Court Opinion

ID: 820331
Source: CourtListenerOpinion
Date Created: 2013-02-12 18:27:31.542059+00
Date Added: 2024-06-11T11:07:47.940602
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.
                                          ORDER AND
UNITED STATES OF AMERICA ,                 OPINION
              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 February 12, 2013

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

                        Order;
                  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.

                          ORDER

   The opinion and appendix filed on January 28, 2013 are
withdrawn. A new opinion and appendix are filed
concurrently with this order.

   IT IS SO ORDERED.

                         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.
4 DICHTER -MAD FAMILY PARTNERS V . UNITED STATES

    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
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

 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.
   DICHTER -MAD FAMILY PARTNERS V . UNITED STATES 5

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
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
1016                  707 FEDERAL SUPPLEMENT, 2d SERIES

   IT IS HEREBY ORDERED that Peti-
tioner Clifton Brown’s motion under 18           DICHTER–MAD FAMILY PARTNERS,
U.S.C. § 2255 will be GRANTED and he               LLP; Philip Dichter; Claudia Gvirtz-
will be GRANTED an out-of-time appeal              man Dichter; and Richard H. Gordon,
as the remedy for Counsel’s failure to file        Plaintiffs,
an appeal.
                                                                      v.
  IT IS FURTHER ORDERED that the
Court will VACATE Petitioner Clifton              UNITED STATES of America; Secu-
Brown’s July 3, 2008 dated Amended                 rities Exchange Commission, and
Judgment (Doc. No. 115 in Case No.                       Does 1–10, Defendants.
1:06CR99RWS) and REIMPOSE the                         No. CV 09–9061 SVW (FMOx).
same sentence so the time for appeal can
start to run again. See Rosinski v. United             United States District Court,
States, 459 F.2d 59 (6th Cir.1972); United                   C.D. California.
States v. Phillips, 225 F.3d 1198, 1201                        April 20, 2010.
(11th Cir.2000). The Court WILL EN-
                                                 Background: Investors in Ponzi scheme
TER a Second Amended Judgment.
                                                 brought a Federal Tort Claims Act
  IT IS FURTHER ORDERED that the                 (FTCA) action against the Securities and
Clerk of the Court is ordered to prepare a       Exchange Commission (SEC) and the
Second Amended Judgment in the matter            United States, claiming SEC’s negligent
United States of America v. Clifton              acts and omissions caused scheme to con-
Brown, No. 1:06CR99RWS in accordance             tinue, perpetuate, and expand, and that the
with this order.
                                                 SEC failed to terminate Ponzi scheme de-
   IT IS FURTHER ORDERED that Pe-                spite its multiple opportunities to do so.
titioner Clifton Brown has the right to          Defendants filed motions to dismiss.
appeal the reimposed sentence. The Clerk
                                                 Holding: The District Court, Stephen V.
of the Court shall file a notice of appeal for
                                                 Wilson, J., held that discretionary function
him within fourteen days from the entry
                                                 exception barred investors’ claims against
of the Second Amended Judgment. If
                                                 government based on SEC investigators’
Brown cannot afford counsel to represent
                                                 failure to discover Ponzi scheme and publi-
him on appeal, he should complete the in
forma pauperis application which the             cize or prosecute it.
Clerk will provide him, and file it, along       Motions granted.
with a motion requesting the Court to
appoint counsel to represent him.                1. United States O78(12)
  IT IS FURTHER ORDERED that the                      Under discretionary function excep-
Clerk of the Court shall mail a copy of this     tion to Federal Tort Claims Act (FTCA),
Memorandum and the accompanying judg-            officers are only liable if (1) the officers’
ment, the Second Amended Judgment, and           actions were prescribed by statute, regula-
the in forma pauperis affidavit (CJA 23)
                                                 tion, or policy, or (2) the officers’ conduct
to Petitioner Clifton Brown at Clifton
                                                 was not susceptible to analysis on social,
Brown, # 33172–044, F.C.I. Greenville,
                                                 economic, or political policy grounds. 28
P.O. Box 5000, Greenville, IL 62246.
                                                 U.S.C.A. § 2680(a).

             ,                                   2. Federal Civil Procedure O1832
                                                     Because Securities and Exchange
                                                 Commission’s (SEC) Office of Inspector
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                1017
                             Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

General’s report on agency’s failure to un-        function exception to Federal Tort Claims
cover Ponzi scheme was both attached to            Act (FTCA); government must prove that
and incorporated-by-reference into com-            each of the allegedly wrongful acts, by
plaint, it was properly considered on mo-          each allegedly negligent actor, is covered
tion to dismiss investors’ Federal Tort            by the discretionary function exception.
Claims Act (FTCA) action against SEC for           28 U.S.C.A. § 2680(a).
failing to terminate Ponzi scheme despite          7. United States O78(12)
multiple opportunities to do so.         28              Discretionary function exception to
U.S.C.A. § 2674 et seq.; Fed.Rules Civ.            Federal Tort Claims Act (FTCA) barred
Proc.Rule 10(c), 28 U.S.C.A.                       investors’ claims against government
3. United States O78(1)                            based on Securities and Exchange Com-
    A federal agency cannot itself be sued         mission’s (SEC) investigators’ failure to
under Federal Tort Claims Act (FTCA);              discover Ponzi scheme and publicize or
                                                   prosecute it; SEC’s decisions of whether
FTCA only allows claims against the Unit-
                                                   and how to conduct investigations and en-
ed States. 28 U.S.C.A. § 2671.
                                                   forcement actions were discretionary, and
4. Federal Civil Procedure O1772                   investors’ conclusory allegations failed to
     A claim has facial plausibility when          establish that SEC examiners were guided
the plaintiff pleads factual content that          by any mandatory duties requiring them to
allows the court to draw the reasonable            share information and coordinate their ac-
inference that the defendant is liable for         tivities. Securities Exchange Act of 1934,
the misconduct alleged; a complaint that           § 21(a)(1), (d)(1), 15 U.S.C.A. § 78u(a)(1),
offers mere labels and conclusions or a            (d)(1); 28 U.S.C.A. § 2680(a); 17 C.F.R.
formulaic recitation of the elements of a          § 202.5.
cause of action will not do. Fed.Rules             8. United States O78(12)
Civ.Proc.Rule 8(a), 28 U.S.C.A.                         Employment, supervision, and train-
5. United States O78(12)                           ing decisions fall squarely within the dis-
     When established governmental poli-           cretionary function exception to Federal
cy, as expressed or implied by statute,            Tort Claims Act (FTCA). 28 U.S.C.A.
regulation, or agency guidelines, allows a         § 2680(a).
government agent to exercise discretion, it        9. Federal Civil Procedure O1275.5
must be presumed, for purposes of discre-             Federal Courts O33
tionary function exception to Federal Tort              Where pertinent facts bearing on the
Claims Act (FTCA), that the agent’s acts           question of subject matter jurisdiction are
are grounded in policy when exercising             in dispute, discovery should be allowed;
that discretion; in contrast, if the applica-      however, a court’s refusal to allow further
ble statute or regulation does not give the        discovery before dismissing on jurisdic-
employee discretion, no presumption at-            tional grounds is not an abuse of discretion
taches, and the court must determine               when it is clear that further discovery
whether the decisions were of the kind             would not demonstrate facts sufficient to
that are susceptible to policy analysis. 28        constitute a basis for jurisdiction.
U.S.C.A. § 2680(a).
                                                   10. Federal Civil Procedure O1275.5
6. United States O141(3)                               Federal Courts O33
    United States bears the burden of                  Additional discovery was not warrant-
proving the applicability of discretionary         ed prior to dismissal of Federal Tort
1018                   707 FEDERAL SUPPLEMENT, 2d SERIES

Claims Act (FTCA) claim for lack of sub-          ing a Federal Tort Claims Act (‘‘FTCA’’)
ject matter jurisdiction where plaintiffs         action against the Securities and Exchange
failed to articulate a discrete discovery         Commission (‘‘SEC’’) and the United
request that might cure the jurisdictional        States (‘‘Government’’ or ‘‘Defendant’’).
deficiency and failed to otherwise specify        Plaintiffs assert that the SEC ‘‘owes a
where they might discover the necessary           duty of reasonable due care to all members
factual predicate for subject matter juris-       of the general public including all investors
diction. 28 U.S.C.A. § 2680(a).                   in U.S. financial markets who are foresee-
                                                  ably endangered by its conduct.’’ (Compl.
11. Federal Civil Procedure O852.1
                                                  ¶ 163.) Plaintiffs also assert that the
     When an amended complaint is filed,          SEC’s negligent acts and omissions
the previous complaint is rendered null           ‘‘caused Madoff’s scheme to continue, per-
and void, and only the amended complaint          petuate, and expand,’’ and that the SEC
remains legally operable; a plaintiff waives      ‘‘fail[ed] to terminate Madoff’s Ponzi
all causes of action alleged in the original      scheme despite its multiple opportunities
complaint which are not alleged in the            to do so.’’ (Compl. ¶ 2; see also Compl.
amended complaint.                                ¶ 164.)     Plaintiffs further assert that
                                                  ‘‘Plaintiffs here were among those victim-
                                                  ized by Madoff. Plaintiffs made their in-
                                                  vestments in reliance on Madoff’s reputa-
  Philip J. Dichter, Philip J. Dichter Law        tion, clean regulatory record, and the
Offices, Malibu, CA, for Plaintiffs.              SEC’s implied stamp of approval.’’
                                                  (Compl. ¶ 8.) Because of the SEC’s alleged
  Richard M. Gordon, Beverly Hills, CA,           negligence, Plaintiffs seek to recover their
pro se.                                           losses from their investments with Madoff.
  Jeffrey Paul Ehrlich, United States De-
partment of Justice, Washington, DC, for             [1] Defendants have brought a pair of
Defendants.                                       Motions to Dismiss, arguing that the Court
                                                  lacks jurisdiction to hear the claims under
 ORDER GRANTING DEFENDANTS’                       the FTCA, 28 U.S.C. § 2674 et seq. Un-
 MOTIONS TO DISMISS FOR LACK                      der the ‘‘discretionary function exception’’
     OF JURISDICTION [6, 7]                       to the FTCA, federal courts are barred
                                                  from adjudicating tort actions arising out
     STEPHEN V. WILSON, District Judge.           of federal officers’ discretionary acts. 28
I.    INTRODUCTION                                U.S.C. § 2680(a). In brief, officers are
                                                  only liable if (1) the officers’ actions were
     A.   BACKGROUND                              prescribed by statute, regulation, or policy,
  Plaintiffs were investors in Bernard Ma-        or (2) the officers’ conduct was not suscep-
doff’s Ponzi scheme.1 Plaintiffs are bring-       tible to analysis on social, economic, or

1. The plaintiffs are:                               -Claudia Gvirtzman Dichter (represented by
    –Dichter–Mad Family Partners, LLP (a           Philip Dichter), and
  Florida partnership represented by attorney
                                                     -Richard M. Gordon (who is a lawyer repre-
  Philip Dichter, an investor in the partner-
                                                   senting himself).
  ship),
    -Philip Dichter (who is a lawyer represent-
  ing himself),
                      DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                      1019
                                  Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

political policy grounds.     See United                Plaintiffs the benefit of any plausible infer-
States v. Gaubert, 499 U.S. 315, 322, 111               ences contained in the Report (as Plaintiffs
S.Ct. 1267, 113 L.Ed.2d 335 (1991).2                    repeatedly urged the Court to do, see, e.g.
   [2] The Complaint contains over fifty                Compl. ¶ 1 n. 3, Sur-reply at 5 n. 1), the
pages of allegations summarizing the                    Court has reviewed the full Report and
SEC’s failure to uncover Madoff’s fraud.                treats it as though it were fully included in
The Complaint also attaches five exhibits,              Plaintiffs’ Complaint. Although this is an
the most substantial of which is the SEC                unusual procedure, there is clear legal au-
Office of Inspector General’s 450–page In-              thority permitting the Court to do so:
vestigation of Failure of the SEC to Un-                Plaintiffs’ Complaint ‘‘reference[s]’’ the
cover Bernard Madoff’s Ponzi Scheme—                    Report ‘‘extensively,’’ and the factual alle-
Public Version [hereinafter ‘‘the Report’’],            gations contained in the Report are ‘‘inte-
which was released in August 2009.                      gral to [their] claim.’’ United States v.
(Compl., Ex. A.) 3 Plaintiffs purport to                Ritchie, 342 F.3d 903, 908 (9th Cir.2003)
adopt the ‘‘factual allegations or determi-             (citations omitted). Thus, it is appropriate
nations made in the report’’ by ‘‘fully in-             in this particular instance to consider the
corporat[ing] by reference’’ the Report as              Report as part of Plaintiffs’ allegations for
a part of the Complaint. (Compl. ¶ 1 n. 3.)             purposes of the present Motion to Dismiss.
This request is technically impermissible                  Although the inclusion of the Report
under Fed.R.Civ.P. 10(c), which only per-
                                                        results in an unusually long Complaint, the
mits the incorporation of a legally operable
                                                        Ninth Circuit has counseled that an overly
‘‘written instrument’’ such as a contract,
                                                        detailed complaint is acceptable under
check, letter, or affidavit. See, e.g., Ren-
                                                        Fed.R.Civ.P. 8(a) if, for example, it is ‘‘or-
nie & Laughlin, Inc. v. Chrysler Corp.,
                                                        ganized, [and is] divided into a description
242 F.2d 208, 209 & n. 209 (9th Cir.1957);
                                                        of the parties, a chronological factual back-
see also Wright & Miller, 5A Federal
                                                        ground, and a presentation of enumerated
Practice & Procedure § 1327 n. 1 (3d ed.
                                                        legal claims, each of which lists the liable
2009 update). In contrast, items such as
                                                        Defendants and legal basis therefor.’’
‘‘newspaper articles, commentaries and ed-
itorial cartoons’’ are not properly incorpo-            Hearns v. San Bernardino Police Dept.,
rated into the complaint by reference.                  530 F.3d 1124, 1132 (9th Cir.2008). In the
Perkins v. Silverstein, 939 F.2d 463, 467 n.            present case, both the Complaint and the
2 (7th Cir.1991); see also Wright & Miller,             Report satisfy these criteria. Accordingly,
5A Federal Practice & Procedure § 1327                  because the Report is both attached to and
n. 2.                                                   incorporated-by-reference into the Com-
                                                        plaint, it is properly considered on the
  That said, Defendants have not objected
                                                        Motion to Dismiss. (See also infra Part
to Plaintiffs’ attempt to incorporate the
                                                        III.A.)
Report by reference into the Complaint.
(See generally Defs.’ Motion; Defs.’ Re-                   Many of Plaintiffs’ allegations (including
ply.) Additionally, Fed.R.Civ.P. 8(e) re-               the factual averments contained in the Re-
quires the Court to ‘‘construe[ ] pleadings             port) identify decisions that, in hindsight,
so as to do justice.’’ In order for the                 could have and should have been made
Court to comply with Rule 8(e) and give                 differently. Other allegations reveal the

2.     There are, of course, various other require-     3.     This Order refers to the Office of Inspector
     ments and exceptions in the FTCA. This brief            General’s report as ‘‘the Report,’’ and pin-
     summary only relates to the matter at issue             citations to the Report are abbreviated as
     here—the discretionary function exception.              ‘‘Ex. A.’’
1020                       707 FEDERAL SUPPLEMENT, 2d SERIES

SEC’s sheer incompetence in regulating                 operations that ‘‘should have’’ been done.
Madoff’s broker-dealer, market-making,                 (Compl. ¶¶ 34, 37, 39.)
and investment-management operations.                     The second warning sign came in May
What is lacking in the present Complaint,              2000, when industry analyst Harry Marko-
however, is any plausible allegation reveal-           polos provided an eight-page complaint to
ing that the SEC violated its clear, non-              the Boston SEC office. (Compl. ¶¶ 42–46;
discretionary duties, or otherwise under-              Ex. A at 61–67.) The complaint provided
took a course of action that is not poten-             evidence ‘‘questioning the legitimacy of
tially susceptible to policy analysis.                 Madoff’s reported returns.’’ (Compl. ¶ 42.)
                                                       Markopolos presented his findings to an
     B.   FACTUAL ALLEGATIONS
                                                       unqualified senior staff member (Compl.
   The facts of the Madoff fraud need little           ¶ 44), and although the staffer stated that
introduction. A thorough summary of Ma-                he forwarded the matter to the New York
doff’s operations can be found in the re-              office, he did not actually do so. (Compl.
cent decision In re Bernard L. Madoff Inv.             ¶ 45.)
Secs. LLC, 424 B.R. 122, 127–32 (Bkrtcy.
                                                          The third warning sign came in March
S.D.N.Y.2010) (order affirming trustee’s               2001, when Markopolos submitted a second
determination of former investors’ net eq-             complaint to the Boston office containing
uity).                                                 new, simplified information.        (Compl.
   In the present case, Plaintiffs’ central            ¶¶ 47–50; Ex. A at 67–74.) This time, the
allegations are largely drawn from the In-             matter was forwarded to New York, but
spector General’s Report, which Plaintiffs             ‘‘after just one day’’ the lead enforcement
have incorporated by reference into the                attorney in New York ‘‘rejected it out of
Complaint. (Compl. ¶ 1 n. 3.) The Com-                 hand.’’ (Compl. ¶ 49.) Although Marko-
plaint alleges the following.                          polos’s complaint was more detailed than
   The first warning sign of Madoff’s fraud            the average complaint, the attorney wrote
came in 1992, when Avellino & Bienes, a                a short email stating ‘‘I don’t think we
firm that invested exclusively through Ma-             should pursue this matter further.’’
doff’s brokerage, was exposed as a Ponzi               (Compl. ¶¶ 49–50.) 4
scheme. (Compl. ¶¶ 29–40; Ex. A at 42–                   The fourth warning sign came in May
61.) Plaintiffs explain that the SEC’s in-             2001, when industry publications MAR-
vestigators were ‘‘woefully inexperienced’’            Hedge and Barron’s published articles dis-
in the area of Ponzi schemes (Compl. ¶ 32)             cussing the secrecy of Madoff’s operations
and failed to obtain trading records from              and the improbability of his consistently
the Depository Trust Corporation that                  strong returns. (Compl. ¶¶ 51–57; Ex. A
could have revealed that Madoff’s opera-               at 74–77, 80–81, 86.) An SEC staff mem-
tions were fraudulent. (Compl. ¶¶ 35, 37.)             ber in the Boston office asked the New
Because the SEC was focused on Avellino                York team reviewing Markopolos’s com-
& Bienes rather than Madoff, the SEC                   plaint if they were interested in reading
staff failed to make a number of other                 the articles. (Compl. ¶ 55.) The New
‘‘common sense’’ inquiries into Madoff’s               York team apparently did not read the

