Court Opinion

ID: 857683
Source: CourtListenerOpinion
Date Created: 2013-04-10 14:44:07.120841+00
Date Added: 2024-06-11T09:06:37.020193
License: Public Domain

11-2510-cv(L)
     Molchatsky, et al. v. United States

 1                   UNITED STATES COURT OF APPEALS
 2
 3                       FOR THE SECOND CIRCUIT
 4
 5
 6
 7                          August Term, 2012
 8
 9    (Argued: March 14, 2013              Decided: April 10, 2013)
10
11                     Docket Nos. 11-2510-cv(L),
12        11-2532-cv(con), 11-3142-cv(con),11-3304-cv(con),
13        11-3306-cv(con), 11-3310-cv(con),12-472-cv(con),
14          12-476-cv(con),12-502-cv(con), 12-511-cv(con),
15                  12-518-cv(con), 12-533-cv(con).
16
17
18    PHYLLIS MOLCHATSKY, CHARLES MEDERRICK, INDIVIDUALLY AND ON
19           BEHALF OF ALL THOSE PERSONS SIMILARLY SITUATED,
20              ALAN GOLDMAN, THE LITWIN FOUNDATION, INC.,
21      THE MICHAEL AND RUTH SLADE FOUNDATION, STEVEN SCHNEIDER,
22       M.D., JUDITH WELLING, INDIVIDUALLY AND ON BEHALF OF ALL
23          THOSE PERSONS SIMILARLY SITUATED, BLAYNE GOLDMAN,
24     ALLAN H. APPLESTEIN, AS TRUSTEE FOR THE BENEFIT OF D.C.A.
25     GRANTOR TRUST, GEORGE R. MARKS, ROBERT MICK, INDIVIDUALLY
26       AND ON BEHALF OF ALL THOSE PERSONS SIMILARLY SITUATED,
27   GEORGE R. MARKS, AS BENEFICIARY FOR THE BENEFIT OF GEORGE R.
28    MARKS I.R.A., HAROLD SCHWARTZ, AS TRUSTEE FOR THE BENEFIT
29     OF HAROLD SCHWARTZ 1997 IRREVOCABLE TRUST, AS BENEFICIARY
30    FOR THE BENEFIT OF HAROLD SCHWARTZ I.R.A. AND AS TRUSTEE OF
31          THE BENEFIT OF HAROLD SCHWARTZ 1998 LIVING TRUST,
32    ROSENMAN FAMILY, LLC, ROBERT I. LAPPIN, AS TRUSTEE FOR THE
33         BENEFIT OF SHETLAND PROPERTIES EMPLOYEE SAVINGS AND
34   RETIREMENT PLAN, DANIEL SILNA, AS TRUSTEE FOR THE BENEFIT OF
35             O.D.D. INVESTMENTS L.P. PROFIT SHARING PLAN,
36
37                                            Plaintiffs-Appellants,
38
39                                -v.-
40
41
42
43
 1             UNITED STATES OF AMERICA, JOHN DOES 1-10,
 2
 3                                            Defendants-Appellees.*
 4
 5
 6
 7
 8   Before:
 9       WESLEY, DRONEY, Circuit Judges, NATHAN, District Judge.**
10
11
12        Appeal from the April 19, 2011 Opinion and Order by the
13   United States District Court for the Southern District of
14   New York (Swain, J.) granting the United States’ motion to
15   dismiss Plaintiffs-Appellants’ claims against the United
16   States Securities and Exchange Commission (the “SEC”) for
17   lack of subject matter jurisdiction pursuant to Federal Rule
18   of Civil Procedure 12(b)(1), and from the January 24, 2011
19   Memorandum Order denying Plaintiffs-Appellants’ motion for
20   relief from judgment under Federal Rule of Civil Procedure
21   60(b). Plaintiffs-Appellants argue that the district court
22   erred by dismissing their complaints pursuant to the
23   Discretionary Function Exception to the Federal Tort Claims
24   Act because the SEC negligently failed to adequately
25   investigate Bernard Madoff despite numerous warnings and, in
26   doing so, violated federal statutes and regulations, as well
27   as internal agency policies. We AFFIRM because the
28   Discretionary Function Exception shields the SEC’s conduct
29   from Plaintiffs-Appellants’ claims.
30
31        AFFIRMED.
32
33
34
35
36
37

          *
            The Clerk of Court is directed to amend the official
     caption to conform to the listing of the parties stated above.
          **
            The Honorable Alison J. Nathan, of the United States
     District Court for the Southern District of New York, sitting by
     designation.

