning memorandum and there was a
27    discretionary policy (which used the suggestive “should” and the permissive
      “may,” see Sabow, 93 F.3d at 1452) regarding staff members’ decisions to
28    file a Matter Under Inquiry report.

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1    requiring the SEC to conduct its investigations in a particular manner
2    or to bring an enforcement action in particular situations.          These
3    decisions are fundamentally discretionary and require staff to make
4    policy-based judgments.   See, e.g., Sloan, 236 F.3d at 762 (“[T]he
5    sifting of evidence, the weighing of its significance, and the myriad
6    other decisions made during investigations plainly involve elements of
7    judgment and choice.”); Vickers, 228 F.3d at 951 (“[T]he discretionary
8    function exception protects agency decisions concerning the scope and
9    manner in which it conducts an investigation.”).
10         In light of this broad investigatory discretion, General
11   Dynamics is therefore directly on point regarding the small handful of
12   mandatory procedural obligations imposed on SEC staff.         In General
13   Dynamics, the Ninth Circuit explained that an otherwise actionable
14   agency decision is immune from suit if “a totally separate exercise” of
15   “independent” and “broad based discretion” “intervenes between an
16   alleged government wrongdoer and the harm suffered by a plaintiff.”
17   139 F.3d at 1285.   There, prosecutors brought a criminal action against
18   General Dynamics based solely on facts stated in a negligently prepared
19   auditing statement.   The court explained that the prosecutors’
20   affirmative decision to prosecute constituted an independent exercise
21   of broad-based discretion that thereby insulated the government from a
22   lawsuit based on the auditors’ non-discretionary actions.         Id.    The
23   court noted that the “source of the [plaintiff’s] injury” was the
24   independent and “discretionary” decision to prosecute.         Id.   Although
25   the prosecutors could have sought more information and could have
26   double-checked the auditors’ reports, they retained discretion to
27   ///
28
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1    choose whether or not to do so, and they affirmatively decided to rely
2    only on the inaccurate reports.     Id.
3         In contrast, in Glacier Bay, hydrographers prepared oceanographic
4    charts pursuant to mandatory requirements stated in their handbook.
5    They then presented these charts to their supervisor, who had
6    discretion regarding whether or not to approve those charts.          The court
7    held that the supervisor’s limited exercise of discretion did not
8    immunize the hydrographers’ negligent preparation of the charts in
9    violation of mandatory guidelines.    As the court later explained in
10   General Dynamics, “little intervened between the hydrographers’
11   wrongdoing and the injury to the plaintiff.”       General Dynamics, 139
12   F.3d at 1285.   Instead, there was a “tight coupling between
13   hydrographers, reviewers, charts, and results,” such that the plaintiff
14   was injured by the hydrographers’ violation of the mandatory guidelines
15   in preparing the charts, and was not injured by the supervisor’s
16   discretionary approval of the charts.     Id. at 1284.
17        The allegations in the present case are far more analogous to the
18   facts in General Dynamics than in Glacier Bay.       Plaintiffs allege in
19   essence that the first New York investigative team had a mandatory duty
20   to be aware of the prior Washington investigation.        Plaintiffs’
21   allegations are neatly summarized in a quotation in the Complaint:
22   under SEC policy “there should never be two examinations of the same
23   entity being conducted at the same time without both teams being aware
24   of each other’s examination.”    (Compl. ¶ 102, quoting Ex. A at 132,
25   emphasis added by Court.)   21

26
      21
27       Again, the Court notes that the word “should” is suggestive rather than
      mandatory and officials’ subjective beliefs are insufficient evidence of a
28    mandatory policy. However, at the present stage of proceedings, plausible