4.     In full, the email stated: ‘‘As we discussed,    nard Madoff, and some information about
     after reviewing the complaint received (via        Madoff and others identified in the complaint,
     the [Boston office] ) from Harry Markopol[o]s      I don’t think we should pursue this matter
     of Rampart Investments about purported per-        further.’’ (Ex. A at 72.)
     formance claims for funds managed by Ber-
                      DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                    1021
                                   Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

articles. (Id.) At the same time, the arti-              Once the investigation commenced, the
cles piqued a Washington supervisor’s in-                team focused its attention on potential
terest. (Compl. ¶ 56.) Although the su-                  front-running 5—with which it was more
pervisor wrote a note on the article stating             familiar—rather than a Ponzi scheme.
that ‘‘[t]his is a great exam[ination] for               (Compl. ¶¶ 65–67.) The team created a
us!,’’ no further actions were taken in the              written plan, but the plan was ‘‘too nar-
Washington office. (Compl. ¶ 56; Ex. A at                rowly focused’’ (Ex. A at 142) and the team
86.)                                                     did not follow through by obtaining rele-
   The first major investigative event came              vant information from third parties.
in May 2003, when a hedge fund manager                   (Compl. ¶ 70.) At one point, the Broker–
provided a complaint to the SEC’s Office                 Dealer team drafted a letter ‘‘to the [Na-
of Compliance Inspections and Examina-                   tional Association of Securities Dealers] to
tions in Washington D.C. (Compl. ¶¶ 58–                  confirm Madoff’s trading activity,’’ but re-
81; Ex. A at 77–145.) The fund manager’s                 frained from sending the letter because,
complaint summarized a number of red                     according to one staff member, ‘‘it would
flags that suggested that Madoff was run-                have been too burdensome and time-con-
ning a Ponzi scheme. (Compl. ¶ 59.) The                  suming for the staff to review the docu-
Investment Management team in Wash-                      ments that the [National Association of
ington, which was more qualified to handle               Securities Dealers] would have supplied in
an investigation into a Ponzi scheme, re-                response.’’ (Compl. ¶¶ 69–98.) Similarly,
ferred the matter to the Washington of-                  ‘‘the team failed to consult Exchange,’’
fice’s Broker–Dealer team.           (Compl.             even though Madoff’s purported options
¶¶ 61–62.) The two teams never conferred                 trades were being processed through it.
on the investigation. (Compl. ¶ 62.) Com-                (Compl. ¶ 74.) Instead of receiving this
pounding this failure to confer, the Bro-                information from third parties that ‘‘would
ker–Dealer team employed a number of                     have assisted in independently verifying
inexperienced staff members at that time.                [Madoff’s] trading activity,’’ the team
(Compl. ¶¶ 63–64.) One team member ex-                   ‘‘rel[ied] solely on verbal answers’’ from
plained that ‘‘[a]t the time TTT we were                 Madoff, which, according to the Office of
expanding rapidly,’’ (Compl. ¶ 63, quoting               the Inspector General’s consultants, ‘‘is not
Ex. A, at 90) and various staff members                  an appropriate method of examination.’’
recalled that they received little-to-no for-            (Compl. ¶¶ 70, 72, quoting Ex. A at 111 n.
mal training. (Compl. ¶¶ 63–64.)                         74, 206 n. 143.) The team supervisor ad-
   Upon receiving the case, the Washington               mitted that it was ‘‘asinine’’ for the team
Broker–Dealer team inexplicably failed to                not to obtain a proper audit trail, which
begin its investigation for nine months and              Plaintiffs characterize as a ‘‘common-sense
failed to log its investigation into the                 procedure’’ in such an investigation.
SEC’s Super Tracking and Reporting Sys-                  (Compl. ¶ 77, quoting Ex. A at 109.)
tem (STARS), a computer database used                      The Washington team stopped its in-
to track examinations. (Compl. ¶¶ 65–67;                 vestigation in April 2004 because SEC su-
Ex. A at 85 n. 54.) This failure to log the              pervisors ‘‘determined that a new investi-
investigation was consistent with the                    gation probing mutual funds was more
SEC’s regular practice at the time. (Id.)                important than following up on Madoff.’’

5.     Front-running is the practice in which a             customers.’’ (Compl. ¶ 66.) See also Black’s
     ‘‘broker execut[es] orders on a security for its       Law Dictionary 739 (9th ed. 2009) (defining
     own account while taking advantage of ad-              term in similar manner).
     vance knowledge of pending orders from its
1022                       707 FEDERAL SUPPLEMENT, 2d SERIES

(Compl. ¶ 78.) 6 At the end of the investi-             commenced, the Broker–Dealer team nev-
gation, the team failed to produce a final              er consulted the Investment Management
report, which according to the Report                   team for guidance and advice. (Compl.
was a ‘‘critical error’’ that later led to un-          ¶¶ 86, 88.) Unlike the team that conduct-
necessary duplication of efforts. (Compl.               ed the Washington investigation, the New
¶ 78, quoting Ex. A at 144.)                            York Broker–Dealer team failed to even
   The second major investigation started               draft a planning memorandum, let alone
in the Northeast Regional (New York) Of-                follow it. (Compl. ¶ 87.) When conducting
fice in April 2004, just as the Washington              the investigation, the team accepted Ma-
investigation was being put on indefinite               doff’s assertions at face value, even though
hold. (Compl. ¶¶ 82–109.) The New York                  they knew or should have known that Ma-
investigation was prompted by the SEC’s                 doff was lying—for example, by saying
discovery of internal emails from a hedge               that he was no longer trading options
fund that had invested with Madoff                      (which was contradicted by readily avail-
through a feeder fund that invested direct-             able records, see Ex. A at 172, 207) and
ly in Madoff’s funds. Upon conducting                   that he was satisfied with foregoing hun-
due diligence, the hedge fund had decided               dreds of millions of dollars in potential
to withdraw its investments from the Ma-                management fees and receiving only bro-
doff feeder fund. (Compl. ¶¶ 82–83.) The                kerage commissions instead.          (Compl.
emails summarized the investor’s concerns               ¶¶ 90–92.) The team focused its investiga-
about Madoff’s activities, and essentially              tion on their own area of expertise (front-
tracked the issues raised in the Markopo-               running and ‘‘cherry-picking’’ 7), while ig-
los reports and the articles that had ap-               noring other potential areas of investiga-
peared in MARHedge and Barron’s.                        tion such as looking for a Ponzi scheme.
(Compl. ¶¶ 83–84.)                                      (Compl. ¶¶ 88–89.) 8 They generally failed
  The New York investigation proceeded                  to corroborate information with third par-
in a similar manner as the Washington                   ties or follow up on red flags such as
investigation. (Compl. ¶ 86.) The case                  Madoff’s auditor’s conflict of interest and
was transferred from an Investment Man-                 obvious inadequacy to audit a complex op-
agement team to an ill-equipped Broker–                 eration like Madoff’s. (Compl. ¶¶ 94–96.)
Dealer team; the Broker–Dealer team was                   In spite of these failings, the New York
not even assembled for seven months, and                investigation came remarkably close to un-
did not begin working for yet another                   covering Madoff’s fraud in June 2005.
three months; and, once the investigation               The team conducted a two-to-three month

6.     One examiner later wrote that ‘‘[i]n early       8.     One of the investigators explained that he
     2004, [the Office of Compliance Inspections             interpreted the initial complaint and referral
     and Examinations] made it a priority to ex-             as suggesting that the investigation ‘‘focus
     amine mutual funds’ undisclosed payments to             exclusively on whether Madoff was using his
     broker-dealers,’’ (Ex. A at 125, quoting July 1,        market making capability to cherry pick
     2009 letter from Lori Richards to Inspector             trades or to front run market making trades
     General David Kotz), and contemporary rec-              for the benefit of his hedge fund clients.’’
     ords confirm this. (Ex. A at 125–26.)                   (Ex. A at 167, paraphrasing testimony of John
                                                             Nee.) Another team members explained that
                                                             ‘‘he focused on abusive trading practices rath-
7.     ‘‘[C]herry-picking is generally a scheme in
                                                             er than the other issues raised in the [referral]
     which trades, once they are determined to be
                                                             e-mail, in part, because order leakage was a
     favorable, are allocated to a favored account           prominent issue at the time of the examina-
     at the expense of other accounts.’’ (Ex. A at           tion.’’ (Ex. A at 168, paraphrasing testimony
     146 n. 92.)                                             of Robert Sollazzo.)
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                1023
                            Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

on-site investigation (see Ex. A at 179) and      they would likely have exposed the fraud.
had a formal interview with Madoff in late        (Ex. A at 206–07.)
May (Ex. A at 193–95). Embarrassingly                Almost immediately after the New York
for the SEC, it was during the May meet-
                                                  team closed its investigation, Harry Mar-
ing that the New York team first
                                                  kopolos provided the Boston office with a
learned—from Madoff himself—about the
                                                  third version of his report on Madoff’s
prior Washington investigation. (Compl.
                                                  alleged fraud, sparking off yet another in-
¶¶ 102–04.) Shortly after the interview,
                                                  vestigation    in   Madoff’s    operations.
the examiners decided that they should
contact Madoff’s clients to corroborate his       (Compl. ¶¶ 110–146.) Markopolos’s report
trading activity. (Ex. A at 219–21.) The          summarized the many warning signs that
investigators successfully obtained useful        Madoff was running a Ponzi scheme, and
information from one relevant third party         referred the SEC to a handful of industry
(Barclays), but they failed to follow up on       insiders who could corroborate Markopo-
it because of a mistaken belief that they         los’s suspicions.     (Compl. ¶¶ 111–16.)
could not obtain audit-trail data from Bar-       Markopolos even recommended that the
clays’s foreign affiliates. (Compl. ¶ 101.)       SEC simply compare Madoff’s purported
Another staffer stated that, to his under-        over-the-counter options trading to the
standing, SEC had a general policy of not         publicly-reported information regarding
contacting third parties to follow up on          exchange-based options trading. (Compl.
leads. (Compl. ¶ 100.) The team also              ¶ 115; see also Ex. C, at 6–7.) Markopolos
planned on requesting written responses           explained that if Madoff were truly trading
to follow-up on their face-to-face meeting        in options, his high-volume trades would
with Madoff, but ultimately failed to do so,      have a visible effect in the market.
even though they had drafted such an              (Compl. ¶ 115.).
inquiry letter. (Compl. ¶ 108; Ex. A at
                                                     The Boston office referred the matter to
203–04.)
                                                  the New York office, and emphasized to
   When the New York investigators final-         the New York staff that the report de-
ly suggested conducting on-site visits of
                                                  served close attention. (Compl. ¶ 117.)
Madoff’s clients, the team supervisor ve-
                                                  The New York office, instead of staffing
toed the suggestion. (Compl. ¶¶ 97–99.)
                                                  the matter with experts in Ponzi schemes,
A Washington investigator had explained
                                                  placed relatively inexperienced staff mem-
that he ‘‘was hesitant to make trouble for
                                                  bers on the case. (Compl. ¶ 118.) The
someone so ‘well connected’ ’’ (Compl. ¶ 97,
                                                  investigators failed to treat the matter as a
quoting Ex. A at 194), and the New York
                                                  Ponzi scheme investigation, and generally
supervisor ‘‘expressed a fear that he (and
the junior staffers) could be sued as indi-       refused to credit Markopolos’s report be-
viduals if their inquiries to third parties       cause of interpersonal tensions (Compl.
somehow damaged Madoff’s business.’’              ¶¶ 119–20, 122) and a misguided belief that
(Compl. ¶ 98.) Within days of the decision        Markopolos was seeking a reward for un-
not to visit Madoff’s clients, the New York       covering the fraud. (Compl. ¶ 121.) The
investigators began drafting their case-          team also relied on the earlier New York
closing memorandum, and the case was              team’s incorrect assertion that it had in
closed by September 2005.            (Compl.      fact investigated the Ponzi-scheme angle,
¶ 107.) Madoff himself believed that had          which deterred the new team from fully
the investigators contacted third-party           following up on Markopolos’s suggestions.
trading partners, account holders, and/or         (Compl. ¶ 123.) Additionally, because the
trade-clearing and -settlement agencies,          new team had failed to file a ‘‘matter un-
1024                  707 FEDERAL SUPPLEMENT, 2d SERIES

der inquiry’’ report for two months, a new      purported trading strategy was based on
tip—this time from an anonymous investor        options trades. (Compl. ¶ 140.) Finally,
who stated that he had invested with Ma-        the investigators made, in the Report’s
doff but withdrew his money when he be-         description, an ‘‘inexplicable decision’’ not
gan suspecting fraud—was improperly ig-         to send a letter to obtain information from
nored. (Compl. ¶¶ 124–25.) Because the          Madoff’s purported European counterpar-
team felt outmatched by the technical as-       ties. (Compl. ¶ 141; Ex. A at 371.) The
pects of Madoff’s operations, they forward-     team closed the investigation in June 2006,
ed certain matters to the SEC’s Office of       having overlooked various clear indications
Economic Analysis, but due to miscommu-         of Madoff’s fraud. (Compl. ¶¶ 144–47.)
nications running in both directions, these     The team also failed to follow up on possi-
efforts failed to produce useful insights.      ble charges related to Madoff’s various
(Compl. ¶¶ 128–30.)                             misrepresentations and non-disclosures
   The unprepared New York investiga-           during the interview and examinations.
tions team eventually proceeded with its        (See Ex. A at 322–23.)
investigation and interviewed Madoff di-           Following that investigation, the SEC
rectly. (Compl. ¶¶ 132–36.) At one point,       received three more tips that might have
the interview produced potentially incrimi-
                                                uncovered the fraud. (Compl. ¶¶ 148–53.)
nating     information—Madoff’s      account
                                                The first was dismissed when Madoff’s
number with the Depository Trust Compa-
                                                attorney told the SEC that the tipster was
ny—but the investigators failed to proper-
                                                not actually a Madoff client (Compl. ¶ 150);
ly follow up on the matter. (Compl.
                                                the second was yet another Markopolos
¶¶ 136–37.) When a junior staffer contact-
                                                warning that was simply ignored because
ed the Depository Trust Company, the
                                                the staff believed that it had fully exam-
staffer failed to recognize the significance
                                                ined the Ponzi-scheme allegations (Compl.
of the fact that Madoff held his assets in
                                                ¶ 151; Ex. A at 354–55); and the third tip
commingled accounts, and the staffer also
                                                (from the former Madoff investor whose
failed to ask about the size of the account.
                                                earlier complaint had arrived just prior to
(Compl. ¶¶ 138–39; Ex. A at 323–24.) Ma-
doff himself has acknowledged that had          the opening of the final investigation) was
the investigators simply asked to see the       likewise ignored because the investigation
size of the account, they immediately           was deemed complete. (Compl. ¶¶ 152–
would have discovered that Madoff’s trad-       53.)
ing positions were nowhere near as large          More than two years after the closure of
as he had claimed. The staff believed,          the final investigation, Madoff’s fraud was
based on Madoff’s representations, that         exposed. (Compl. ¶¶ 154–55.) The fraud
the Depository Trust Company account            could have been discovered at any number
held over $2 billion of securities; in fact,
                                                of points in the previous sixteen years had
the account held only between $10 and $30
                                                the SEC ‘‘performed its everyday, non-
million. (Ex. A at 332–33.)
                                                discretionary functions with the most basic
  The investigators also failed to recognize    level of competence.’’ (Compl. ¶ 158.) At
the significance of the fact that the Nation-   various points, even ‘‘a single action, per-
al Association of Securities Dealers told       formed diligently and ably, or even with
them that Madoff had no option positions        the most minimal competence, would have
on a particular date, even though Madoff’s      exposed the scheme.’’ (Compl. ¶ 159.)
                   DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                     1025
                               Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

II.    PRELIMINARY           PROCEDURAL                 B.    THE DOE DEFENDANTS ARE
       ISSUES                                                 PERMISSIBLE
  A.    THE SECURITIES AND EX-                          As for the Doe Defendants, Gordon
        CHANGE COMMISSION IS NOT                     properly points out that the Government
        A PROPER DEFENDANT                           does not necessarily have standing to ob-
                                                     ject to their presence. For purposes of
  The three Dichter Plaintiffs (that is, the         this motion, then, the Doe Defendants’ lia-
Dichter–Mad investment partnership, Phil-            bility is linked with that of the United
ip Dichter, and Claudia G. Dichter) volun-           States.
tarily dismissed the SEC and the Doe
Defendants on January 11, 2010.                      III. LEGAL STANDARDS
   [3] The SEC brings a separate Motion                 A.    MOTION TO DISMISS FOR
to Dismiss Plaintiff Gordon’s claims                          LACK OF SUBJECT MATTER
against it. [Docket no. 7.] In its one-page                   JURISDICTION
motion, the SEC cites clear controlling                 [4] In order to comply with the notice
authority that bars Gordon’s claims. See,            pleading standards of Fed.R.Civ.P. 8(a), a
e.g., FDIC v. Craft, 157 F.3d 697, 706 (9th          plaintiff’s complaint ‘‘must contain suffi-
Cir.1998) (‘‘The FTCA is the exclusive               cient factual matter, accepted as true, to
remedy for tortious conduct by the United            ‘state a claim to relief that is plausible on
States, and it only allows claims against            its face.’ ’’ Ashcroft v. Iqbal, ––– U.S.
the United States. Although such claims              ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868
can arise from the acts or omissions of              (2009) (quoting Bell Atlantic Corp. v.
United States agencies (28 U.S.C. § 2671),           Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167
an agency itself cannot be sued under the            L.Ed.2d 929 (2007)). ‘‘A claim has facial
                                                     plausibility when the plaintiff pleads factu-
FTCA.’’); see also Standifer v. SEC, 542
                                                     al content that allows the court to draw the
F.Supp.2d 1312, 1317 (N.D.Ga.2008) (‘‘The
                                                     reasonable inference that the defendant is
SEC cannot be sued under the FTCA.’’)
                                                     liable for the misconduct alleged.’’ Id. A
  In Gordon’s Opposition,9 he does not               complaint that offers mere ‘‘labels and con-
even attempt to argue that his claims                clusions’’ or ‘‘a formulaic recitation of the
against the SEC are viable. Accordingly,             elements of a cause of action will not do.’’
the SEC’s Motion is GRANTED. Gor-                    Id.; see also Moss v. U.S. Secret Service,
don’s claims against the SEC are DIS-                572 F.3d 962, 969 (9th Cir.2009) (citing
MISSED.                                              Iqbal, 129 S.Ct. at 1951).10