                                     2
 1                 PATRICIA M. GRAHAM (Howard Elisofon, David R.
 2                      King, on the brief), Herrick, Feinstein LLP,
 3                      New York, NY, for Plaintiff-Appellant Phyllis
 4                      Molchatsky.
 5
 6             DR. GAYTRI D. KACHROO, Kachroo Legal Services,
 7                  P.C., Cambridge, MA, for Plaintiff-Appellant
 8                  Charles Mederrick.
 9
10             Howard Kleinhendler, Sara Spiegelman, Wachtel Masyr
11                  & Missry LLP, New York, NY, for Plaintiff-
12                  Appellant Allan H. Applestein.
13
14             SARAH S. NORMAND, Assistant United States Attorney
15                  (Neil M. Corwin, Assistant United States
16                  Attorney, on the brief), for Preet Bharara,
17                  United States Attorney for the Southern
18                  District of New York, New York, NY, for
19                  Defendants-Appellees.
20
21             Lawrence R. Velvel, Massachusetts School of Law,
22                  Andover, MA; David Bernfeld, Bernfeld,
23                  DeMatteo & Bernfeld LLP, New York, NY, for
24                  Amicus Curiae Network for Investor Action and
25                  Protection.
26
27
28
29
30   PER CURIAM:

31        Plaintiffs-Appellants Phyllis Molchatsky, et al.

32   (“Plaintiffs”) appeal from an April 19, 2011 Opinion and

33   Order by the United States District Court for the Southern

34   District of New York (Swain, J.) granting Defendant-Appellee

35   the United States’ motion to dismiss Plaintiffs’ complaints

36   against the United States Securities and Exchange Commission

37   (the “SEC”) for lack of subject matter jurisdiction pursuant

                                       3
 1   to Federal Rule of Civil Procedure 12(b)(1).     Plaintiffs

 2   also appeal from the district court’s January 24, 2011

 3   Memorandum Order denying Plaintiffs’ motion for relief from

 4   judgment under Federal Rule of Civil Procedure 60(b).

 5   Plaintiffs seek to hold the United States liable for SEC

 6   employees’ failure to detect Bernard Madoff’s Ponzi scheme

 7   and for the financial losses that Plaintiffs claim they

 8   suffered as a result.    Because we find that the SEC’s

 9   actions, along with its regrettable inaction, are shielded

10   by the Discretionary Function Exception, we affirm the

11   district court’s dismissal of Plaintiffs’ claims for lack of

12   subject matter jurisdiction.

13                             Background

14       Plaintiffs are investors who lost money they had

15   entrusted to Bernard Madoff (“Madoff”) and his firm, Bernard

16   L. Madoff Investment Securities LLC, after Madoff’s massive

17   Ponzi scheme exploded in 2008.     Plaintiffs’ principal

18   allegation is that the SEC negligently failed to uncover

19   Madoff’s fraud despite receiving numerous complaints over a

20   sixteen-year period.    Relying on an extensive report from

21   the SEC’s Office of the Inspector General, Plaintiffs allege

22   in detail approximately eight separate complaints the SEC

23   received regarding Madoff and the SEC’s inadequate and often

                                    4
 1   incompetent response to each.       As a result of the SEC’s

 2   repeated failure to alert other branch offices of ongoing

 3   investigations, properly review complaints and staff

 4   subsequent inquiries, and follow up on disputed facts

 5   elicited in interviews, the SEC missed many opportunities to

 6   uncover Madoff’s multi-billion-dollar fraud.

 7                             Discussion

 8         Plaintiffs claim that the SEC’s clear negligence

 9   exposes the agency to liability under the Federal Tort

10   Claims Act (“FTCA”).   The district court disagreed, as do

11   we.   The FTCA provides in relevant part that federal courts

12              shall have exclusive jurisdiction of
13              civil actions on claims against the
14              United States, for money damages,
15              accruing on and after January 1, 1945,
16              for injury or loss of property, or
17              personal injury or death caused by the
18              negligent or wrongful act or omission of
19              any employee of the Government while
20              acting within the scope of his office or
21              employment, under circumstances where the
22              United States, if a private person, would
23              be liable to the claimant in accordance
24              with the law of the place where the act
25              or omission occurred.
26
27   28 U.S.C. § 1346(b)(1).