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1         However, even though these two teams’ conduct violated mandatory
2    policies or otherwise involved non-judgment-based decisions, the
3    discretionary function exception will apply if “a totally separate
4    exercise” of “independent” and “broad based discretion” “intervenes
5    between an alleged government wrongdoer and the harm suffered by a
6    plaintiff.”   General Dynamics, 139 F.3d at 1285.      Here, Plaintiffs were
7    harmed by the investigators’ failure to discover the Madoff fraud and
8    publicize or prosecute it.   Plaintiffs were not harmed by the teams’
9    failure to follow case-management procedures because the first team of
10   New York investigators undertook an independent exercise of discretion
11   when they (1) received and reviewed the Washington team’s files and
12   determined that the Washington team’s investigative materials were
13   duplicative of their own investigation (Compl. ¶ 105, quoting Ex. A at
14   200), (2) conducted their own independent investigation into Madoff’s
15   operations (Compl. ¶¶ 82-109), and (3) determined that there was no
16   basis for bringing an enforcement action against Madoff (Compl. ¶ 107).
17        Each of these three acts by the New York team was a “totally
18   separate exercise of discretion” that was unrelated to the
19   investigators’ non-discretionary violations of mandatory case-
20   management rules.   See General Dynamics, 139 F.3d at 1285.         The New
21   York investigators retained “broad based discretion,” id. at 1285, to
22   select the manner and scope of their investigation of Madoff and their
23   review of the Washington team’s files.     This “broad based discretion”
24   is derived both from the SEC’s congressionally-authorized discretion to
25

26
      inferences in the Complaint must be drawn in Plaintiffs’ favor. This
27    quotation, combined with the other factual allegations discussed supra,
      provide a plausible inference that these particular case-management
28    obligations were mandatory.

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1    choose the manner and scope of its investigations, see 17 U.S.C. §§
2    78u(a)(1), 78u(d)(1), and from the inherently discretionary nature of
3    investigative activities.   See, e.g., Sloan, 236 F.3d at 762 (“[T]he
4    sifting of evidence, the weighing of its significance, and the myriad
5    other decisions made during investigations plainly involve elements of
6    judgment and choice.”); Vickers, 228 F.3d at 951 (“[T]he discretionary
7    function exception protects agency decisions concerning the scope and
8    manner in which it conducts an investigation.”).
9          In addition, the New York team, after conducting an independent
10   and discretionary review of both Madoff’s operations and the Washington
11   team’s files, made an independent decision to close its investigation
12   in September 2005 without bringing an enforcement action against
13   Madoff.   The decision of whether or not to bring an enforcement action
14   is plainly discretionary.   See 17 U.S.C. § 78u(d)(1) (permitting SEC
15   “in its discretion” to bring enforcement actions); 17 C.F.R. § 202.5
16   (stating that SEC “may in its discretion” select from various
17   enforcement tools if it believes that enforcement action is necessary).
18   Although FTCA claims most often involved negligent agency actions
19   rather than failures to act, the New York team’s decision not to act
20   was fully within its discretion in selecting the manner and scope of
21   its investigations and enforcement actions.      See, e.g., Block v. SEC,
22   50 F.3d at 1084 (in Administrative Procedures Act action, SEC cannot be
23   compelled to undertake certain enforcement actions); Board of Trade v.
24   SEC, 883 F.2d at 531 (same); Leytman v. New York Stock Exchange, 1995
25   WL 761843, at *3 (dismissing FTCA claims alleging that SEC failed to
26   investigate alleged wrongdoing).
27   ///
28
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1          In short, General Dynamics applies to the allegedly negligent acts
2    by the Washington team and the first New York team.        The New York
3    team’s intervening discretionary actions are closely analogous to the
4    General Dynamics prosecutors’ actions in at least two ways:
5          (1) In General Dynamics, the prosecutors reviewed and relied on
6    information contained in a negligently-conducted investigation when
7    choosing to pursue a prosecution.    Here, the first New York team
8    reviewed the Washington team’s allegedly negligently-prepared files and
9    the New York team relied (at least part) on those files in choosing to
10   close the case without pursuing an enforcement action.         In both cases,
11   the second actor retained discretion to decide how thoroughly to rely
12   on (or discredit) the underlying information received from a previous
13   investigation.   In both cases, the second actor exercised that
14   discretion: in General Dynamics, the prosecutors elected not to conduct
15   a further investigation, and here, the New York team elected to conduct
16   a “cursory” review of the Washington team’s files.
17         (2) In General Dynamics, the prosecutors retained discretion to
18   conduct additional independent investigations before deciding whether
19   or not to file a criminal action; they elected to file the action
20   without seeking additional information beyond that contained in the
21   auditing reports.   Here, the first New York team retained discretion to
22   conduct further investigations into Madoff’s affairs before deciding
23   whether or not to bring enforcement actions against Madoff.          Unlike the
24   prosecutors in General Dynamics, the New York team elected to conduct
25   additional independent investigations beyond those contained in the
26   Washington team’s files, and the New York team further elected to close
27   ///
28
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1    its case without bringing an enforcement action.22       The New York team in
2    fact exercised greater discretion than the prosecutors in General
3    Dynamics – the prosecutors in General Dynamics were presented with
4    clear (albeit incorrect) evidence showing fraud; it does not exactly
5    require “a robust exercise of discretion” to decide to prosecute that
6    fraud.   139 F.3d at 1285.   Here, however, neither the Washington team
7    nor the New York team uncovered any actionable wrongdoing.
8    Accordingly, the New York team exercised relatively “robust” discretion
9    by deciding to investigate the allegations further and ultimately
10   concluding on the basis of that investigation not to bring an
11   enforcement action.
12         Thus, the New York team’s actions – its affirmative choice to
13   review the Washington team’s files; its affirmative choice to conduct
14   additional investigations into Madoff’s operations; and its affirmative
15   choice not to bring an enforcement action — constituted intervening
16   exercises of independent and broad-based discretion.        Both the facts
17   and holding of General Dynamics are directly on-point.         As such, the
18   discretionary function exception bars Plaintiffs’ claims regarding the
19   Washington and New York investigators’ alleged failures to follow
20   mandatory case-management procedures.
21   ///
22