9. Gordon’s ‘‘Opposition’’ brief is 37–pages            Civ. 12(b)(1) rather than a motion to dismiss
  long, well above the 25–page limit set by this        for failure to state a claim under Fed.R.Civ.P.
  Court. In addition, Gordon did not file his           12(b)(6), motions to dismiss on jurisdictional
  substantive brief with this Court until March         grounds are governed by the standard plead-
  1, which was one week later than the dead-            ing rules of Fed.R.Civ.P. 8(a). See Doe v.
  line set by this Court’s Local Rules. The             Holy See, 557 F.3d 1066, 1074 (9th Cir.2009)
  Court accordingly STRIKES Gordon’s Oppo-              (per curiam) (citing Twombly, 127 S.Ct. at
  sition. However, as the document raises the           1964–65), cert. filed (June 25, 2009). In addi-
  same issues as are raised in Plaintiffs’ joint        tion, it should be noted that Twombly and
  Opposition and Sur–Reply (which the Court             Iqbal, while technically brought under Fed. R.
  has considered despite its procedural irregu-         Civ. 12(b)(6), focused their analysis on the
  larities), the Court has addressed all the is-        notice pleading requirements of Fed.R.Civ.P.
  sues raised in Gordon’s stricken submission.          8(a). Twombly and Iqbal therefore state the
                                                        proper standard for addressing the sufficiency
10. Although the present motion is a motion to          of Plaintiffs’ allegations with respect to the
  dismiss for lack of jurisdiction under Fed. R.        Court’s subject matter jurisdiction.
1026                  707 FEDERAL SUPPLEMENT, 2d SERIES

   Generally, the Court’s analysis is limited     2449, 101 L.Ed.2d 352 (1988) (quoting 28
to the contents of the complaint. See             U.S.C. § 1346(b)). The FTCA provides,
Schneider v. Cal. Dept. Of Corrections, 151       however, that the government shall not be
F.3d 1194, 1197 n. 1 (9th Cir.1998) (cita-        liable for ‘‘[a]ny claim based upon an act or
tions omitted). However, ‘‘[w]hen a plain-        omission of an employee of the Govern-
tiff has attached various exhibits to the         ment TTT based upon the exercise or per-
complaint, those exhibits may be consid-          formance or the failure to exercise or per-
ered in determining whether dismissal [i]s        form a discretionary function or duty on
proper.’’ Parks School of Business, Inc. v.       the part of a federal agency or an employ-
Symington, 51 F.3d 1480, 1484 (9th Cir.           ee of the Government, whether or not the
1995) (citation omitted). Likewise, the           discretion involved be abused.’’ 28 U.S.C.
Court ‘‘may TTT consider certain materi-          § 2680(a).       This statutory provision,
als—documents attached to the complaint,
                                                  known as the ‘‘discretionary function ex-
documents incorporated by reference in
                                                  ception,’’ lies at the heart of the present
the complaint, or matters of judicial no-
                                                  motion. Because the FTCA is jurisdic-
tice—without converting the motion to dis-
                                                  tional, it must be emphasized that the
miss into a motion for summary judg-
                                                  present analysis is focused on jurisdiction-
ment.’’ United States v. Ritchie, 342 F.3d
                                                  al considerations rather than the merits of
903, 907 (9th Cir.2003).
                                                  Plaintiffs’ Complaint.
  When a motion to dismiss is granted,
ordinarily ‘‘any dismissal[,] TTT except one        C.   DISCRETIONARY            FUNCTION
for lack of jurisdiction, improper venue,                EXCEPTION
or failure to join a party under Rule 19[,]
                                                     The discretionary function exception
operates as an adjudication on the merits.’’
                                                  provides the government with immunity
Fed.R.Civ.P. 41(b) (emphasis added).
                                                  from suit for ‘‘[a]ny claim TTT based upon
  B.   FEDERAL TORT CLAIMS ACT                    the exercise or performance of the failure
                                                  to exercise or perform a discretionary
   The Federal Tort Claims Act (‘‘FTCA’’)
                                                  function or duty on the part of a federal
‘‘gives federal courts jurisdiction over
claims against the United States for mon-         agency or employee of the Government,
ey damages ‘for injury or loss of property,       whether or not the discretion involved be
or personal injury or death caused by the         abused.’’ 28 U.S.C. § 2680(a). ‘‘In this
negligent or wrongful act or omission of          way, the discretionary function exception
any employee of the Government while              serves to insulate certain governmental de-
acting within the scope of his office or          cision-making from ‘judicial second guess-
employment, under circumstances where             ing of legislative and administrative deci-
the United States, if a private person,           sions grounded in social, economic, and
would be liable to the claimant in accor-         political policy through the medium of an
dance with the law of the place where the         action in tort.’ ’’ Terbush v. United States,
act or omission occurred.’ ’’ Sheridan v.         516 F.3d 1125, 1129 (9th Cir.2008) (quoting
United States, 487 U.S. 392, 398, 108 S.Ct.       United States v. S.A. Empresa de Viacao

   In the only post-Twombly circuit court to       (5th Cir.2008)). In addition, the Ninth Cir-
 address pleading standards in the FTCA con-       cuit has explicitly applied Twombly when ana-
 text, the Fifth Circuit cited Twombly as the      lyzing a complaint under the discretionary
 operative standard governing a jurisdictional     function exception caselaw, but only had oc-
 dispute like the present one. Castro v. United    casion to do so under the Foreign Sovereign
 States, 560 F.3d 381, 386 (5th Cir.2009) (cit-    Immunities Act, not the FTCA. Doe v. Holy
 ing Lane v. Halliburton, 529 F.3d 548, 557        See, 557 F.3d at 1073–74, 1084–85.
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                  1027
                             Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

Aerea Rio Grandense (Varig Airlines),              by statute, regulation, or agency guide-
467 U.S. 797, 104 S.Ct. 2755, 81 L.Ed.2d           lines, allows a Government agent to exer-
660 (1984)); accord Marbury v. Madison,            cise discretion, it must be presumed that
5 U.S. (1 Cranch) 137, 170, 2 L.Ed. 60             the agent’s acts are grounded in policy
(1803) (‘‘The province of the court is, sole-      when exercising that discretion.’’ Id. In
ly, to decide on the rights of individuals,        contrast, if the applicable statute or regu-
not to inquire how the executive, or execu-        lation does not give the employee discre-
tive officers, perform duties in which they        tion, no presumption attaches, and the
have discretion.’’).                               court must determine whether the deci-
  Whether a given action by a government           sions were ‘‘of the kind’’ that are ‘‘suscepti-
employee is protected by the discretionary         ble to policy analysis.’’ Gaubert, 499 U.S.
function exception involves a two-part in-         at 323, 325, 111 S.Ct. 1267.
quiry.                                                 Where there is no statute, regulation, or
   First, the court must determine whether         policy on point (either conferring discre-
the challenged action involves an ‘‘element        tion or limiting discretion), the relevant
of judgment or choice.’’ United States v.          question is not whether the decision was
Gaubert, 499 U.S. 315, 322, 111 S.Ct. 1267,        the result of an actual policy-based deci-
113 L.Ed.2d 335 (1991). If ‘‘a federal stat-       sion-making process. As the Ninth Circuit
ute, regulation, or policy specifically pre-       has repeatedly explained, ‘‘we do not need
scribes a course of action for the employee        actual evidence that policy-weighing was
to follow,’’ then the employee can be held         undertaken.’’ Terbush, 516 F.3d at 1136 n.
liable for failing to follow the prescribed        5 (citing Gaubert, 499 U.S. at 324–25, 111
directive. Id. (emphasis added).                   S.Ct. 1267). Instead, ‘‘[t]he focus of the
   Second, ‘‘even assuming the challenged          inquiry is TTT on the nature of the actions
conduct involves an element of judgment,           taken and on whether they are susceptible
it remains to be decided whether that              to policy analysis.’’ See Gaubert, 499 U.S.
judgment is of the kind that the discretion-       at 325, 111 S.Ct. 1267 (emphasis added);
ary function exception was designed to             see also GATX/Airlog Co., 286 F.3d at
shield.’’ Id. ‘‘Because the purpose of this        1178 (‘‘[T]he question is not whether policy
exception is to prevent judicial second-           factors necessary for a finding of immunity
guessing of legislative and administrative         were in fact taken into consideration, but
decisions grounded in social, economic, and        merely whether such a decision is suscep-
political policy TTT, the exception protects       tible to policy analysis.’’); Nurse v. United
only governmental actions and decisions            States, 226 F.3d 996, 1001 (9th Cir.2000)
based on considerations of public policy.’’        (‘‘the challenged decision need not actually
Id. at 323, 111 S.Ct. 1267.                        be grounded in policy considerations so
   [5] In assessing the second step, it is         long as it is, by its nature, susceptible to a
important to keep in mind that ‘‘if a regu-        policy analysis.’’); Childers v. United
lation allows the employee discretion, the         States, 40 F.3d 973, 974 n. 1 (9th Cir.1994)
very existence of the regulation creates a         (‘‘The application of the exception does not
strong presumption that a discretionary            depend, however, on whether federal offi-
act authorized by the regulation involves          cials actually took public policy consider-
consideration of the same policies which           ations into account. All that is required is
led to the promulgation of the regula-             that the applicable statute or regulation
tions.’’ Id. at 324, 111 S.Ct. 1267 (empha-        gave the government agent discretion to
sis added). Thus, ‘‘[w]hen established gov-        take policy goals into account.’’); Lesoeur
ernmental policy, as expressed or implied          v. United States, 21 F.3d 965, 969 (9th
1028                  707 FEDERAL SUPPLEMENT, 2d SERIES

Cir.1994) (‘‘[Appellants] argue that the dis-   rejected ‘‘a rigid dichotomy between ‘plan-
cretionary function exception cannot apply      ning’ and ‘operational’ decisions and activi-
in the absence of a ‘conscious decision.’       ties.’’ Terbush, 516 F.3d at 1130 (citing
The statute is not so limitedTTTT The lan-      Gaubert, 499 U.S. at 324, 111 S.Ct. 1267).
guage is directed at the nature of the          The courts have likewise rejected the ar-
conduct, and does not require an analysis       gument that the government is per se im-
of the decision-making process.’’) (quoting     mune when conducting ‘‘uniquely govern-
In re Consol. United States Atmos. Test-        mental functions,’’ as such an analysis
ing Litig., 820 F.2d 982, 988–89 (9th Cir.      would ‘‘push the courts into the ‘non-gov-
1987)).                                         ernmental’-‘governmental’ quagmire that
  The Ninth Circuit has noted that ‘‘the        has long plagued the law of municipal cor-
distinction between protected and unpro-        porations.’’ Indian Towing Co. v. United
tected decisions can be difficult to appre-     States, 350 U.S. 61, 64, 76 S.Ct. 122, 100
hend, but this is the result of the nature of   L.Ed. 48 (1955); see also United States v.
government actions—they fall ‘along a           Olson, 546 U.S. 43, 46, 126 S.Ct. 510, 163
spectrum, ranging from those totally di-        L.Ed.2d 306 (2005) (reaffirming Indian
vorced from the sphere of policy analysis,      Towing ).
such as driving a car, to those fully
grounded in regulatory policy, such as the        D.   PROCEDURAL     CONSIDER-
regulation and oversight of a bank.’ ’’ Sol-           ATIONS RELATING TO THE
dano v. United States, 453 F.3d 1140, 1145             DISCRETIONARY FUNCTION
(9th Cir.2006) (quoting Whisnant v. Unit-              EXCEPTION
ed States, 400 F.3d 1177, 1181 (9th Cir.           [6] In deciding whether to grant De-
2005)). This distinction is drawn in part       fendant’s Motion to Dismiss for lack of
from the Supreme Court’s discussion in          subject matter jurisdiction, the Court
Gaubert, in which the Court explained:          ‘‘must accept as true the factual allegations
  There are obviously discretionary acts        in the complaint.’’ Terbush v. United
  performed by a Government agent that          States, 516 F.3d 1125, 1128 (9th Cir.2008)
  are within the scope of his employment        (citing GATX/Airlog Co. v. United States,
  but not within the discretionary function     286 F.3d 1168, 1173 (9th Cir.2002)). ‘‘The
  exception because these acts cannot be        United States bears the burden of proving
  said to be based on the purposes that         the applicability of the discretionary func-
  the regulatory regime seeks to accom-         tion exception.’’ Id. (citing Prescott v.
  plish. If one of the officials involved in    United States, 973 F.2d 696, 702 (9th Cir.
  this case drove an automobile on a mis-       1992)). The government must prove that
  sion connected with his official duties       each of the allegedly wrongful acts, by
  and negligently collided with another         each allegedly negligent actor, is covered
  car, the exception would not apply. Al-       by the discretionary function exception.
  though driving requires the constant ex-      GATX/Airlog, 286 F.3d at 1174 (‘‘[W]hen
  ercise of discretion, the official’s deci-    determining whether the discretionary
  sions in exercising that discretion can       function exception is applicable, ‘the prop-
  hardly be said to be grounded in regula-      er question to ask is not whether the Gov-
  tory policy.                                  ernment as a whole had discretion at any
Gaubert, 499 U.S. at 325 n. 7, 111 S.Ct.        point, but whether its allegedly negligent
1267.                                           agents did in each instance.’ ’’) (citing In re
  In addition to these general principles, it   Glacier Bay, 71 F.3d 1447, 1451 (9th Cir.
should also be noted that the courts have       1995)) (alterations omitted). In examining
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                 1029
                             Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

each of the government’s particular acts,          sis.’’ Gaubert, 499 U.S. at 323–25, 111
‘‘the question of how the government is            S.Ct. 1267.
alleged to have been negligent is critical.’’
Whisnant v. United States, 400 F.3d 1177,             E.    ILLUSTRATIVE CASELAW
1185 (9th Cir.2005) (emphasis added) (cit-            As explained by a leading treatise,
ing Glacier Bay, 71 F.3d at 1451). The             ‘‘cases under the [Federal Tort Claims]
central question is whether, ‘‘at this stage       Act can be roughly grouped into there
of the case’’—and under the standard of            categories: (1) claims based upon [non-
proof applicable at this stage—‘‘the gov-          regulatory] determinations or decisions or
ernment has [or has] not established that          other acts of choice or judgment of govern-
choices exercised by government officials          ment officials and administrators; (2)
involved policy judgments.’’ Prescott, 973         claims based upon the regulatory activities
F.2d at 703.                                       of regulatory agencies or officials; and (3)
  These considerations can be summarized           claims arising from the design or execution
succinctly by reference to the two-step            of public works and other authorized gov-
analysis set forth in Gaubert, 499 U.S. at         ernmental programs.’’ Lester S. Jayson &
322–25, 111 S.Ct. 1267. The government             Robert C. Longstreth, 2 Handling Federal
can meet its initial burden in one of two          Tort Claims, § 12.05[1] (2009 update).
ways, and the plaintiffs can respond to               ‘‘Whatever else the discretionary func-
each showing in one of two ways.                   tion exception may include, TTT it plainly
   First, the government may show that a           was intended ‘to encompass the discretion-
statute, regulation or policy confers discre-      ary acts of the Government acting in its
tion on the government actor; this gives           role as regulator of the conduct of private
rise to a ‘‘strong presumption’’ that the          individuals.’ ’’ Jayson & Longstreth, Fed-
alleged harmful act was guided by policy           eral Tort Claims, § 12.07 (quoting United
judgment. Id. at 324, 111 S.Ct. 1267.              States v. Varig Airlines, 467 U.S. 797, 813–
Second, the government may show that               14, 104 S.Ct. 2755, 81 L.Ed.2d 660 (1984)).
the actor’s course of action was ‘‘of the          That is not to say that regulatory actions
kind’’ that is ‘‘susceptible to policy analy-      enjoy blanket immunity: the ‘‘uniquely
sis.’’ Id. at 323, 325, 111 S.Ct. 1267. Ei-        government functions’’ approach was re-
ther of these showings will satisfy the gov-       jected by the Supreme Court over half-a-
ernment’s ‘‘burden of proving application          century ago. See Indian Towing, 350 U.S.
of the discretionary function exception.’’         at 64, 76 S.Ct. 122. But at the very least,
Blackburn v. United States, 100 F.3d 1426,         it appears from the caselaw and secondary
1436 (9th Cir.1996).                               authorities that regulatory actions are
  ‘‘[O]nce the Government met its burden,          more likely to be deemed ‘‘discretionary
TTT the party opposing [the application of         functions’’ than non-regulatory actions are.
the discretionary function exception] ha[s]          A leading case involving government
to present sufficient evidence to withstand        regulators is United States v. Gaubert, 499
dismissal’’ for lack of jurisdiction. Id. Un-      U.S. 315, 111 S.Ct. 1267, 113 L.Ed.2d 335
der Gaubert, the plaintiffs may meet their         (1991). In that case, the plaintiff alleged
the burden by showing either (1) that              that the Federal Home Loan Bank Board
there are mandatory rules prescribing the          and the Federal Home Loan Bank Dallas
actor’s course of action, or (2) that the          branch ‘‘had been negligent in carrying out
actor’s course of action was not ‘‘of the          their supervisory activities’’ following their
kind’’ that is ‘‘susceptible to policy analy-      take-over of a failing Texas savings-and-
1030                  707 FEDERAL SUPPLEMENT, 2d SERIES