28   The FTCA is an exception to the rule that the United States

29   is typically immune from suit.       The district court

30   determined that the Discretionary Function Exception

                                     5
 1   (“DFE”), an exception to the exception, barred Plaintiffs’

 2   claims.   The DFE suspends the FTCA from applying to
 3
 4             [a]ny claim based upon an act or omission
 5             of an employee of the Government,
 6             exercising due care, in the execution of
 7             a statute or regulation, whether or not
 8             such statute or regulation be valid, or
 9             based upon the exercise or performance or
10             the failure to exercise or perform a
11             discretionary function or duty on the
12             part of a federal agency or an employee
13             of the Government, whether or not the
14             discretion involved be abused.
15
16   28 U.S.C. § 2680(a).
17
18       The DFE is not about fairness, it “is about power,”

19   National Union Fire Insurance v. United States, 115 F.3d

20   1415, 1422 (9th Cir. 1997); the sovereign “reserve[s] to

21   itself the right to act without liability for misjudgment

22   and carelessness in the formulation of policy,” id.    “[T]he

23   DFE bars suit only if two conditions are met: (1) the acts

24   alleged to be negligent must be discretionary, in that they

25   involve an ‘element of judgment or choice’ and are not

26   compelled by statute or regulation and (2) the judgment or

27   choice in question must be grounded in ‘considerations of

28   public policy’ or susceptible to policy analysis.”

29   Coulthurst v. United States, 214 F.3d 106, 109 (2d Cir.

30   2000) (quoting United States v. Gaubert, 499 U.S. 315, 322-

31   23 (1991)).   Plaintiffs bear the initial burden to state a

                                   6
 1   claim that is not barred by the DFE.     See Gaubert, 499 U.S.

 2   at 324-25.    Here, Plaintiffs have failed to make the

 3   necessary showing.

 4       Plaintiffs’ harm ultimately stems from the SEC’s

 5   failure to investigate Madoff and uncover his Ponzi scheme.

 6   As a result, the conduct Plaintiffs seek to challenge is

 7   “too intertwined with purely discretionary decisions” made

 8   by SEC personnel.     Gray v. Bell, 712 F.2d 490, 515 (D.C.

 9   Cir. 1983); see generally id. at 515-16.     Despite our

10   sympathy for Plaintiffs’ predicament (and our antipathy for

11   the SEC’s conduct), Congress’s intent to shield regulatory

12   agencies’ discretionary use of specific investigative powers

13   via the DFE is fatal to Plaintiffs’ claims.     See Berkovitz

14   by Berkovitz v. United States, 486 U.S. 531, 538 & 538 n.4

15   (1988) (quoting H.R.Rep. No. 1287, 79th Cong., 1st Sess., 6

16   (1945)).     In satisfaction of the first prong of the DFE, the

17   SEC retains complete discretion over when, whether and to

18   what extent to investigate and bring an action against an

19   individual or entity.     See 15 U.S.C. § 78u(a)(1); 17 C.F.R.

20   § 202.5(a)-(b).     The conduct in question here meets the

21   second prong of the DFE by virtue of the SEC’s choices

22   regarding allocation of agency time and resources being

23   sufficiently grounded in economic, social and policy

                                     7
 1   considerations.   See Bd. of Trade of City of Chicago v. SEC,

 2   883 F.2d 525, 531 (7th Cir. 1989); cf. Coulthurst, 214 F.3d

 3   at 108-11.

 4        We find additionally that the district court did not

 5   abuse its discretion in denying Plaintiffs’ Rule 60(b)

 6   motion for relief from judgment, or in denying Plaintiffs’

 7   request for jurisdictional discovery.    Boule v. Hutton, 328

 8   F.3d 84, 95 (2d Cir. 2003) (we review denials of Rule 60(b)

 9   motions for abuse of discretion); Best Van Lines, Inc. v.

10   Walker, 490 F.3d 239, 255 (2d Cir. 2007) (we review district

11   court’s refusal to permit jurisdictional discovery for abuse

12   of discretion).   We have considered Plaintiffs’ remaining

13   arguments and find them to be without merit.

14                               Conclusion

15       For the foregoing reasons, the order of the district

16   court is hereby AFFIRMED.

                                     8