23
      22
         Even though Plaintiffs allege that the New York team’s review of the
24    Washington team’s files was “cursory,” the General Dynamics court clearly
      explained that it is inappropriate to consider the thoroughness or accuracy
25    of an intervening exercise of “broad based discretion.” See 139 F.3d at
      1285. The General Dynamics prosecutors “could have had even more
26    information if they had chosen to pursue it.” Id. (emphasis added).
      Likewise, the first New York team could have conducted additional
27    investigations into Madoff’s operations or reviewed the Washington team’s
      files more thoroughly. However, the first New York team retained “broad
28    based discretion” to choose the methods and scope of its investigation.

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1                 6.   Conclusion Regarding Plaintiffs’ Purportedly Mandatory
2                      Duties
3            Plaintiffs have failed to identify any of the SEC’s non-
4    discretionary acts that are actionable under Ninth Circuit precedent.
5    As such, they have not rebutted the “strong presumption” established in
6    the statutes, regulations, and caselaw in Defendant’s favor.          Gaubert,
7    499 U.S. at 324.    The discretionary function exception bars Plaintiffs’
8    claims.
9
10   V.      PLAINTIFFS’ REQUEST TO CONDUCT DISCOVERY
11
12           Plaintiffs insist that as-yet-undiscovered internal policies and
13   guidelines will reveal that the SEC’s actions violated clear mandatory
14   rules.    (Surreply at 9, 11.)   However, Plaintiffs have not plausibly
15   alleged any facts suggesting that such mandatory rules exist.          In
16   addition, Plaintiffs have failed to identify the specific types of
17   rules that are likely to exist.     Finally, Plaintiffs have failed to
18   consult the voluminous public record that might bolster their
19   conclusory assertions or potentially contradict them.        In short,
20   Plaintiffs have failed to allege sufficient “facts to raise a
21   reasonable expectation that discovery will reveal evidence” supporting
22   their conclusory assertions.     Twombly, 550 U.S. at 556.      This Court is
23   barred from “unlock[ing] the doors of discovery for a plaintiff armed
24   with nothing more than conclusions.”      Ashcroft v. Iqbal, 129 S. Ct. at
25   1950.    Accordingly, discovery is inappropriate at this juncture.
26   ///
27   ///
28
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1         A.   LEGAL STANDARD
2         “[W]here pertinent facts bearing on the question of jurisdiction
3    are in dispute, discovery should be allowed.”       Am. West Airlines, Inc.
4    v. GPA Group, Ltd., 877 F.2d 793, 801 (9th Cir. 1989).         However, a
5    “court’s refusal to allow further discovery before dismissing on
6    jurisdictional grounds is not an abuse of discretion ‘when it is clear
7    that further discovery would not demonstrate facts sufficient to
8    constitute a basis for jurisdiction.’” Id. at 801 (quoting Wells Fargo
9    & Co. v. Wells Fargo Express Co., 556 F.2d 406, 430-31, n. 24 (9th Cir.
10   1977)).
11        In the FTCA immunity context, “[i]t is well-established that ‘the
12   burden is on the party seeking to conduct additional discovery to put
13   forth sufficient facts to show that the evidence sought exists.’”
14   Gager v. United States, 149 F.3d 918, 922 (9th Cir. 1998) (quoting
15   Conkle v. Jeong, 73 F.3d 909, 914 (9th Cir. 1995)) (internal
16   alterations omitted).   In this regard, it is important to remember that
17   the Rule 8 pleading requirements prevent parties from filing complaints
18   in order to conduct aimless fishing expeditions in the hope that some
19   helpful evidence might possibly be uncovered.       See Ashcroft v. Iqbal,
20   129 S. Ct. at 1950 (“Rule 8 . . . does not unlock the doors of
21   discovery for a plaintiff armed with nothing more than conclusions.”);
22   Twombly, 550 U.S. at 556 (“[A]sking for plausible grounds to infer”
23   that a wrongful act occurred requires plaintiff to plead “enough facts
24   to raise a reasonable expectation that discovery will reveal evidence
25   of” that wrongful act) (emphasis added).
26        The Ninth Circuit applied Twombly to the discretionary function
27   exception in Doe v. Holy See, 557 F.3d at 1084-86.        The court affirmed
28
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1    a dismissal under the Foreign Sovereign Immunities Act’s discretionary
2    function exception where the defendant made only a “facial attack on