loan. Id. at 318, 111 S.Ct. 1267. The               Ultimately, the Court rejected the plain-
plaintiff, who was the chairman and largest      tiff’s argument ‘‘that the challenged ac-
shareholder of the thrift, sought to recover     tions fall outside the discretionary function
the lost value of his shares and the value of    exception because they involved the mere
his personal guarantee of the corporation’s      application of technical skills and business
debts, amounting to $100 million in total.       expertise.’’ Id. at 331, 111 S.Ct. 1267.
Id. at 319–20, 111 S.Ct. 1267. In particu-       The Court explained that the day-to-day
lar, the plaintiff alleged that the Federal      operations of a bank require more than
Home Loan Bank Dallas branch had pres-           mere ‘‘mathematical calculations’’ that ‘‘in-
sured the failed thrift’s sitting officers and   volve no choice or judgment in carrying
directors to resign and then recommended
                                                 out the calculations.’’ Id. Importantly, the
their replacements. Id. at 319, 111 S.Ct.
                                                 Court also noted that ‘‘neither party has
1267. The Dallas branch then became sig-
                                                 identified formal regulations governing
nificantly involved in the thrift’s day-to-
                                                 the conduct in question.’’ Id. at 329, 111
day operations. Id. at 319–20, 111 S.Ct.
                                                 S.Ct. 1267 (emphasis added). The Court
1267. The plaintiff’s allegations centered
on the ‘‘alleged negligence of federal offi-     identified broad statutory grants of discre-
cials in selecting the new officers and di-      tion to the Federal Home Loan Bank to
rectors and in participating in the day-to-      engage in formal supervisory actions, and
day management of’’ the thrift. Id. at 320,      found no prohibition on the agency’s use of
111 S.Ct. 1267.                                  less formal supervisory tools. Id. The
                                                 Court also identified a formal policy state-
   The Supreme Court, after restating the
basic two-part test for the discretionary        ment from the government in which the
function exception, held that ‘‘[d]ay-to-day     agency explained its policy ‘‘that supervi-
management of banking affairs, like the          sory actions must be tailored to each case,’’
management of other businesses, regularly        ranging from ‘‘informal supervisory guid-
requires judgment as to which of a range         ance and oversight,’’ to implementation of
of permissible courses is the wisest.’’ Id.      a ‘‘supervisory agreement,’’ and, in the
at 325, 111 S.Ct. 1267. In this regard, the      most problematic cases, an immediate
Court rejected the proposed distinction be-      ‘‘cease-and-desist order.’’ Id. at 330–31, 111
tween ‘‘policymaking’’ and ‘‘operational’’       S.Ct. 1267 (quoting FHLBB Resolution
functions. Id. In order to determine             No. 82–381 (May 26, 1982)).
whether the alleged acts were discretion-           Notably, the Court approvingly quoted
ary or not, the Court reviewed the com-          from the lower court’s explanation that the
plaint’s allegations of the government’s in-     agency undertook its day-to-day role in an
volvement in the thrift’s day-to-day affairs.    effort to further ‘‘social, economic, or polit-
These allegations focused on the govern-         ical policies’’:
ment’s involvement in day-to-day manage-
                                                    First, they sought to protect the solven-
ment decisions, hiring and salary decisions,
                                                    cy of the savings and loan industry at
operational matters, financial matters, as-
                                                    large, and maintain the public’s confi-
set management, and legal affairs. Id. at
327–28, 111 S.Ct. 1267. The government              dence in that industry. Second, they
became involved in strategic planning, for          sought to preserve the assets of [the
example by recommending that the thrift             thrift] for the benefit of depositors and
change from being state-chartered to be-            shareholders, of which [plaintiff] was
coming federally-chartered, and by giving           one.
advice regarding a potential bankruptcy          Id. at 332, 111 S.Ct. 1267 (quoting 885 F.2d
filing. Id. at 328, 111 S.Ct. 1267.              1284, 1290 (5th Cir.1989)). In this regard,
                   DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                      1031
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the Supreme Court highlighted the fact                  In Glacier Bay, the Ninth Circuit held
that ‘‘[t]here are no allegations that the           that hydrographers for the National
regulators gave anything other than the              Oceanic and Atmospheric Administration
kind of advice that was within the purview           could be sued for their non-discretionary
of the policies behind the statutes.’’ Id. at        actions made while preparing nautical
333, 111 S.Ct. 1267. For example, the                charts. 71 F.3d at 1452–54. The govern-
plaintiff admitted ‘‘the regulators replaced         ment had argued that its supervising hy-
[the thrift’s] management in order to pro-           drographers retained discretion when re-
tect the [federal savings and loan insur-            viewing and approving the charts, and that
ance corporation’s] insurance fund.’’ Id. at         this final level of discretion immunized all
332, 111 S.Ct. 1267.                                 of the allegedly negligent conduct during
   ‘‘In the end,’’ the Court concluded, ‘‘Gau-       the oceanic surveys and drafting of the
bert’s amended complaint alleges nothing             charts. Id. at 1451. The court explained
more than negligence on the part of the              that the final review was indeed discretion-
                                                     ary, because the supervisors had to decide
regulators.’’ Id. at 334, 111 S.Ct. 1267.
                                                     whether the survey was sufficiently accu-
The Court explained that even day-to-day
                                                     rate and whether the social, economic, and
regulatory decisions were protected by the
                                                     political benefits of conducting further sur-
discretionary function exception: ‘‘If the
                                                     veys outweighed the costs of doing so. Id.
routine or frequent nature of a decision
                                                     at 1454. However, the court also deter-
were sufficient to remove an otherwise
                                                     mined that the discretionary final review
discretionary act from the scope of the
                                                     could not insulate the surveying staff’s
exception, then countless policy-based de-
                                                     negligent acts that violated the surveyors’
cisions by regulators exercising day-to-day
                                                     mandatory duties. Id. at 1451. Instead,
supervisory authority would be actionable.
                                                     the court explained that the relevant ques-
This is not the rule of our cases.’’ Id.
                                                     tion is whether ‘‘each person taking an
  Gaubert, then, is a guidepost for two              allegedly negligent action had discretion,’’
reasons: one, because it is the most recent          not whether ‘‘the Government as a whole
Supreme Court authority in this area, and            had discretion at any point.’’ Id.11
two, because it involved a roughly analo-
                                                        The court then engaged in a close analy-
gous factual scenario—the conduct of fi-
                                                     sis of the surveyors’ actions to determine if
nancial regulators in their day-to-day reg-
                                                     they violated any non-discretionary duties.
ulatory activities. (Additional cases that
                                                     Id. at 1452–54. To find these mandatory
specifically discuss the SEC are discussed
                                                     duties, the court looked to ‘‘the Depart-
infra.) It is worth noting, then, that Gau-          ment of Commerce’s ‘Hydrographic Manu-
bert’s reasoning weighs heavily in favor of          al’ and [ ] the 1964 and 1975 Project In-
Defendant’s position.                                structions specifically drafted for the two
   A pair of other cases are worth discuss-          surveys [at issue].’ ’’ Id. at 1452. The
ing at length. These cases set forth prin-           court noted that, contrary to the govern-
ciples that have guided the Ninth Circuit’s          ment’s assertion, such internal guidelines
analysis where cases involve a combination           were in fact ‘‘binding for purposes of the
of discretionary and non-discretionary               discretionary function inquiry.’’ Id. at
duties.                                              1452 n. 1. The court found that the Hydro-

11. The court also noted, however, that the             negligent acts proximately caused the plain-
  presence of a discretionary final review might        tiff’s harm. Id. (citing Routh v. United States,
  affect the merits of the claim because the            941 F.2d 853, 855 (9th Cir.1991).)
  plaintiff would be unable to show that the
1032                 707 FEDERAL SUPPLEMENT, 2d SERIES

graphic Manual and Project Instructions        for the auditors’ professional negligence
established a number of mandatory proce-       rather than the prosecutors’ clearly discre-
dures for conducting oceanic surveys. Id.      tionary decision to prosecute, was improp-
at 1451–52. Much of the ‘‘discretion’’         erly attempting to plead around the discre-
available to the surveyors involved purely     tionary function exception. Id. at 1283–84.
scientific judgments, not judgments based      The court refused to ‘‘accord amaranthine
on ‘‘economic, political and social policy’’   obeisance to a plaintiff’s designation of tar-
that would be shielded from scrutiny under     geted employees’’ when, in sum and sub-
the FTCA. Id. at 1453. Notably, the court      stance, the complaint was alleging prosecu-
contrasted the 1964 survey instructions        torial misconduct. Id. at 1283.
with the 1975 survey instructions and
found that the former contained mandato-          The General Dynamics court distin-
ry language—‘‘[a]ll indications of shoals      guished Glacier Bay by emphasizing that
shall be thoroughly investigated’’—where-      the central focus is the nature of the
as the latter did not contain such language,   allegedly harmful act. Id. at 1284–85.
and instead stated that surveys ‘‘should be    Obviously, ‘‘many actions within an agency
guided by [27 different] considerations TTT    pass through the hands of somebody with
and [the surveyor’s] past experience in        some discretion at some stage’’; the mere
similar areas.’’ Id. at 1453 (quoting Hy-      presence of discretion at one stage in the
drographic Manual and 1964 Survey In-          process does not automatically immunize
structions). Accordingly, the earlier 1964     the non-discretionary negligent conduct
survey was deemed non-discretionary,           that precedes. Id. at 1284. Accordingly,
whereas the 1975 survey—requiring sur-         when an oceanic chart is negligently inves-
veyors to carefully balance 27 different       tigated and drafted in violation of manda-
considerations—was discretionary. Id.          tory rules, the presence of a discretionary
   Three years later, the Ninth Circuit        final review does not immunize the negli-
clarified its holding in Glacier Bay, ex-      gent investigations and drafting. Id. In
plaining that in some instances, an under-     this regard, the court noted that Glacier
lying violation of a mandatory duty will be    Bay involved a ‘‘tight coupling between
immune from suit if another government         hydrographers, reviewers, charts, and re-
agent’s own exercise of discretion inter-      sults.’’ Id. at 1284.
vened prior to the plaintiff’s injury. The
                                                   But when an actor with ‘‘broad based
court explained that the discretionary
                                               discretion’’ such as the prosecutor in Gen-
function exception applies whenever a ‘‘ro-
                                               eral Dynamics undertakes ‘‘a totally sepa-
bust exercise of discretion intervenes be-
                                               rate exercise of discretion’’ that is indepen-
tween an alleged government wrongdoer
and the harm suffered by a plaintiff.’’        dent of the underlying negligent act, all of
General Dynamics Corp. v. United States,       the government’s acts are immunized—
139 F.3d 1280, 1285 (9th Cir.1998). The        including the earlier actions that may have
court proceeded to distinguish the case at     violated mandatory duties. Id. at 1285.
hand from Glacier Bay. The plaintiff in        The court explained that prosecutors have
General Dynamics alleged that govern-          ‘‘access to a great deal of information be-
ment auditors had negligently performed        yond that submitted by any one agency’’
an audit that led prosecutors to indict the    such as the negligent auditors. Because
plaintiff for defrauding the United States,    ‘‘the prosecutors could have had even more
a charge which the plaintiff successfully      information if they had chosen to pursue
defended. Id. at 1282. The court held          it,’’ the prosecutor’s decision to prosecute
that the plaintiff, by attempting to recover   the plaintiff was a sufficiently ‘‘robust ex-
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                 1033
                             Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

ercise of discretion’’ to trigger application      banning the importation of Chilean fruit
of the discretionary function exception.           based on a negligently conducted laborato-
Id. As a result, all of government’s negli-        ry test concluding that the fruit contained
gent acts were immunized—even the ones             cyanide. 46 F.3d at 282–83. Recognizing
that violated non-discretionary auditing           that the Commissioner’s decision to ban
principles.                                        the fruit was a discretionary function, the
   Although they are factually distinguish-        fruit growers alleged injury ‘‘based upon’’
able from the present case, two out-of-            the negligence of the laboratory techni-
circuit decisions are also worth noting in         cians, who were bound by the agency’s
order to show that the reasoning in Gen-           Regulatory Procedures Manual. Id. at
eral Dynamics has been adopted in other            286. The Third Circuit rejected this char-
circuits.12 In Sloan v. United States              acterization of the claim, reasoning that
Dept. of Housing and Urban Develop-                ‘‘[t]he reality here is that the injuries of
ment, 236 F.3d 756 (D.C.Cir.2001), a con-          which the plaintiffs complain were caused
tractor sued the Department of Housing             by the Commissioner’s decisions and, as a
and Urban Development under the FTCA               matter of law, their claims are therefore
for negligently conducting an audit of his         ‘based upon’ those decisions.’’ Id. The
construction site and for suspending him           court concluded that ‘‘a claim must be
from government contract work based on             ‘based upon’ the exercise of a discretionary
the erroneous audit. 236 F.3d at 758–59.           function whenever the immediate cause of
On appeal from the district court’s dis-
                                                   the plaintiff’s injury is a decision which is
missal of the complaint for lack of sub-
                                                   susceptible of policy analysis and which is
ject matter jurisdiction, the contractor
                                                   made by an official legally authorized to
contended that while the suspension of
                                                   make it.’’ Id. at 282.
his government contract work was a dis-
cretionary function, the audit was not a              F.    UNDERLYING POLICIES OF
discretionary function because it was gov-
                                                            THE DISCRETIONARY FUNC-
erned by standards of professional prac-
                                                            TION EXCEPTION
tice. Id. at 761. The court rejected that
contention, holding that there was ‘‘no               Before analyzing the parties’ specific ar-
meaningful way in which the allegedly              guments, it is also helpful to explain the
negligent investigatory acts could be con-         policies that animate the discretionary
sidered apart from the totality of the             function exception. As summarized suc-
prosecution.’’ Id. (quoting Gray v. Bell,          cinctly in Gray v. Bell, 712 F.2d 490
712 F.2d 490, 516 (D.C.Cir.1983)) (inter-          (D.C.Cir.1983), cert. denied, 465 U.S. 1100,
nal quotation marks omitted). The court            104 S.Ct. 1593, 80 L.Ed.2d 125 (1984):
noted that ‘‘[t]he complaint does not al-             The modern policy basis justifying sov-
lege any damages arising from the inves-              ereign immunity from suit has three
tigation itself, but only harm caused by              principal themes. First, and most im-
the suspension to which it assertedly                 portant, under traditional principles of
led.’’ Id. at 762.                                    separation of powers, courts should re-
  In Fisher Bros. Sales, Inc. v. United               frain from reviewing or judging the pro-
States, 46 F.3d 279 (3d Cir.1995) (en banc),          priety of the policymaking acts of coor-
Chilean fruit growers sued the Food and               dinate branches. Second, consistent
Drug Administration under the FTCA for                with the related doctrine of official im-

12. The summaries of these cases are drawn            Drug Admin., 402    F.3d   1249,   1254–55
  from Jerome Stevens Pharma., Inc. v. Food &         (D.C.Cir.2005).
1034                  707 FEDERAL SUPPLEMENT, 2d SERIES

  munity, courts should not subject the         IV. ANALYSIS AND DISCUSSION
  sovereign to liability where doing so           A. RELEVANT              LEGISLATIVE
  would inhibit vigorous decisionmaking              HISTORY
  by government policymakers. Third,
                                                   It is often remarked that Congressional
  in the interest of preserving public rev-
                                                intent is particularly relevant to the Fed-
  enues and property, courts should be
                                                eral Tort Claims Act because ‘‘no action
  wary of creating huge and unpredictable
                                                lies against the United States unless the
  governmental liabilities by exposing the
                                                legislature has authorized it.’’ E.g., Dale-
  sovereign to damage claims for broad
                                                hite v. United States, 346 U.S. 15, 30, 73
  policy decisions that necessarily impact
                                                S.Ct. 956, 97 L.Ed. 1427 (1953) (collecting
  large numbers of people. Framed in
                                                cases). As a result, ‘‘the basic inquiry
  different fashions, each of these themes
                                                concerning the application of the discre-
  appears again and again, alone or in
                                                tionary function exception is whether the
  combination, as a modern justification
                                                challenged acts of a Government employ-
  for retaining a form of immunity, under
                                                ee—whatever his or her rank—are of the
  the general rationale that courts should
                                                nature and quality that Congress intend-
  not ‘‘interfere’’ with government opera-
                                                ed to shield from tort liability.’’ United
  tions and policymaking.
                                                States v. S.A. Empresa de Viacao Aerea
Id. at 511 (emphasis added, internal foot-      Rio Grandense (Varig Airlines), 467 U.S.
notes omitted).                                 797, 813–814, 104 S.Ct. 2755, 81 L.Ed.2d
  Notably absent from this rationale is         660 (1984) (emphasis added).
any mention of ‘‘fairness.’’ As explained in      It is notable, then, that Congress, when
National Un. Fire Ins. v. United States,        drafting and debating the Federal Tort
115 F.3d 1415 (9th Cir.1997):                   Claims Act, repeatedly and explicitly sug-
  Private actors generally must pay for         gested that the discretionary function ex-
  the harm they do by carelessness. The         ception was intended to apply to the SEC.
  government’s power to tax enables it,         See Dalehite v. United States, 346 U.S. 15,
  better than any private actor, to perform     29 & n. 21, 73 S.Ct. 956, 97 L.Ed. 1427
  its conduct with reasonable care for the      (1953) (noting that this particular ‘‘para-
  safety of persons and property, and to        graph [ ] appears time and again’’ in the
  spread the cost over all the beneficiaries    legislative history). Congress explained
  if its conduct negligently causes harm.       that the discretionary function exception
  Fairness might seem to suggest that the       was:
  government should be liable more                designed to preclude application of the
  broadly than private actors. But at its         bill to a claim against a regulatory agen-
  root, the discretionary function excep-         cy, such as the Federal Trade Commis-
  tion is about power, not fairness.              sion or the Securities and Exchange
                                                  Commission, based upon an alleged
Id. at 1422.                                      abuse of discretionary authority by an
   As a result of these underlying policies       officer or employee, whether or not neg-
and principles, Plaintiffs are misguided          ligence is alleged to have been involved.
when they argue that ‘‘there is no over-          To take another example, claims based
sight at all available to the taxpaying citi-     upon an allegedly negligent exercise by
zens, as well as the nation, to insure that       the Treasury Department of the black-
the SEC does its job.’’ (Opp. at 15.) This        listing or freezing powers are also in-
broad policy argument is unavailing.              tended to be excepted. The bill is not
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                1035
                            Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

  intended to authorize a suit for damages               1.   SEC’s Investigative Powers
  to test the validity of or provide a reme-        Section 21 of the Securities and Ex-
  dy on account of such discretionary acts        change Act of 1934, codified at 15 U.S.C.
  even though negligently performed and           § 78u, establishes the SEC’s investigatory
  involving an abuse of discretion.               powers. The statute explicitly provides
Dalehite, 346 U.S. at 29 n. 21, 73 S.Ct. 956      discretion to the SEC:
(quoting H.R.Rep. No. 2245, 77th Cong.,             The Commission may, in its discretion,
2d Sess., p. 10; S.Rep.No. 1196, 77th               make such investigations as it deems
Cong., 2d Sess., p. 7; H.R.Rep. No. 1287,           necessary to determine whether any
79th Cong., 1st Sess., pp. 5–6; Hearings
                                                    person has violated, is violating, or is
before H.Com. on Judiciary on H.R. 5373
                                                    about to violate any provision of this
and H.R. 6463, 77th Cong., 2d Sess., p. 33);
                                                    chapter, [or] the rules or regulations
see also Defs.’ Mot. at 10 & n. 29 (quoting
                                                    thereunder, TTT and may require or
House Rep. 79–1287, at 5–6).
                                                    permit any person to file with it a state-
  B.   THE GOVERNMENT HAS SAT-                      ment in writing, under oath or otherwise
       ISFIED ITS THRESHOLD BUR-                    as the Commission shall determine, as to
       DEN BY IDENTIFYING STAT-                     all the facts and circumstances concern-
       UTES, REGULATIONS, AND                       ing the matter to be investigated. The
       CASES DISCUSSING THE SEC’S                   Commission is authorized in its discre-
       GENERAL     POWERS    AND                    tion, TTT to investigate any facts, condi-
       DUTIES                                       tions, practices, or matters which it may
   [7] In its Motion, the Government sets           deem necessary or proper to aid in the
forth a number of general, broad princi-            enforcement of such provisionsTTTT
ples governing the SEC’s duties and func-         15 U.S.C. § 78u(a)(1) (emphasis added).
tions. These legal assertions establish
                                                      Little discussion is necessary. The stat-
that the alleged wrongs were done in the
                                                  ute repeatedly uses permissive language
course of the SEC’s exercise of its discre-
tion, both in terms of conducting its inves-      rather than mandatory language. The
tigations and deciding whether or not to          SEC has discretion to decide both the
bring enforcement proceedings. These              timing of when it ‘‘make[s] such investiga-
basic conclusions are supported by stat-          tions,’’ and the manner and scope of how
utes, regulations, and caselaw. Defendant         to ‘‘investigate any facts, conditions, prac-
has therefore satisfied its threshold bur-        tices, or matters,’’ whether through ‘‘a
den under Gaubert of establishing that the        statement in writing, under oath or other-
relevant statutes and regulations ‘‘allow[ ]      wise.’’ Id. (emphasis added). All of these
the employee[s] discretion.’’ Gaubert, 499        decisions are framed in permissive lan-
U.S. at 323, 111 S.Ct. 1267. Accordingly,         guage (‘‘[t]he Commission may TTT’’) and
there is ‘‘a strong presumption’’ that the        the SEC is permitted to proceed ‘‘as it
alleged acts were ‘‘based on considerations       deems necessary.’’ Id. In other words, the
of public policy,’’ and Plaintiffs bear the       statute is discretionary—the SEC retains
burden of rebutting this presumption. Id.         discretion over when and how to conduct
  This section discusses the Government’s         its investigations. This leads to a strong
threshold showing that its actions were           presumption that the SEC’s actions were
discretionary and are presumed to be sus-         discretionary. Gaubert, 499 U.S. at 324,
ceptible to policy analysis. The following        111 S.Ct. 1267; see also Vickers v. United
section discusses Plaintiffs’ attempt to re-      States, 228 F.3d 944, 951 (9th Cir.2000)
but this strong presumption.                      (‘‘[T]he discretionary function exception
1036                  707 FEDERAL SUPPLEMENT, 2d SERIES

protects agency decisions concerning the          the carrying out of investigations and
scope and manner in which it conducts an          the turning over of evidence to the At-
investigation so long as the agency does          torney General for presentation to a
not violate a mandatory directive.’’).            grand jury come under the authorized
   The SEC’s own regulations are similarly        duties of the Commission. And likewise,
discretionary. As explained in the SEC’s          plaintiff has not met, in these allega-
formal policies regarding Enforcement Ac-         tions, the task of showing acts which fall
tivities, as summarized in 17 C.F.R.              outside of the [SEC’s] immunity.
§ 202.5:                                        Id. at 43–44 (internal footnote omitted)
   Where, from complaints received from         (emphasis added) (citing 15 U.S.C.
   members of the public, communications        §§ 77h(e), 77s(c), 77t(b)).
   from Federal or State agencies, exami-          Numerous subsequent courts have held
   nation of filings made with the Commis-      that the SEC is immune from liability for
   sion, or otherwise, it appears that there    its investigative actions. In Schmidt v.
   may be violation of the acts adminis-        United States, 198 F.2d 32 (7th Cir.1952),
   tered by the Commission or the rules or      the court applied the discretionary func-
   regulations thereunder, a preliminary        tion exception to bar a claim that the SEC
   investigation is generally made. In          was investigating a corporation and publi-
   such preliminary investigation no pro-       cizing its investigation for the improper
   cess is issued or testimony compelled.       purpose of destroying the company. Id. at
   The Commission may, in its discretion,       33, 36. The court explained that the
   make such formal investigations and au-      SEC’s decision to institute an investigation
   thorize the use of process as it deems       and conduct it in a particular manner ‘‘was
   necessary to determine whether any           TTT clearly within the scope of its discre-
   person has violated, is violating, or is     tionary authority’’ under the 1934 Ex-
   about to violate any provision of the        change Act. Id. at 36. Nothing more was
   federal securities laws or the rules of a    said, and nothing more needed to be said.
   self-regulatory organization of which the    The point was—and remains to this day—
   person is a member or participantTTTT        ‘‘perfectly clear [ ] under the terms of the
17 C.F.R. § 202.5(a) (emphasis added).          applicable statutes.’’ Id.
This regulation does not require the SEC
                                                  The same point has been stated in sub-
to conduct its investigations in any particu-
                                                sequent cases including Sprecher v. Von
lar manner; rather, the agency retains
                                                Stein, 772 F.2d 16, 18 (2d Cir.1985), and
broad discretion to decide how to conduct
                                                other cases discussed infra, subsection 3.
its investigations.
                                                    2.   SEC’s Enforcement Powers
   In light of this statutory and regulatory
language, the courts have unanimously re-          The SEC likewise has discretion regard-
jected challenges to the SEC’s use of its       ing the use of its enforcement powers.
investigatory powers. In a pre-FTCA             Under 15 U.S.C. § 78u(d)(1), the SEC has
case, Justice Vinson, then a member of the      discretion over decisions to seek an injunc-
District of Columbia Court of Appeals,          tion against ongoing violations of the Ex-
wrote an opinion that, inter alia, granted      change Act:
official immunity to members of the SEC            Whenever it shall appear to the Com-
for their investigatory activities. Jones v.       mission that any person is engaged or is
Kennedy, 121 F.2d 40, 43–44 (D.C.Cir.              about to engage in acts or practices
1941). In a terse discussion, the court            constituting a violation of any provision
explained:                                         of this chapter [or] the rules or regula-
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                 1037
                             Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

  tions thereunder, TTT it may in its dis-            The same conclusion was reached in
  cretion bring an action in the proper            S.E.C. v. Better Life Club of America, Inc.,
  district court of the United States TTT to       995 F.Supp. 167, 180 (D.D.C.1998), aff’d,
  enjoin such acts or practicesTTTT                203 F.3d 54 (D.C.Cir.1999), cert. denied
15 U.S.C. § 78u(d)(1) (emphasis added).            sub nom. Taylor v. S.E.C., 528 U.S. 867,
    The SEC retains similar discretion re-         120 S.Ct. 165, 145 L.Ed.2d 140 (1999). In
garding whether to seek monetary relief or         that case, a defendant in an SEC enforce-
other injunctive relief. See § 78u(d)(3)           ment action brought counterclaims for tor-
(‘‘the Commission may bring an action in a         tious interference with contract and inten-
United States district court to seek TTT a         tional infliction of emotional distress on
civil penalty to be paid by the person who         account of its enforcement actions. The
committed such violation.’’) (emphasis add-        court dismissed these counterclaims under
ed); § 78u(d)(5) (‘‘the Commission may             the discretionary function exception be-
seek TTT any equitable relief that may be          cause ‘‘[i]nvestigation and prosecution un-
appropriate or necessary for the benefit           der § 21 of the Securities Acts is discre-
of investors.’’) (emphasis added).                 tionary; therefore the United States is
                                                   immune to these claims.’’ Id. at 180 (cit-
  The regulations are similarly discretion-
ary. Again under 17 C.F.R. § 202.5:                ing Board of Trade of City of Chicago v.
                                                   SEC, 883 F.2d 525, 531 (7th Cir.1989)).
  After investigation or otherwise the
  Commission may in its discretion take              3. The Unanimous Precedent is Sup-
  one or more of the following actions:                ported by the Justifications of the
  Institution of administrative proceedings            Discretionary Function Exception
  looking to the imposition of remedial               The Better Life Club court relied on an
  sanctions, initiation of injunctive pro-         Administrative Procedures Act case decid-
  ceedings in the courts, and, in the case         ed by the Seventh Circuit, Board of Trade
  of a willful violation, reference of the         v. SEC, 883 F.2d 525, 531 (7th Cir.1989).
  matter to the Department of Justice for          In Board of Trade, the court refused to
  criminal prosecution. The Commission             exercise jurisdiction over two futures ex-
  may also, on some occasions, refer the           changes’ claims that SEC had abused its
  matter to, or grant requests for access          discretion by issuing a no-action order and
  to its files made by, domestic and for-          refraining from prosecuting a competing
  eign governmental authorities or foreign         non-exchange ‘‘system’’ that acted as a
  securities authorities, self-regulatory or-      clearing agency for options trades. The
  ganizations such as stock exchanges or           court explained that the ‘‘[r]efusal to pros-
  the National Association of Securities           ecute is a classic illustration of a decision
  Dealers, Inc., and other persons or enti-        committed to agency discretion,’’ and un-
  ties.                                            der the Securities Exchange Act, ‘‘[i]nves-
17 C.F.R. § 202.5 (emphasis added).                tigation and prosecution under § 21 are
   Again, the courts are unanimous in hold-        discretionary, not mandatory.’’ 883 F.2d
ing that these statutory powers are discre-        at 530–31. Judge Easterbrook explained
tionary. In SEC v. Research Automation             at length the reasons why these decisions
Corp., 521 F.2d 585, 590 (2d Cir.1975), the        are discretionary and involve policy judg-
court summarily dismissed a defendant’s            ment:
FTCA-based counterclaim because the                     Doing nothing may be the most con-
SEC had discretion ‘‘to institute and main-           structive use of the Commission’s re-
tain the present [enforcement] action.’’              sources. Congress gives the SEC a
1038                 707 FEDERAL SUPPLEMENT, 2d SERIES

 budget, setting a cap on its personnel.         location is not a task governed by ‘‘law’’.
 With limited numbers of staff-years, the        It is governed by budgets and opportu-
 Commission must enforce several com-            nities. Agencies ‘‘take Care that the
 plex statutes. To do this intelligently         Laws be faithfully executed’’ (Art. II,
 the Commissioners must assign priori-           § 3) by doing the best they can with the
 ties. Prosecuting the System means              resources      Congress     allows     them.
 less time for something else—investigat-        Judges could make allocative decisions
 ing claims of fraud in issuing new stock        only by taking over the job of planning
 or conducting a takeover contest, resolv-       the agency’s entire agenda, something
 ing disputes under the Investment Com-          neither authorized by statute nor part of
 pany Act, and so on. Agencies may find          their constitutional role.
 it worthwhile to give short shrift to a       Id. at 531 (internal citations omitted).
 particular claim if the aggrieved party
                                                 Thus, even if the plain language of the
 can file its own suit (as the [plaintiff]
                                               Securities Exchange Act were insufficient
 futures markets may), for turning the
                                               to bar Plaintiffs’ claims, Judge Easter-
 subject over to private litigation frees up
                                               brook’s policy analysis explains the various
 time without necessarily diminishing the
                                               reasons that the discretionary function ex-
 enforcement of the statute. Yet even
                                               ception applies to the SEC’s actions in the
 when the aggrieved party cannot vindi-
                                               present case. Little more needs to be
 cate its own rights, as with the National
                                               said, except that numerous other court
 Labor Relations Act—indeed, even when
                                               decisions support this conclusion.
 the person complaining about failure to
 prosecute is a defendant whose business          A large number of courts have held that
 is going down the tubes—decisions             SEC decisions are unreviewable under the
 about the best use of the staff’s time are    FTCA and/or the Administrative Proce-
 for the prosecutor’s judgment.                dures Act. See, e.g., Block v. SEC, 50 F.3d
    Courts cannot intelligently supervise      1078, 1084 (D.C.Cir.1995) (rejecting an Ad-
 the Commission’s allocation of its staff’s    ministrative Procedures Act action seeking
 time, because although judges see clear-      to compel SEC action, because ‘‘[s]o far, it
 ly the claim the Commission has de-           appears, the Commission has found [its
 clined to redress, they do not see at all     chosen means] sufficient to induce compli-
 the tasks the staff may accomplish with       ance with the law. That the petitioners
 the time released. Agencies must com-         prefer a different means of enforcement is
 pare the value of pursuing one case           irrelevantTTTT [T]he agency alone, and nei-
 against the value of pursuing another;        ther a private party nor a court, is charged
 declining a particular case hardly means      with the allocation of enforcement re-
 that the SEC’s lawyers and economists         sources.’’); Sprecher v. Von Stein, 772
 will go twiddle their thumbs; case-ver-       F.2d 16, 18 (2d Cir.1985) (claims arising
 sus-case is the daily tradeoff. Judges        out of agency’s investigative operations are
 compare the case at hand against a rule       barred by FTCA immunity); Sprecher v.
 of law or an abstract standard of dili-       Graber, 716 F.2d 968, 975 (2d Cir.1983)
 gence and do not see the opportunity          (claims arising out of agency’s investiga-
 costs of reallocations within the agency.     tive operations are barred by common law
 That fundamental difference in the per-       immunity); Treats Intern. Ents., Inc. v.
 spectives of the two bodies is why agen-      S.E.C., 828 F.Supp. 16, 18–19 (S.D.N.Y.
 cies (and other prosecutors) rather than      1993) (SEC’s investigative decisions are
 courts must make the decisions on pur-        unreviewable under Administrative Proce-
 suing or dropping claims. Resource al-        dures Act); Standifer v. SEC, 542
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                  1039
                             Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

F.Supp.2d 1312, 1318 (N.D.Ga.2008) (dis-           function exception protects agency deci-
missing FTCA claims against SEC for nu-            sions concerning the scope and manner in
merous reasons, including the fact that            which it conducts an investigation so long
‘‘[t]he SEC is granted broad discretion by         as the agency does not violate a mandatory
Congress to investigate possible violations        directive.’’); Gen. Dynamics Corp. v. Unit-
of the securities laws and to determine            ed States, 139 F.3d 1280, 1283–1284 (9th
whether to bring civil or criminal actions         Cir.1998) (government was immune under
to remedy those violations.’’); Leytman v.         the discretionary function exception where
New York Stock Exchange, No. 95 CV 902,            its auditors’ allegedly negligent investiga-
1995 WL 761843, at *3 (E.D.N.Y. Dec. 6,            tions provided the factual basis for the
1995) (‘‘Plaintiff [ ] seeks damages from          prosecutor’s discretionary decision to pros-
the Commission for its failure to investi-         ecute); Sabow v. United States, 93 F.3d
gate his claims about the [New York                1445, 1452 (9th Cir.1996) (government was
Stock] Exchange’s alleged misconductTTTT           immune under the discretionary function
The Securities Exchange Act of 1934 pro-           exception for its investigators’ allegedly
vides that stock exchange records are sub-         tortious investigation where ‘‘the guide-
ject to investigation by the [Securities and       lines promulgated by the [agency] in its
Exchange] Commission ‘as the Commis-               investigative manual were meant to be fol-
sion TTT deems necessary or appropriate.’          lowed at the discretion of [the agency’s]
15 U.S.C. 78q(b). The decision of whether          investigating officers in light of the specific
or not to investigate a stock exchange is          circumstances surrounding a particular in-
left in the discretion of the Commission.          vestigation.’’); Fisher Bros. Sales, Inc. v.
[Under the FTCA,] [e]ven if the Commis-            United States, 46 F.3d 279, 282 (3d Cir.
sion abuses that discretion, the court may         1995) (en banc) (government was immune
not intervene.’’); see also Thomas Lee             under the discretionary function exception
Hazen, 6 The Law of Securities Regula-             where laboratory technicians’ allegedly
tion, § 16.2, at 213 n. 313 (6th ed. 2010
                                                   negligent investigations done pursuant to
supp.) (collecting cases involving SEC and
                                                   mandatory guidelines provided the factual
non-governmental regulatory bodies).
                                                   basis for the Food and Drug Administra-
   In addition, courts have repeatedly held        tion to seize allegedly tainted fruit).
in other contexts that the conduct of regu-
                                                      The weight and logic of this caselaw
latory investigations are immune from
                                                   leads directly to the conclusions proposed
FTCA liability unless there are mandatory
                                                   by the Government: the decisions of
directives that limit the investigators’ dis-
                                                   whether and how to conduct investiga-
cretion to determine both the scope and
                                                   tions and enforcement actions are firmly
the manner of the investigation. See, e.g.,
                                                   lodged in the SEC’s discretion.
Alfrey v. United States, 276 F.3d 557, 565–
66 (9th Cir.2002) (prison guards had dis-               4. Procedural Effect of SEC’s
cretion to determine how thoroughly to                     Statutory and Regulatory
search prisoners’ cells); Sloan v. U.S.                           Discretionary
Dept. of Housing and Urban Devel., 236                As explained in Gaubert, ‘‘[w]hen estab-
F.3d 756, 762 (D.C.Cir.2001) (‘‘[T]he sifting      lished governmental policy, as expressed
of evidence, the weighing of its signifi-          or implied by statute, regulation, or agency
cance, and the myriad other decisions              guidelines, allows a Government agent to
made during investigations plainly involve         exercise discretion, it must be presumed
elements of judgment and choice.’’); Vick-         that the agent’s acts are grounded in poli-
ers v. United States, 228 F.3d 944, 951 (9th       cy when exercising that discretion.’’ 499
Cir.2000) (stating that ‘‘the discretionary        U.S. at 324, 111 S.Ct. 1267. Because the
1040                      707 FEDERAL SUPPLEMENT, 2d SERIES

Government has satisfied this threshold                 where does [plaintiff] allege the existence
burden the burden shifts to Plaintiffs to               of a policy that is ‘specific and mandato-
identify particular acts and decisions that             ry’ on the [defendant]. He does not state
were either (1) mandatorily prescribed by               the terms of this alleged policy, or describe
statute, regulation, or policy, or (2) were             any documents, promulgations, or orders
not ‘‘susceptible to policy analysis.’’ Id. at          embodying it.’’ Id. (quoting Kennewick
323, 325, 111 S.Ct. 1267.                               Irrig. Dist. v. United States, 880 F.2d
                                                        1018, 1026 (9th Cir.1989)). In addition, the
  C.    PLAINTIFFS’ BROAD ALLEGA-                       alleged harmful acts were plainly suscepti-
        TIONS OF MISCONDUCT ARE                         ble to policy judgment, and under Circuit
        UNAVAILING                                      precedent, were ‘‘the type of discretionary
   At various points in their Complaint and             judgments that the [discretion function ex-
moving papers, Plaintiffs assert that the               ception] was designed to protect.’’ Id. Be-
SEC violated various unidentified ‘‘[p]oli-             cause of these glaring inadequacies, the
cies and practices,’’ and ‘‘common-sense.’’             court held that the discretionary function
(E.g., Compl. ¶ 12 (alleging that the SEC               exception applied.
staff ‘‘fail[ed] to follow the SEC’s clear                 Like the plaintiff in Doe v. Holy See,
policies and practices’’)).13                           Plaintiffs in this case largely fail to identify
   To the extent that Plaintiffs rely on                any mandatory ‘‘policies’’ or ‘‘practices’’
conclusory allegations about ‘‘policies,’’              that were violated in this case. (Cf. infra
‘‘practices,’’ and ‘‘common-sense,’’ they               Part IV.C.) Plaintiffs’ ‘‘labels and conclu-
have failed to rebut Defendant’s threshold              sions’’ are insufficient to satisfy the plead-
showing. Broad allegations regarding un-                ing requirements of Fed.R.Civ.P. 8(a)(2).
defined ‘‘policies and practices’’ are insuffi-         See Iqbal, 129 S.Ct. at 1949 (quoting
cient under clear Ninth Circuit precedent.              Twombly, 550 U.S. 544, 127 S.Ct. 1955).
In the recent decision in Doe v. Holy See,                Likewise, Plaintiffs have wholly failed to
557 F.3d at 1084–85, the Ninth Circuit                  identify any of the SEC’s actions that were
examined the adequacy of a plaintiff’s                  not ‘‘susceptible to policy analysis.’’ See
pleadings under the discretionary function              Gaubert, 499 U.S. at 325, 111 S.Ct. 1267
exception as articulated by the Supreme                 (emphasis added). Their Complaint and
Court in Gaubert.14 The court held that                 their moving papers do not contain any
the complaint failed to adequately allege               attempt to rebut the Government’s prelim-
the existence of non-discretionary duties               inary showing that the SEC retained dis-
imposed on the government’s officials be-               cretion to decide when to investigate, how
cause it only ‘‘refer[red] vaguely TTT to the           to investigate, and whether or not to take
[defendant’s] ‘policies, practices, and pro-            enforcement actions. Plaintiffs attempt to
cedures.’ ’’ Id. at 1084 (quoting com-                  recharacterize the nature of Defendant’s
plaint). The court explained that ‘‘no-                 burden, and argue that the Government