3    the allegations of subject-matter jurisdiction in the complaint.”           Id.
4    at 1086.   The court dismissed the complaint because it contained only
5    conclusory assertions that the defendant had adopted a mandatory policy
6    relevant to the cause of action, and the plaintiff wholly failed to
7    “state the terms of this alleged policy, or describe any documents,
8    promulgations, or orders embodying it.”     Id.    Notably, the court did
9    not require that the plaintiff have an opportunity to conduct discovery
10   into the existence of this alleged policy.      See id. at 1084-86.
11   Instead, the court merely analyzed the adequacy of the plaintiff’s
12   pleadings, and, finding them to be insufficient under Twombly, affirmed
13   dismissal under the discretionary function exception.        Id. at 1086.
14        Even prior to the Supreme Court’s re-articulation of the proper
15   pleading requirements in Twombly and Iqbal, it was not unusual for
16   courts to dismiss FTCA claims under the discretionary function
17   exception without giving litigants an opportunity to conduct discovery.
18   See, e.g., Abreu v. United States, 468 F.3d 20, 33 (1st Cir. 2006);
19   Dalli v. Frech, 70 Fed. Appx. 46 (2d Cir. 2003); see also Mesa v.
20   United States, 123 F.3d 1435, 1439 (11th Cir. 1997) (affirming
21   dismissal under discretion function exception where “[plaintiffs] have
22   pointed to no act of these DEA agents that could fall outside of the
23   discretionary function exception, nor have the [plaintiffs] pointed to
24   any requested discovery that could reasonably be expected to reveal any
25   such act.”); accord Razore v. Tulalip Tribe of Wash., 66 F.3d 236, 240
26   (9th Cir. 1995) (affirming dismissal of CERCLA action on jurisdictional
27   grounds without permitting parties to conduct discovery); but see
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1    Ignatiev v. United States, 238 F.3d 464, 467 (D.C. Cir. 2001) (holding
2    that D.C. Circuit “require[s] that plaintiffs be given an opportunity
3    for discovery of facts . . . [regarding the] existence [or not] of
4    internal governmental policies guiding that action.”).23
5          B.   DISCUSSION AND ANALYSIS
6          Additional discovery is not appropriate at present.         Plaintiffs
7    have not pleaded “enough facts to raise a reasonable expectation that
8    discovery will reveal evidence of” the sought-after SEC policies and
9    guidelines.   Twombly, 550 U.S. at 556.     In their request for discovery
10   contained in the sur-reply,   Plaintiffs have failed to meet their
11   burden of “put[ting] forth sufficient facts to show that the evidence
12   sought exists.”   Gager, 149 F.3d at 922.
13         A salient analogy can be found in Freeman v. United States, 556
14   F.3d 326 (5th Cir.), cert. denied, 130 S.Ct. 154 (2009).          In that case,
15   the court held that the “plaintiffs have failed to articulate a
16   discrete discovery request that might cure the jurisdictional
17
18    23
        The D.C. Circuit’s Ignatiev opinion requires that district courts in that
      Circuit allow FTCA plaintiffs an opportunity to pursue limited discovery to
19    determine whether or not internal agency guidelines mandate staff members to
      take a particular course of action. It is unclear whether Ignatiev’s
20    bright-line rule survives post-Twombly and -Iqbal, both of which state that
      something more than a conclusory allegation is required to obtain discovery.
21    As the Supreme Court explained in Iqbal:
           Respondent . . . implies that our construction of Rule 8 should be
22         tempered where, as here, the Court of Appeals has “instructed the
           district court to cabin discovery in such a way as to preserve”
23         petitioners’ defense of qualified immunity “as much as possible in
           anticipation of a summary judgment motion.” Iqbal Brief 27. We have
24         held, however, that the question presented by a motion to dismiss a
           complaint for insufficient pleadings does not turn on the controls
25         placed upon the discovery process. Twombly, [550 U.S.] at 559 (“It is
           no answer to say that a claim just shy of a plausible entitlement to
26         relief can, if groundless, be weeded out early in the discovery
           process through careful case management given the common lament that
27         the success of judicial supervision in checking discovery abuse has
           been on the modest side.”).
28    Iqbal, 129 S.Ct. at 1953.