13. Plaintiffs explain that ‘‘ ‘policies’ refer[s] to     SEC had promulgated any formal or informal
  formal or informal policies, rules, standards,          policies with respect to that conduct.’’ (Id.)
  guidelines, procedures, codes, routines or oth-           Under Gaubert, Plaintiffs’ ‘‘practices’’ are
  er directives implemented by the SEC to gov-            clearly an inadequate basis for showing a
  ern the conduct of its agents.’’ (Compl. ¶ 4 n.         mandatory SEC duty.
  4.) ‘‘ ‘Practices’ refers to common-sense stan-       14. Technically, Doe v. Holy See involves the
  dards of conduct required of SEC agents in              Foreign Sovereign Immunities Act rather
  the course of exercising their duties with rea-         than the FTCA, but, as noted supra, the court
  sonable due care, regardless of whether the             solely examined FTCA caselaw.
                   DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                       1041
                                Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

bears the burden of showing that the                  These are: sharing information; obtaining
SEC’s actions were susceptible to policy              trading records and other information
analysis. Plaintiffs are misguided. The               from third parties; hiring, training, and/or
Government has in fact satisfied its bur-             deploying qualified staff members; avoid-
den: it has identified specific and discre-           ing improper personal motivations; and
tionary statutes, regulations, and caselaw-           engaging in various administrative case-
based policy arguments. See Doe v. Holy               management tasks.
See, 557 F.3d at 1084–85 (where defendant                As Plaintiffs themselves point out in
identifies statutes, regulations, and case-           their sur-reply, ‘‘it is important to specifi-
law conferring policy-based discretion on             cally identify the allegations of the Com-
actor, burden shifts to plaintiff to identify         plaint relating to the SEC’s violation of
allegations to rebut this showing). Plain-            mandatory policies.’’ (Surreply at 5.) Yet
tiffs have failed to rebut Defendant’s show-          Plaintiffs’ factual allegations (which pur-
ing.                                                  port to incorporate the Report in its en-
   In light of the Government’s showing               tirety) fail to support these conclusions.
that the SEC retains broad discretion to              Plaintiffs almost wholly fail to allege that
regulate securities markets through formal            SEC’s agents violated any mandatory
and informal means (see supra Part III.A),            duties, and where Plaintiffs’ allegations
the Government has sufficiently satisfied             provide an inference that such mandatory
its threshold burden of showing that the              duties existed, Plaintiffs’ arguments are
relevant investigative and enforcement de-            defeated by the holding in General Dy-
cisions were discretionary and/or suscepti-           namics, 139 F.3d at 1284–85. Plaintiffs
ble to policy judgments. Under Gaubert,               therefore have failed to overcome the pre-
this threshold showing creates a ‘‘strong             sumption that the SEC’s investigative and
presumption’’ that the discretionary func-            enforcement decisions were discretionary.
tion exception is satisfied. Gaubert, 499             Accordingly, Plaintiffs’ Complaint must be
U.S. at 324, 111 S.Ct. 1267. Plaintiffs’              dismissed for lack of subject matter juris-
conclusory allegations regarding ‘‘policies           diction.
and practices’’ fail to rebut this presump-                 1. Duty to Share Information
tion. See Doe v. Holy See, 557 F.3d at                   Plaintiffs’ Complaint alleges that SEC
1084–85.                                              teams failed to coordinate their investiga-
                                                      tions among themselves and with the Na-
  D.   PLAINTIFFS’   ARGUMENTS                        tional Association of Securities Dealers
       ABOUT MANDATORY POLI-                          and Chicago Board of Options Exchange.
       CIES ARE UNAVAILING                            (Surreply at 6, citing Compl. ¶¶ 37, 62, 63,
  In an oversized sur-reply,15 Plaintiffs at-         78, 86, 103, 105, 123, 128, 130, 131.) Ac-
tempt to satisfy their burden of rebuttal             cording to Plaintiffs, these ‘‘negligent fail-
by identifying five purportedly mandatory             ures to communicate TTT were prohibited
duties imposed on the SEC and its staff.              by law.’’ (Id.)

15. The Court never granted Plaintiffs leave to          Reply. Plaintiffs’ sur-reply is therefore proce-
  file a sur-reply. Nor did the Court grant              durally improper.
  Plaintiffs leave to file an oversized brief. In          It is therefore well within the Court’s dis-
  addition, the sur-reply goes far beyond the            cretion to strike the surreply. However,
  scope of the arguments raised in the Govern-           while the Court would ordinarily strike such
  ment’s Reply. Even if the Court had granted            an improper filing, the Court will consider the
  Plaintiffs leave to file an oversized sur-reply,       merits of Plaintiffs’ arguments in order to
  Plaintiffs would only have been allowed to             foreclose certain of these claims in future
  address Defendant’s specific arguments in the          proceedings.
1042                    707 FEDERAL SUPPLEMENT, 2d SERIES

   Plaintiffs have failed to support their          coordinated approach to regulatory over-
assertions. Plaintiffs’ conclusory allega-          sight,’’ these decisions are inherently
tions fail to establish that SEC examiners          ‘‘grounded in social, economic, and political
were guided by any mandatory duties re-             policy.’’ Gaubert, 499 U.S. at 323, 111
quiring them to share information and co-           S.Ct. 1267. Accordingly, the discretionary
ordinate their activities.                          function exception applies to information-
                                                    sharing under § 78q(k)(2).
  Plaintiffs argue that Section 17 of the
                                                       The legislative history supports this con-
Securities Exchange Act of 1934, codified
                                                    clusion. This particular subsection (for-
at 15 U.S.C. § 78q, imposes mandatory
                                                    merly labeled subsection (i)) was added to
duties requiring SEC staff to share infor-
                                                    the statute in 1996 by the National Securi-
mation. The statute reads:
                                                    ties Markets Improvement Act of 1996,
  The Commission and the examining au-              Pub.L. 104–290, § 108. It is instructive to
  thorities 16 shall share such information         contrast the statute’s final language with
  [regarding securities exchanges and               the language of the original House bill.
  their members, brokers and dealers, rat-          The House’s bill included a complex set of
  ings organizations, and clearing agen-            reporting and coordination requirements
  cies], including reports of examinations,         for self-regulatory organizations.        See
  customer complaint information, and               H.R. Rep. 104–622, 104th Cong., 2d Sess.,
  other nonpublic regulatory information,           1996 U.S.C.C.A.N. 3877, 3877 (1996). The
  as appropriate to foster a coordinated            original bill required, inter alia: annual
  approach to regulatory oversight of bro-          meetings between the SEC and self-regu-
  kers and dealers that are subject to              latory organizations, § 108(a)(i)(2), period-
  examination by more than one examin-              ic standardized reporting requirements for
  ing authority.                                    the SEC and self-regulatory organizations,
                                                    § 108(a)(i)(3), annual evaluations by an
15 U.S.C. § 78q(k)(2) (emphasis added).
                                                    SEC-created panel, § 108(a)(i)(7), and an-
   The statute clearly provides for SEC             nual reports to Congress, § 108(a)(i)(8).
discretion. The mandatory ‘‘shall’’ is mod-         Id. These requirements were mandatory,
ified by the discretionary ‘‘as appropriate.’’      not discretionary: the SEC and the self-
See Sabow, 93 F.3d at 1452 (distinguishing          regulatory organizations had no flexibility
between ‘‘suggestive (‘should’) [and] man-          in implementing these clear congressional
datory (‘must’) terms’’) (collecting cases).        directives.
The statute itself describes the nature of             However, after some legislative wran-
‘‘appropriate’’ information-sharing: the in-        gling, see H.R. Conf. Rep. 104–864, 1996
formation-sharing must be ‘‘appropriate to          U.S.C.C.A.N. 3920, 3920 (1996), the
foster a coordinated approach to regula-            House–Senate     conference     committee
tory oversight.’’ 15 U.S.C. § 78q(k)(2)             stripped all of the above-mentioned re-
(emphasis added). When the SEC is                   quirements and left intact only a few gen-
tasked with making decisions to ‘‘foster a          eralized requirements.17 The central pur-

16. ‘‘For purposes of this subsection, the term     17. As part of the compromise, the revised law
  ‘examining authority’ means a self-regulatory       required that the SEC coordinate its activities
  organization registered with the Commission         with the self-regulatory organizations (where-
  under this chapter (other than a registered         as the old bill merely required the self-regula-
  clearing agency) with the authority to exam-        tory organizations to coordinate their activi-
  ine, inspect, and otherwise oversee the activi-     ties). Compare 15 U.S.C. § 78q(k)(2) (‘‘The
  ties of a registered broker or dealer.’’ 15         Commission and the examining authorities
  U.S.C. § 78q(k)(5).                                 shall   share    TTT’’)   with    H.R.     3005,
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                         1043
                             Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

pose of the final bill, as explained by the        (Report at 133, 198, quoting testimony of
conference committee, was to streamline            Eric Swanson.) Taking this allegation as
regulation between federal and state au-           true, Plaintiffs’ Complaint directly contra-
thorities. id. at 3920–21. The purpose of          dicts the conclusory assertions in their sur-
the remaining portions of the bill—appar-          reply.
ently including § 108—was ‘‘to eliminate                      b. Summary re: duty to
duplication, promote efficiency and protect                      share information
investors.’’ Id. at 3921. This broad lan-
                                                      Plaintiffs have therefore failed to meet
guage sets forth three general policy goals,
                                                   their burden of identifying either a manda-
the balancing of which requires the SEC
                                                   tory duty requiring the SEC to share in-
to make inherently discretionary judg-
                                                   formation with other regulators, or plausi-
ments. See also Milton R. Schroeder, The
                                                   ble allegations that the SEC’s decisions
Law of Regulation of Financial Institu-
                                                   regarding information-sharing were not
tions, ¶ 8.06[1] (2009 update) (‘‘The Act TTT
calls for information sharing between au-          susceptible to policy analysis. The SEC
thorities and the elimination of unneces-          retained discretion to determine the man-
sary and burdensome duplication in the             ner and scope of its investigations. See
examination process.’’); Rutherford B.             Vickers, 228 F.3d at 951 (‘‘[T]he discretion-
Campbell, Jr., Blue Sky Laws and the               ary function exception protects agency de-
Recent Congressional Preemption Failure,           cisions concerning the scope and manner
22 J. Corp. L. 175, 204 n. 156 (1997) (‘‘The       in which it conducts an investigation so
Act TTT mandates that federal authorities          long as the agency does not violate a man-
attempt to eliminate duplication and en-           datory directive.’’).
hance coordination and cooperation with                 2.   Failing to Request Materials
the states as concerns the regulation of                        from Third Parties
brokers.’’).                                          Plaintiffs argue that the SEC violated
  In short, the law cited by Plaintiffs is         ‘‘formal SEC policies’’ and ‘‘basic auditing
purely discretionary. Under the well-es-           principles’’ by ‘‘repeatedly fail[ing] to re-
tablished requirements of the discretion-          quest materials from third parties to sub-
ary function exception, this Court cannot          stantiate Madoff’s claimed trading activi-
second-guess the SEC’s failure to simulta-         ty.’’ (Surreply at 8, citing Compl. ¶¶ 34–
neously accomplish all three of these com-         36, 67, 74, 77, 101, 143.) Again, Plaintiffs
peting policy goals set out by Congress.           fail to identify any of the ‘‘formal SEC
The goals require policy judgment and re-          policies’’ upon which they rely. But Plain-
source allocation, and are therefore subject       tiffs insist that ‘‘SEC staffers themselves
to the discretionary function exception.           considered it mandatory [to determine if
   a.   Plaintiffs’ factual allegations            Madoff was actually making the trades he
   In addition to these clear statutory            purported to be making], given one staf-
rules, Plaintiffs’ Complaint expressly alleg-      fer’s characterization of the failure to do so
es that formal policies did not exist. The         as ‘asinine.’ ’’ (Surreply at 10, quoting
Report (which is incorporated into the             Compl. ¶ 77.)
Complaint by reference) quotes one staff             Plaintiffs’ arguments are not supported
member as stating that ‘‘there was no rule         by their allegations. It is unclear why an
or policy about TTT information-sharing at         SEC staff member’s use of the word ‘‘asi-
[the investigative] level between offices.’’       nine’’ provides evidence of an SEC policy.

 § 108(a)(4)(A) in H.R. Rep. 104–622 (‘‘The           examining authorities shall share TTT’’).
1044                   707 FEDERAL SUPPLEMENT, 2d SERIES

‘‘Asinine’’ means ‘‘unintelligent, stupid, sil-   with third parties, it was not required by
ly, [or] obstinate.’’ Webster’s Third New         mandatory SEC policies. (See Compl.
International Dictionary 128 (1981). ‘‘As-        ¶ 35, citing Ex. A, at 290 n. 202.)
inine’’ does not mean that a person has              Plaintiffs have therefore failed to plead
violated a non-discretionary legal duty;          facts that overcome the discretionary func-
nor does ‘‘asinine’’ mean that the person         tion exception. The statutes, regulations,
has made a decision that is not susceptible       and caselaw discussed supra establish be-
to policy judgment.                               yond peradventure that the SEC retained
   Plaintiffs fail to identify any other alle-    full discretion to determine the manner
gations that state or even imply the exis-        and scope of its investigation. See Vick-
tence of mandatory duties to obtain rec-          ers, 228 F.3d at 951 (‘‘[T]he discretionary
ords from third parties. In fact, the             function exception protects agency deci-
Complaint is replete with factual allega-         sions concerning the scope and manner in
tions suggesting that there were no SEC           which it conducts an investigation so long
policies regarding requesting information         as the agency does not violate a mandatory
from third parties. The Report quotes a           directive.’’). Plaintiffs’ allegations fail to
former SEC staff member as stating that           rebut this presumption, by identifying ei-
the SEC ‘‘always’’ obtained Depository            ther a formal mandatory duty or a specific
Trust Company statements ‘‘from the               decision that was not susceptible to policy
firm’’ being investigated rather than from        analysis.
the Depository Trust Company itself.                  3.   Assigning Unqualified Staff
(Ex. A at 48, quoting testimony of Dem-                    Members to Investigative
etrios Vasilakis, emphasis added.) The
                                                                   Teams
Report also quotes a supervisor as stating
that ‘‘most of the time we do not send out           Plaintiffs argue that ‘‘several SEC staf-
[requests for trading] confirmations and          fers were inexcusably unqualified for their
do asset verification.’’ (Ex. A at 206,           positions,’’ and that the SEC ‘‘assigned [ ]
quoting testimony of Robert Sollazzo.)            staffers who had no understanding of secu-
As a result of these and other statements,        rities transactions, and were otherwise un-
the Report explained it was ‘‘common              qualified, to the Madoff investigations.’’
practice’’ to rely on the firm under inves-       (Surreply at 8, citing Compl. ¶¶ 32, 37, 46,
tigation, (Ex. A at 48), and that ‘‘it was        61–64, 67, 88–89, 100, 118, 126, 132, 134.)
not unusual for [examiners] to rely exclu-            [8] It is well-established that ‘‘employ-
sively on records and data produced by            ment, supervision and training’’ decisions
the’’ firm being investigated. (Ex. A at          ‘‘fall squarely within the discretionary
98, emphasis added; see also Ex. A at 191         function exception.’’ Nurse v. United
(noting that ‘‘it was not normal practice in      States, 226 F.3d 996, 1001 (9th Cir.2000);
the exam program to reach out to enti-            see also Doe v. Holy See, 557 F.3d at 1084
ties’’ that centrally cleared and settled         (‘‘the decision of whether and how to retain
trades).)                                         and supervise an employee TTT [is] the
  Because Plaintiffs’ Complaint attempts          type of discretionary judgments that the
to incorporate the Report in its entirety,        exclusion was designed to protect. We
Plaintiffs therefore allege that there was        have held the hiring, supervision, and
an absence of mandatory duties requiring          training of employees to be discretionary
SEC staff to use specific investigative           acts.’’); Gager v. United States, 149 F.3d
techniques. Although it may have been             918 (9th Cir.1998) (‘‘The [postal service’s]
good practice for the SEC to follow up            decision not to provide universal training
                   DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                  1045
                               Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

and supervision in mail bomb detection               the FTCA clearly states that the discre-
involved judgment or choice grounded in              tionary function applies ‘‘whether or not
social, economic, and political policy.’’).          the discretion involved be abused.’’ 28
  Plaintiffs have failed to identify any alle-       U.S.C. § 2680(a). In addition, Supreme
gations that would bring their case outside          Court precedent requires this Court to
the purview of the Ninth Circuit’s general           examine ‘‘the nature of the actions taken
caselaw on this question. Accordingly,               and [ ] whether they are susceptible to
Defendant has satisfied its burden of                policy analysis,’’ not ‘‘the agent’s subjec-
showing that the relevant decisions fall             tive intent in exercising the discretion
within the discretionary function exception,         conferred by statute or regulation.’’ Gau-
and Plaintiffs have not alleged any facts to         bert, 499 U.S. at 324, 111 S.Ct. 1267 (em-
the contrary.                                        phasis added). Accordingly, the SEC
     4. Staff Members’ Personally                    staff’s subjective reasons for deciding how
              Motivated Acts                         to investigate Madoff are irrelevant to the
                                                     present inquiry.18
   Plaintiffs argue that SEC ‘‘staffers [ ]
acted out of personal animus, unfounded                 Furthermore, the relevant question is
fear of individual liability, and improper           not, as Plaintiffs suggest, whether the
deference to Madoff on account of his rep-           agents’ activities were actually ‘‘grounded
utation,’’ and that ‘‘one staffer ignored a          in any legitimate policy considerations.’’
whistleblower out of spite.’’ (Surreply at           (Surreply at 9.) Rather, the question is
8, citing Compl. ¶¶ 23, 97–99, 119, 121–22.)         whether the agents’ activities were suscep-
    All of these assertions strike at the            tible to policy analysis. See Gaubert, 499
manner in which the SEC conducted its                U.S. at 324, 111 S.Ct. 1267; Terbush, 516
investigations. As noted repeatedly in this          F.3d at 1129. Investigative decisions are
Order, the SEC retained discretion to                inherently susceptible to policy analysis,
make policy-based decisions about the                and Plaintiffs fail to identify any mandato-
manner and scope of its investigations.              ry laws, regulations, or policies that pre-
See 15 U.S.C. § 78u(a)(1) (permitting SEC            scribe a specific course of action for the
to decide ‘‘as it deems necessary’’ how to           staff to follow when conducting investiga-
‘‘investigate any facts, conditions, prac-           tions. Accordingly, these decisions are
tices, or matters,’’ whether through ‘‘a             subject to the discretionary function excep-
statement in writing, under oath or other-           tion.
wise.’’); see also Vickers, 228 F.3d at 951                   5. Failing to Follow Case–
(‘‘[T]he discretionary function exception                       Management Procedures
protects agency decisions concerning the                Plaintiffs next argue that the SEC ‘‘vio-
scope and manner in which it conducts an             lated its own internal policies’’ regarding
investigation so long as the agency does             case-management by doing the following:
not violate a mandatory directive.’’).               (1) ‘‘failing to obey rules regarding the
   Plaintiffs’ allegations, taken as true, at        filing of reports and the use of the SEC’s
most establish that the SEC staff abused             STARS [Super Tracking and Reporting
its discretion when conducting investiga-            System] computer system,’’ (2) failing to
tions into Madoff’s operations. However,             consult the Super Tracking and Reporting

18. To the extent that SEC staff members were           the Government while acting within the scope
  truly acting for personal purposes, such activ-       of his office or employment,’’ and the FTCA
  ities would not constitute a ‘‘negligent or           would not provide an avenue for recovery.
  wrongful act or omission of any employee of           28 U.S.C. § 1346(b)(1) (emphasis added).
1046                  707 FEDERAL SUPPLEMENT, 2d SERIES

System database before beginning exami-          ing report in the STARS computer system.
nations, (3) ‘‘fail[ing] to submit Matter Un-    (Compl. ¶ 80.) There is one allegation
der Inquiry [ ] reports with respect to TTT      suggesting that case-opening report is
open investigations,’’ and (4) failing to file   mandatory: the Report quotes a supervi-
case-opening and case-closing reports.           sor’s statement that the staff members
(Surreply at 7.)                                 were ‘‘supposed to’’ enter their case-open-
   Plaintiffs have adequately alleged that       ing ‘‘information into the tracking system.’’
the SEC teams failed to conduct each of          (Ex. A at 132, quoting McCarthy testimo-
these tasks at one time or another. Plain-       ny.) The Washington team also failed to
tiffs have not, however, adequately alleged      follow its case-planning memo. (Compl.
that these tasks were mandatory or were          ¶ 69.) There are no factual allegations,
not otherwise susceptible to policy judg-        however, that there is a mandatory duty to
ment. Because the SEC staff had broad            follow a case-planning memorandum.
discretion to determine how to conduct its          In April 2004, the Washington team
investigations, see supra Part IV.B, Plain-      closed its investigation and failed to file a
tiffs bear the burden of identifying plausi-     case-closing memorandum. (Compl. ¶¶ 78,
ble allegations that non-discretionary           80.) There is one allegation that the case-
duties were imposed on the investigators.        closing memo may have been mandatory:
See, e.g., Sabow, 93 F.3d at 1452–53 (close-     the Report quotes a supervisor’s statement
ly examining Naval Investigative Ser-            that ‘‘[t]ypically, staff is supposed to—
vice/Judge Advocate General investigation        when they finish an exam[ination] they’re
manuals to determine whether investiga-          supposed to close it out and I think there
tors were obligated to conduct investiga-        should have been a close-out memo is my
tions in particular manner); Alfrey v.
                                                 understanding.’’ (Compl. ¶ 78 & n. 15,
United States, 276 F.3d 557, 563 (9th Cir.
                                                 quoting Ex. A at 136 (quoting McCarthy
2002) (holding that prison guard’s failure
                                                 testimony).)
to search a computer database was part of
discretionary investigatory decision where         At the same time that the Washington
there was no policy requiring such a             team closed its investigation (April 2004),
search to be conducted); cf. Franklin Sav.       the first New York enforcement team re-
Corp. v. United States, 180 F.3d 1124,           ceived a tip, and in December 2004 the
1132–33 (10th Cir.1999) (agency not im-          New York team opened its investigation.
mune where its employees failed to pre-          (Compl. ¶ 86.) This team failed to draft a
pare mandatory case memoranda; howev-            planning memorandum. (Compl. ¶¶ 87,
er, plaintiff’s claims were dismissed on the     108.) Plaintiffs state in a conclusory fash-
merits because no injury flowed from the         ion that there was an SEC ‘‘policy or
failure to prepare the memoranda). Plain-        practice’’ requiring such a memorandum,
tiffs have not met their burden.                 but support this assertion by citing to a
           a. Factual Allegations                factual statement in the Report that
                                                 quotes staff members saying that there
   In May 2003, the Washington-based Of-
fice of Compliance Inspections and Exami-        was not such a policy at the time of the
nations received a tip and referred the          investigation. (Compl. ¶ 87, citing Ex. A
matter to a team in the Broker–Dealer            at 166.)
section. In December 2003, the Washing-            The New York team failed to consult the
ton team received a second tip and opened        STARs computer system to see if any
its investigation into Madoff. According to      prior case-opening reports had been filed.
Plaintiffs, the team failed to file case-open-   (Compl. ¶¶ 103, 108.) There is no specific
                 DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                               1047
                           Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

allegation that there is a mandatory duty        ination.’’ (Ex. A at 142; see also Compl.
to check the computer system; however,           ¶ 1 n. 3 (incorporating Report in its entire-
Plaintiffs allege that SEC policy required       ty into Complaint).)
that ‘‘there should never be two examina-
tions of the same entity being conducted at         In September 2005, the first New York
the same time without both teams being           team formally closed its investigation. In
aware of each other’s examination.’’             October 2005, after Harry Markopolos’s
(Compl. ¶ 103, quoting Ex. A at 132.) In         third report was referred from the Boston
the Ninth Circuit, the word ‘‘should’’ is        office, a different New York team began a
generally viewed as suggestive rather            new investigation into Madoff’s operations.
than mandatory, see, e.g., Sabow, 93 F.3d        In December 2005, this second New York
at 1452, and a person’s subjective belief        team filed its ‘‘Matter Under Inquiry’’ re-
that something ‘‘should’’ be done is inade-      port. (Compl. ¶ 124.) The New York of-
quate evidence that there is ‘‘in fact [a]       fice received another tip about Madoff be-
mandatory [duty] under some federal reg-         tween the October 2005 opening of the
ulation or [internal] policy.’’ Alfrey, 276      investigation and the December 2005 filing
F.3d at 563. However, viewing this quota-        of the Matter Under Inquiry report.
tion in the light most favorable to Plain-       (Compl. ¶ 125.) Plaintiffs allege that, had
tiffs, there may be a plausible inference        the Matter Under Inquiry been filed in
that there was a mandatory policy to check       October, this new tip would have been part
the STARs computer system or that the            of the second New York team’s investiga-
decision to check the STARs computer was
                                                 tion. (Compl. ¶ 125.) However, there are
not susceptible to policy analysis. (See
                                                 no factual allegations that SEC policy re-
surreply at 12, 25.) Plaintiffs therefore
                                                 quires that a Matter Under Inquiry form
allege that the Washington and first New
                                                 be filed immediately, other than Plaintiffs’
York teams violated internal policies
                                                 conclusory allegations that this a ‘‘required
and/or made decisions that were not sus-
                                                 step at the beginning of any Enforcement
ceptible to policy judgment. These acts
and omissions will be examined in greater        investigation.’’ (Compl. ¶ 124.) Contra-
detail infra.                                    dicting this conclusory assertion, Plaintiffs’
                                                 Complaint contains specific factual asser-
   Plaintiffs further allege that the first
                                                 tions that, although the Matter Under In-
New York team learned about the previous
                                                 quiry ‘‘should’’ have been opened sooner,
Washington examination while the New
                                                 the SEC’s enforcement manual states that
York team was interviewing Madoff in
                                                 staff members ‘‘may’’ file a Matter Under
mid-to-late May 2005. (Ex. A at 195.) In
                                                 Inquiry if and when they determine that a
early June 2005, the Washington team sent
its files to the New York team, and the          complaint is ‘‘serious and substantial.’’
New York team performed a ‘‘cursory re-          (Compl. ¶ 125, citing Ex. A at 263 (quoting
view’’ of the Washington team’s findings         SEC Enforcement Manual) (emphasis add-
because the information ‘‘seemed so simi-        ed).) Plaintiffs further allege that ‘‘it is
lar to what we [the New York team] were          unclear whether the tip would have made
receiving in real time.’’ (Compl. ¶ 105,         any difference in the conduct or the result
quoting Ex. A at 200.) Plaintiffs allege         of the [second New York team’s] investiga-
that the two teams’ failures to fully com-       tion because TTT of [the investigating at-
municate ‘‘resulted in embarrassment and         torney’s] view that anonymous tips, ‘on
a waste of Commission resources as two           their face’ were not credible.’’ (Ex. A at
examination teams from two different of-         265; see also Compl. ¶ 1 n. 3 (incorporat-
fices essentially conducted the same exam-       ing Report in its entirety into Complaint).)
1048                    707 FEDERAL SUPPLEMENT, 2d SERIES

   In June 2006, after completing its exam-         York team’s ongoing investigations.
ination, the second New York team filed             (Compl. ¶ 105, citing Ex. A at 200.)
its case-closing report despite the fact that         Ultimately, then, Plaintiffs are alleging
it had failed to resolve all of the red flags       that two SEC offices violated mandatory
it identified. (Compl. ¶ 147.) However,             policies and thereby failed to adequately
there are no allegations that the SEC staff         coordinate their investigations and other-
is required to resolve red flags before de-         wise conduct their investigations in a thor-
ciding to close a case and file a case-             ough and adequate manner.
closing report. (See Compl. ¶ 147.)
                                                        As has been shown repeatedly through-
       b. Discussion and Analysis                   out this Order, the SEC retained discre-
   In short, viewing the plausible infer-           tion to decide how to conduct its investiga-
ences of the Complaint’s factual averments          tions—which includes decisions about how
in favor of Plaintiffs, the Complaint alleges       to coordinate investigations between of-
three acts that violated mandatory duties           fices. (See supra Parts. IV.B.1, IV.B.3.)
and/or were not susceptible to policy judg-         At the risk of being repetitive, it is useful
ment:                                               to refer back to 15 U.S.C. § 78u(a)(1),
   (1) the Washington team failed to file a         which permits the SEC to decide ‘‘as it
   case-opening report;                             deems necessary’’ how to ‘‘investigate any
   (2) the first New York team failed to            facts, conditions, practices, or matters,’’
   consult the STARs computer database              whether through ‘‘a statement in writing,
   to find prior case-opening reports re-           under oath or otherwise.’’ In addition, 15
   garding Madoff; and                              U.S.C. § 78u(d)(1) permits the SEC ‘‘in its
   (3) the Washington team failed to file a         discretion’’ to bring an enforcement action
   case-closing memorandum.                         when it detects a securities violation dur-
Plaintiffs’ other assertions are either un-         ing its investigations. There are, in short,
supported by any factual allegations what-          no mandatory obligations requiring the
soever 19 or are supported by factual alle-         SEC to conduct its investigations in a par-
gations that plainly contradict Plaintiffs’         ticular manner or to bring an enforcement
conclusory assertions that there was a              action in particular situations. These deci-
mandatory duty and/or decision not sus-             sions are fundamentally discretionary and
ceptible to policy analysis.20 Plaintiffs fur-      require staff to make policy-based judg-
ther allege that the three specific SEC             ments. See, e.g., Sloan, 236 F.3d at 762
omissions had an extremely limited impact.          (‘‘[T]he sifting of evidence, the weighing of
Plaintiffs assert that the New York team,           its significance, and the myriad other deci-
prior to closing its investigation, received        sions made during investigations plainly
and reviewed the Washington files—albeit            involve elements of judgment and
in a ‘‘cursory’’ manner because the infor-          choice.’’); Vickers, 228 F.3d at 951 (‘‘[T]he
mation appeared duplicative of the New              discretionary function exception protects

19. There are no specific allegations stating        their specific allegations in the Report that
  that there was a requirement to follow a case-     there was no policy requiring staff to prepare
  planning memorandum. Nor are there spe-            a case-planning memorandum and there was
  cific allegations stating that there was a re-     a discretionary policy (which used the sugges-
  quirement to resolve red flags prior to closing    tive ‘‘should’’ and the permissive ‘‘may,’’ see
  a case and preparing a case-closing memo-          Sabow, 93 F.3d at 1452) regarding staff mem-
  randum.                                            bers’ decisions to file a Matter Under Inquiry
20. Plaintiffs’ conclusory assertions that there     report.
  were mandatory duties are contradicted by
                    DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                      1049
                                 Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

agency decisions concerning the scope and              the supervisor’s limited exercise of discre-
manner in which it conducts an investiga-              tion did not immunize the hydrographers’
tion.’’).                                              negligent preparation of the charts in vio-
   In light of this broad investigatory dis-           lation of mandatory guidelines. As the
cretion, General Dynamics is therefore di-             court later explained in General Dynam-
rectly on point regarding the small handful            ics, ‘‘little intervened between the hydrog-
of mandatory procedural obligations im-                raphers’ wrongdoing and the injury to the
posed on SEC staff. In General Dynam-                  plaintiff.’’ General Dynamics, 139 F.3d at
ics, the Ninth Circuit explained that an               1285. Instead, there was a ‘‘tight coupling
otherwise actionable agency decision is im-            between hydrographers, reviewers, charts,
mune from suit if ‘‘a totally separate exer-           and results,’’ such that the plaintiff was
cise’’ of ‘‘independent’’ and ‘‘broad based            injured by the hydrographers’ violation of
discretion’’ ‘‘intervenes between an alleged           the mandatory guidelines in preparing the
government wrongdoer and the harm suf-                 charts, and was not injured by the supervi-
fered by a plaintiff.’’ 139 F.3d at 1285.              sor’s discretionary approval of the charts.
There, prosecutors brought a criminal ac-              Id. at 1284.
tion against General Dynamics based sole-                 The allegations in the present case are
ly on facts stated in a negligently prepared           far more analogous to the facts in General
auditing statement. The court explained                Dynamics than in Glacier Bay. Plaintiffs
that the prosecutors’ affirmative decision             allege in essence that the first New York
to prosecute constituted an independent                investigative team had a mandatory duty
exercise of broad-based discretion that                to be aware of the prior Washington inves-
thereby insulated the government from a                tigation. Plaintiffs’ allegations are neatly
lawsuit based on the auditors’ non-discre-             summarized in a quotation in the Com-
tionary actions. Id. The court noted that              plaint: under SEC policy ‘‘there should
the ‘‘source of the [plaintiff’s] injury’’ was         never be two examinations of the same
the independent and ‘‘discretionary’’ deci-            entity being conducted at the same time
sion to prosecute. Id. Although the prose-             without both teams being aware of each
cutors could have sought more information              other’s examination.’’ (Compl. ¶ 102, quot-
and could have double-checked the audi-                ing Ex. A at 132, emphasis added by
tors’ reports, they retained discretion to             Court.) 21
choose whether or not to do so, and they                   However, even though these two teams’
affirmatively decided to rely only on the              conduct violated mandatory policies or oth-
inaccurate reports. Id.                                erwise involved non-judgment-based deci-
  In contrast, in Glacier Bay, hydrogra-               sions, the discretionary function exception
phers prepared oceanographic charts pur-               will apply if ‘‘a totally separate exercise’’ of
suant to mandatory requirements stated in              ‘‘independent’’ and ‘‘broad based discre-
their handbook. They then presented                    tion’’ ‘‘intervenes between an alleged gov-
these charts to their supervisor, who had              ernment wrongdoer and the harm suffered
discretion regarding whether or not to ap-             by a plaintiff.’’ General Dynamics, 139
prove those charts. The court held that                F.3d at 1285. Here, Plaintiffs were