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1    deficiency and have failed to otherwise specify where they might
2    discover the necessary factual predicate for subject matter
3    jurisdiction.”   Id. at 342.   The Freeman case is particularly relevant
4    because it involved a “well-documented” government failure akin to the
5    one at issue in the present case: the government’s response to
6    Hurricane Katrina.   Id. at 343.    The court stated that it found “no
7    fault in the district court’s conclusion that a mandatory directive, if
8    one existed, could be found in the public realm” because “in this case
9    plaintiffs’ allegations are based on statutes, regulations, and other
10   authorities that are publicly available.”      Id. 342.
11         Freeman is particularly apt because the plaintiffs in that case
12   relied heavily “on numerous congressional investigations regarding the
13   government’s response to Hurricane Katrina.”       Id. at 342 n.16.      In the
14   case before this Court, Plaintiffs rely almost exclusively on the SEC
15   Office of Inspector General’s Report.     Plaintiffs have done nothing
16   more than read a small portion of the voluminous public record
17   regarding the relevant factual issues.
18         Notably, Plaintiffs have not shown that the relevant information
19   is unavailable to them in the absence of discovery.        To the contrary,
20   the SEC Inspector General has issued a follow-up report that
21   specifically examines the Office of Compliance Inspections and
22   Examinations’s “modules, policies, procedures and guidance associated
23   with the conduct of its examinations” into Madoff’s conduct.          The Court
24   further notes that countless other relevant documents are readily
25   available through the SEC’s website.
26         Accordingly, Plaintiffs’ request for discovery is denied.
27   ///
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1    VI.   LEAVE TO AMEND THE COMPLAINT
2

3          When a court grants a motion to dismiss, the court may grant the
4    plaintiff leave to amend a deficient claim “when justice so requires.”
5    Fed. R. Civ. P. 15(a)(2).   The plaintiff need not specifically request
6    leave to amend.   Doe v. United States, 58 F.3d 494, 497 (9th Cir.
7    1995); but see Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741,
8    749 (9th Cir. 2006) (“Although Plaintiffs’ complaint is susceptible of
9    amendment, we generally will not remand with instructions to grant
10   leave to amend unless the plaintiff sought leave to amend below.”)
11   (citing Alaska v. United States, 201 F.3d 1154, 1163-64 (9th Cir.
12   2000)).   “Five factors are frequently used to assess the propriety of a
13   motion for leave to amend: (1) bad faith, (2) undue delay, (3)
14   prejudice to the opposing party, (4) futility of amendment; and (5)
15   whether plaintiff has previously amended his complaint.”          Allen v. City
16   of Beverly Hills, 911 F.2d 367, 373 (9th Cir. 1990) (citing Ascon
17   Properties, Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir.
18   1989)).
19         It is disfavored to prevent a plaintiff from amending the
20   complaint at least once, and Defendant has not introduced any evidence
21   showing that amendment would be entirely futile.        Accordingly,
22   Plaintiffs are granted 30 days to amend their Complaint and incorporate
23   plausible factual allegations showing that the SEC failed to conform to
24   its mandatory duties.
25         Plaintiffs are cautioned that an amended complaint supercedes a
26   previous complaint.   See, e.g., Hal Roach Studios, Inc. v. Richard
27   Feiner & Co., 896 F.2d 1542, 1546 (9th Cir. 1990); see also Local Rule
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1    15-2.    When an amended complaint is filed, the previous complaint is
2    rendered null and void, and only the amended complaint remains legally
3    operable.    Under this rule, “a plaintiff waives all causes of action
4    alleged in the original complaint which are not alleged in the amended
5    complaint.”    London v. Coopers & Lybrand, 644 F.2d 811, 814 (9th Cir.
6    1981).    Accordingly, if Plaintiffs wish to preserve their original
7    arguments for appeal, Plaintiffs are advised to restate those
8    allegations in their amended complaint.24     However, in order to expedite
9    future proceedings, the Court orders Plaintiffs to clearly identify any
10   modifications, additions, or deletions in their amended complaint.
11           While preparing the amended complaint, Plaintiffs are advised that
12   Fed. R. Civ. P. 11(b) requires that the factual allegations be made “to
13   the best of the person’s knowledge, information, and belief, formed
14   after an inquiry reasonable under the circumstances.”        Obviously this
15   rule does not require Plaintiffs’ amended complaint to contain factual
16   support of the type required in a Rule 56 summary judgment motion.           But
17   in the present context, in order for Plaintiffs’ pre-filing “inquiry”
18   to be “reasonable under the circumstances,” they are expected to make a
19   good faith examination of the publicly available documents and allege
20   only those facts that are reasonably likely to find evidentiary support
21   during discovery.    Plaintiffs shall refrain from submitting additional
22   conclusory allegations regarding unnamed “policies and practices.”
23   Plaintiffs shall also refrain from submitting new allegations that are
24
25
      24
         Given the voluminous nature of the original complaint, the Court grants
26    Plaintiffs permission to incorporate their original allegations by reference
      into the amended complaint. The Court anticipates, however, that the “law
27    of the case” doctrine may preclude reconsideration of the specific
      allegations addressed in the present Order. See, e.g., United States v.
28    Smith, 389 F.3d 944, 948-50 (9th Cir. 2004).

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1    contradicted by facts stated in any of the SEC’s Office of Inspector
2    General reports unless Plaintiffs can also plausibly allege that such
3    reports are inaccurate or incomplete.     Plaintiffs shall identify, to
4    the best of their ability, the specific type of conduct governed by the
5    alleged policies and the specific time period during which the policies
6    were effective.
7          Plaintiffs are advised that if they are unable to make a
8    sufficient good faith inquiry within 30 days, their action will be
9    dismissed without prejudice for lack of subject matter jurisdiction.
10   See Frigard v. United States, 862 F.2d 201, 204 (9th Cir. 1988) (per
11   curiam); Fed. R. Civ. P. 41(b).     Because dismissal for lack of subject
12   matter jurisdiction is ordinarily without prejudice, Plaintiffs may not
13   necessarily be barred from reinstating the action in the future.           See
14   Wright & Miller, Federal Practice & Procedure § 1350 & nn. 61-62
15   (collecting cases).
16   ///
17   ///
18   ///
19
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1    VII. CONCLUSION
2

3         Accordingly, Defendants’ Motions to Dismiss for lack of subject
4    matter jurisdiction are GRANTED.    Plaintiffs may file an amended
5    complaint containing new allegations that are reasonably aimed at
6    satisfying Plaintiffs’ burden as described in this Order.         If
7    Plaintiffs choose to file an amended complaint, the amended complaint
8    must be filed within 30 days of the date that this Order is entered on
9    the docket.   Should Plaintiffs fail to file an amended complaint, the
10   action will be dismissed without prejudice for lack of subject matter
11   jurisdiction.
12
13

14            IT IS SO ORDERED.
15

16
17   DATED:   April 20, 2010
18                                                     STEPHEN V. WILSON
19                                               UNITED STATES DISTRICT JUDGE
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