21. Again, the Court notes that the word                  Plaintiffs’ favor. This quotation, combined
  ‘‘should’’ is suggestive rather than mandatory          with the other factual allegations discussed
  and officials’ subjective beliefs are insufficient      supra, provide a plausible inference that these
  evidence of a mandatory policy. However, at             particular case-management obligations were
  the present stage of proceedings, plausible             mandatory.
  inferences in the Complaint must be drawn in
1050                  707 FEDERAL SUPPLEMENT, 2d SERIES

harmed by the investigators’ failure to dis-     pendent decision to close its investigation
cover the Madoff fraud and publicize or          in September 2005 without bringing an
prosecute it. Plaintiffs were not harmed         enforcement action against Madoff. The
by the teams’ failure to follow case-man-        decision of whether or not to bring an
agement procedures because the first team        enforcement action is plainly discretionary.
of New York investigators undertook an           See 15 U.S.C. § 78u(d)(1) (permitting SEC
independent exercise of discretion when          ‘‘in its discretion’’ to bring enforcement
they (1) received and reviewed the Wash-         actions); 17 C.F.R. § 202.5 (stating that
ington team’s files and determined that the      SEC ‘‘may in its discretion’’ select from
Washington team’s investigative materials        various enforcement tools if it believes that
were duplicative of their own investigation      enforcement action is necessary). Al-
(Compl. ¶ 105, quoting Ex. A at 200), (2)        though FTCA claims most often involved
conducted their own independent investi-         negligent agency actions rather than fail-
gation into Madoff’s operations (Compl.          ures to act, the New York team’s decision
¶¶ 82–109), and (3) determined that there        not to act was fully within its discretion in
was no basis for bringing an enforcement         selecting the manner and scope of its in-
action against Madoff (Compl. ¶ 107).
                                                 vestigations and enforcement actions. See,
    Each of these three acts by the New          e.g., Block v. SEC, 50 F.3d at 1084 (in
York team was a ‘‘totally separate exercise      Administrative Procedures Act action,
of discretion’’ that was unrelated to the        SEC cannot be compelled to undertake
investigators’ non-discretionary violations      certain enforcement actions); Board of
of mandatory case-management rules. See          Trade v. SEC, 883 F.2d at 531 (same);
General Dynamics, 139 F.3d at 1285. The          Leytman v. New York Stock Exchange,
New York investigators retained ‘‘broad          1995 WL 761843, at *3 (dismissing FTCA
based discretion,’’ id. at 1285, to select the   claims alleging that SEC failed to investi-
manner and scope of their investigation of       gate alleged wrongdoing).
Madoff and their review of the Washington
team’s files. This ‘‘broad based discretion’’       In short, General Dynamics applies to
is derived both from the SEC’s congres-          the allegedly negligent acts by the Wash-
sionally-authorized discretion to choose the     ington team and the first New York team.
manner and scope of its investigations, see      The New York team’s intervening discre-
15 U.S.C. §§ 78u(a)(1), 78u(d)(1), and from      tionary actions are closely analogous to the
the inherently discretionary nature of in-       General Dynamics prosecutors’ actions in
vestigative activities. See, e.g., Sloan, 236    at least two ways:
F.3d at 762 (‘‘[T]he sifting of evidence, the       (1) In General Dynamics, the prosecu-
weighing of its significance, and the myri-      tors reviewed and relied on information
ad other decisions made during investiga-        contained in a negligently-conducted inves-
tions plainly involve elements of judgment       tigation when choosing to pursue a prose-
and choice.’’); Vickers, 228 F.3d at 951         cution. Here, the first New York team
(‘‘[T]he discretionary function exception        reviewed the Washington team’s allegedly
protects agency decisions concerning the         negligently-prepared files and the New
scope and manner in which it conducts an         York team relied (at least part) on those
investigation.’’).                               files in choosing to close the case without
  In addition, the New York team, after          pursuing an enforcement action. In both
conducting an independent and discretion-        cases, the second actor retained discretion
ary review of both Madoff’s operations and       to decide how thoroughly to rely on (or
the Washington team’s files, made an inde-       discredit) the underlying information re-
                   DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                     1051
                                Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

ceived from a previous investigation. In              concluding on the basis of that investiga-
both cases, the second actor exercised that           tion not to bring an enforcement action.
discretion: in General Dynamics, the                     Thus, the New York team’s actions—its
prosecutors elected not to conduct a fur-             affirmative choice to review the Washing-
ther investigation, and here, the New York            ton team’s files; its affirmative choice to
team elected to conduct a ‘‘cursory’’ review          conduct additional investigations into Ma-
of the Washington team’s files.                       doff’s operations; and its affirmative
   (2) In General Dynamics, the prosecu-              choice not to bring an enforcement ac-
tors retained discretion to conduct addi-             tion—constituted intervening exercises of
tional independent investigations before              independent and broad-based discretion.
deciding whether or not to file a criminal            Both the facts and holding of General Dy-
action; they elected to file the action with-         namics are directly on-point. As such, the
out seeking additional information beyond             discretionary function exception bars
that contained in the auditing reports.               Plaintiffs’ claims regarding the Washing-
Here, the first New York team retained                ton and New York investigators’ alleged
discretion to conduct further investigations          failures to follow mandatory case-manage-
into Madoff’s affairs before deciding                 ment procedures.
whether or not to bring enforcement ac-                  6.   Conclusion Regarding Plaintiffs’
tions against Madoff. Unlike the prosecu-
                                                              Purportedly Mandatory Duties
tors in General Dynamics, the New York
team elected to conduct additional inde-                 Plaintiffs have failed to identify any of
pendent investigations beyond those con-              the SEC’s non-discretionary acts that are
tained in the Washington team’s files, and            actionable under Ninth Circuit precedent.
the New York team further elected to                  As such, they have not rebutted the
close its case without bringing an enforce-           ‘‘strong presumption’’ established in the
ment action.22 The New York team in fact              statutes, regulations, and caselaw in De-
exercised greater discretion than the pros-           fendant’s favor. Gaubert, 499 U.S. at 324,
ecutors in General Dynamics—the prose-                111 S.Ct. 1267. The discretionary function
cutors in General Dynamics were present-              exception bars Plaintiffs’ claims.
ed with clear (albeit incorrect) evidence
showing fraud; it does not exactly require            V.      PLAINTIFFS’ REQUEST TO CON-
‘‘a robust exercise of discretion’’ to decide                 DUCT DISCOVERY
to prosecute that fraud. 139 F.3d at 1285.              Plaintiffs insist that as-yet-undiscovered
Here, however, neither the Washington                 internal policies and guidelines will reveal
team nor the New York team uncovered                  that the SEC’s actions violated clear man-
any actionable wrongdoing. Accordingly,               datory rules. (Surreply at 9, 11.) Howev-
the New York team exercised relatively                er, Plaintiffs have not plausibly alleged any
‘‘robust’’ discretion by deciding to investi-         facts suggesting that such mandatory rules
gate the allegations further and ultimately           exist. In addition, Plaintiffs have failed to

22. Even though Plaintiffs allege that the New           sue it.’’ Id. (emphasis added). Likewise, the
  York team’s review of the Washington team’s            first New York team could have conducted
  files was ‘‘cursory,’’ the General Dynamics            additional investigations into Madoff’s opera-
  court clearly explained that it is inappropriate       tions or reviewed the Washington team’s files
  to consider the thoroughness or accuracy of            more thoroughly. However, the first New
  an intervening exercise of ‘‘broad based dis-          York team retained ‘‘broad based discretion’’
  cretion.’’ See 139 F.3d at 1285. The General           to choose the methods and scope of its inves-
  Dynamics prosecutors ‘‘could have had even             tigation.
  more information if they had chosen to pur-
1052                  707 FEDERAL SUPPLEMENT, 2d SERIES

identify the specific types of rules that are   doors of discovery for a plaintiff armed
likely to exist. Finally, Plaintiffs have       with nothing more than conclusions.’’);
failed to consult the voluminous public rec-    Twombly, 550 U.S. at 556, 127 S.Ct. 1955
ord that might bolster their conclusory         (‘‘[A]sking for plausible grounds to infer’’
assertions or potentially contradict them.      that a wrongful act occurred requires
In short, Plaintiffs have failed to allege      plaintiff to plead ‘‘enough facts to raise a
sufficient ‘‘facts to raise a reasonable ex-    reasonable expectation that discovery
pectation that discovery will reveal evi-       will reveal evidence of’’ that wrongful act)
dence’’ supporting their conclusory asser-      (emphasis added).
tions. Twombly, 550 U.S. at 556, 127 S.Ct.
1955. This Court is barred from ‘‘un-              The Ninth Circuit applied Twombly to
lock[ing] the doors of discovery for a plain-   the discretionary function exception in Doe
tiff armed with nothing more than conclu-       v. Holy See, 557 F.3d at 1084–86. The
sions.’’ Ashcroft v. Iqbal, 129 S.Ct. at        court affirmed a dismissal under the For-
1950. Accordingly, discovery is inappro-        eign Sovereign Immunities Act’s discre-
priate at this juncture.                        tionary function exception where the de-
                                                fendant made only a ‘‘facial attack on the
  A.   LEGAL STANDARD                           allegations of subject-matter jurisdiction in
   [9] ‘‘[W]here pertinent facts bearing on     the complaint.’’ Id. at 1086. The court
the question of jurisdiction are in dispute,    dismissed the complaint because it con-
discovery should be allowed.’’ Am. West         tained only conclusory assertions that the
Airlines, Inc. v. GPA Group, Ltd., 877          defendant had adopted a mandatory policy
F.2d 793, 801 (9th Cir.1989). However, a        relevant to the cause of action, and the
‘‘court’s refusal to allow further discovery    plaintiff wholly failed to ‘‘state the terms of
before dismissing on jurisdictional grounds     this alleged policy, or describe any docu-
is not an abuse of discretion ‘when it is       ments, promulgations, or orders embody-
clear that further discovery would not          ing it.’’ Id. Notably, the court did not
demonstrate facts sufficient to constitute a    require that the plaintiff have an opportu-
basis for jurisdiction.’ ’’ Id. at 801 (quot-   nity to conduct discovery into the existence
ing Wells Fargo & Co. v. Wells Fargo            of this alleged policy. See id. at 1084–86.
Express Co., 556 F.2d 406, 430–31, n. 24
                                                Instead, the court merely analyzed the
(9th Cir.1977)).
                                                adequacy of the plaintiff’s pleadings, and,
   In the FTCA immunity context, ‘‘[i]t is      finding them to be insufficient under
well-established that ‘the burden is on the     Twombly, affirmed dismissal under the
party seeking to conduct additional discov-     discretionary function exception. Id. at
ery to put forth sufficient facts to show       1086.
that the evidence sought exists.’ ’’ Gager
v. United States, 149 F.3d 918, 922 (9th          Even prior to the Supreme Court’s re-
Cir.1998) (quoting Conkle v. Jeong, 73 F.3d     articulation of the proper pleading require-
909, 914 (9th Cir.1995)) (internal altera-      ments in Twombly and Iqbal, it was not
tions omitted). In this regard, it is impor-    unusual for courts to dismiss FTCA claims
tant to remember that the Rule 8 pleading       under the discretionary function exception
requirements prevent parties from filing        without giving litigants an opportunity to
complaints in order to conduct aimless          conduct discovery. See, e.g., Abreu v.
fishing expeditions in the hope that some       United States, 468 F.3d 20, 33 (1st Cir.
helpful evidence might possibly be uncov-       2006); Dalli v. Frech, 70 Fed.Appx. 46 (2d
ered. See Ashcroft v. Iqbal, 129 S.Ct. at       Cir.2003); see also Mesa v. United States,
1950 (‘‘Rule 8 TTT does not unlock the          123 F.3d 1435, 1439 (11th Cir.1997) (af-
                    DICHTER–MAD FAMILY PARTNERS, LLP v. U.S.                                        1053
                                 Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

firming dismissal under discretion function            that the evidence sought exists.’’ Gager,
exception where ‘‘[plaintiffs] have pointed            149 F.3d at 922.
to no act of these DEA agents that could                  A salient analogy can be found in Free-
fall outside of the discretionary function             man v. United States, 556 F.3d 326 (5th
exception, nor have the [plaintiffs] pointed           Cir.), cert. denied, ––– U.S. ––––, 130 S.Ct.
to any requested discovery that could rea-             154, 175 L.Ed.2d 39 (2009). In that case,
sonably be expected to reveal any such                 the court held that the ‘‘plaintiffs have
act.’’); accord Razore v. Tulalip Tribes of            failed to articulate a discrete discovery
Wash., 66 F.3d 236, 240 (9th Cir.1995)                 request that might cure the jurisdictional
(affirming dismissal of CERCLA action on               deficiency and have failed to otherwise
jurisdictional grounds without permitting              specify where they might discover the nec-
parties to conduct discovery); but see Ig-             essary factual predicate for subject matter
natiev v. United States, 238 F.3d 464, 467             jurisdiction.’’ Id. at 342. The Freeman
(D.C.Cir.2001) (holding that D.C. Circuit              case is particularly relevant because it in-
‘‘require[s] that plaintiffs be given an op-           volved a ‘‘well-documented’’ government
portunity for discovery of facts TTT [re-              failure akin to the one at issue in the
garding the] existence [or not] of internal            present case: the government’s response
governmental policies guiding that ac-                 to Hurricane Katrina. Id. at 343. The
tion.’’).23                                            court stated that it found ‘‘no fault in the
                                                       district court’s conclusion that a mandato-
                                                       ry directive, if one existed, could be found
  B.    DISCUSSION AND ANALYSIS
                                                       in the public realm’’ because ‘‘in this case
   [10] Additional discovery is not appro-             plaintiffs’ allegations are based on statutes,
priate at present. Plaintiffs have not                 regulations, and other authorities that are
pleaded ‘‘enough facts to raise a reason-              publicly available.’’ Id. at 342.
able expectation that discovery will reveal              Freeman is particularly apt because the
evidence of’’ the sought-after SEC policies            plaintiffs in that case relied heavily ‘‘on
and guidelines. Twombly, 550 U.S. at 556,              numerous congressional investigations re-
127 S.Ct. 1955. In their request for dis-              garding the government’s response to
covery contained in the sur-reply, Plain-              Hurricane Katrina.’’ Id. at 342 n. 16. In
tiffs have failed to meet their burden of              the case before this Court, Plaintiffs rely
‘‘put[ting] forth sufficient facts to show             almost exclusively on the SEC Office of

23. The D.C. Circuit’s Ignatiev opinion re-                 qualified immunity ‘‘as much as possible in
  quires that district courts in that Circuit allow         anticipation of a summary judgment mo-
  FTCA plaintiffs an opportunity to pursue lim-             tion.’’ Iqbal Brief 27. We have held, how-
  ited discovery to determine whether or not                ever, that the question presented by a mo-
  internal agency guidelines mandate staff                  tion to dismiss a complaint for insufficient
  members to take a particular course of action.            pleadings does not turn on the controls
  It is unclear whether Ignatiev’s bright-line              placed upon the discovery process. Twom-
  rule survives post-Twombly and -Iqbal, both               bly, [550 U.S.] at 559, 127 S.Ct. 1955 (‘‘It is
  of which state that something more than a                 no answer to say that a claim just shy of a
  conclusory allegation is required to obtain               plausible entitlement to relief can, if
  discovery. As the Supreme Court explained                 groundless, be weeded out early in the dis-
  in Iqbal:                                                 covery process through careful case man-
    Respondent TTT implies that our construc-               agement given the common lament that the
    tion of Rule 8 should be tempered where, as             success of judicial supervision in checking
    here, the Court of Appeals has ‘‘instructed             discovery abuse has been on the modest
    the district court to cabin discovery in such           side.’’).
    a way as to preserve’’ petitioners’ defense of        Iqbal, 129 S.Ct. at 1953.
1054                   707 FEDERAL SUPPLEMENT, 2d SERIES

Inspector General’s Report. Plaintiffs             plaintiff has previously amended his com-
have done nothing more than read a small           plaint.’’ Allen v. City of Beverly Hills, 911
portion of the voluminous public record            F.2d 367, 373 (9th Cir.1990) (citing Ascon
regarding the relevant factual issues.             Properties, Inc. v. Mobil Oil Co., 866 F.2d
   Notably, Plaintiffs have not shown that         1149, 1160 (9th Cir.1989)).
the relevant information is unavailable to            It is disfavored to prevent a plaintiff
them in the absence of discovery. To the           from amending the complaint at least once,
contrary, the SEC Inspector General has            and Defendant has not introduced any evi-
issued a follow-up report that specifically        dence showing that amendment would be
examines the Office of Compliance Inspec-          entirely futile. Accordingly, Plaintiffs are
tions and Examinations’s ‘‘modules, poli-          granted 30 days to amend their Complaint
cies, procedures and guidance associated           and incorporate plausible factual allega-
with the conduct of its examinations’’ into        tions showing that the SEC failed to con-
Madoff’s conduct. The Court further                form to its mandatory duties.
notes that countless other relevant docu-
ments are readily available through the               [11] Plaintiffs are cautioned that an
SEC’s website.                                     amended complaint supercedes a previous
                                                   complaint. See, e.g., Hal Roach Studios,
  Accordingly, Plaintiffs’ request for dis-
                                                   Inc. v. Richard Feiner & Co., 896 F.2d
covery is denied.
                                                   1542, 1546 (9th Cir.1990); see also Local
VI.   LEAVE TO AMEND THE COM-                      Rule 15–2. When an amended complaint
      PLAINT                                       is filed, the previous complaint is rendered
                                                   null and void, and only the amended com-
   When a court grants a motion to dis-
                                                   plaint remains legally operable. Under
miss, the court may grant the plaintiff
                                                   this rule, ‘‘a plaintiff waives all causes of
leave to amend a deficient claim ‘‘when
                                                   action alleged in the original complaint
justice so requires.’’ Fed.R.Civ.P. 15(a)(2).
                                                   which are not alleged in the amended com-
The plaintiff need not specifically request
                                                   plaint.’’ London v. Coopers & Lybrand,
leave to amend. Doe v. United States, 58
                                                   644 F.2d 811, 814 (9th Cir.1981). Accord-
F.3d 494, 497 (9th Cir.1995); but see
                                                   ingly, if Plaintiffs wish to preserve their
Reyn’s Pasta Bella, LLC v. Visa USA,
                                                   original arguments for appeal, Plaintiffs
Inc., 442 F.3d 741, 749 (9th Cir.2006) (‘‘Al-
                                                   are advised to restate those allegations in
though Plaintiffs’ complaint is susceptible
                                                   their amended complaint.24 However, in
of amendment, we generally will not re-
mand with instructions to grant leave to           order to expedite future proceedings, the
amend unless the plaintiff sought leave to         Court orders Plaintiffs to clearly identify
amend below.’’) (citing Alaska v. United           any modifications, additions, or deletions in
States, 201 F.3d 1154, 1163–64 (9th Cir.           their amended complaint.
2000)). ‘‘Five factors are frequently used           While preparing the amended complaint,
to assess the propriety of a motion for            Plaintiffs are advised that Fed.R.Civ.P.
leave to amend: (1) bad faith, (2) undue           11(b) requires that the factual allegations
delay, (3) prejudice to the opposing party,        be made ‘‘to the best of the person’s
(4) futility of amendment; and (5) whether         knowledge, information, and belief, formed

24. Given the voluminous nature of the origi-       the ‘‘law of the case’’ doctrine may preclude
  nal complaint, the Court grants Plaintiffs        reconsideration of the specific allegations ad-
  permission to incorporate their original alle-    dressed in the present Order. See, e.g., Unit-
  gations by reference into the amended com-        ed States v. Smith, 389 F.3d 944, 948–50 (9th
  plaint. The Court anticipates, however, that      Cir.2004).
                                     ROUSER v. WHITE                                         1055
                              Cite as 707 F.Supp.2d 1055 (E.D.Cal. 2010)

after an inquiry reasonable under the cir-          Order. If Plaintiffs choose to file an
cumstances.’’ Obviously this rule does not          amended complaint, the amended com-
require Plaintiffs’ amended complaint to            plaint must be filed within 30 days of the
contain factual support of the type re-             date that this Order is entered on the
quired in a Rule 56 summary judgment                docket. Should Plaintiffs fail to file an
motion. But in the present context, in              amended complaint, the action will be dis-
order for Plaintiffs’ pre-filing ‘‘inquiry’’ to     missed without prejudice for lack of sub-
be ‘‘reasonable under the circumstances,’’          ject matter jurisdiction.
they are expected to make a good faith
examination of the publicly available docu-            IT IS SO ORDERED.
ments and allege only those facts that are

                                                                     ,
reasonably likely to find evidentiary sup-
port during discovery. Plaintiffs shall re-
frain from submitting additional concluso-
ry allegations regarding unnamed ‘‘policies
and practices.’’ Plaintiffs shall also refrain
from submitting new allegations that are
contradicted by facts stated in any of the                  William ROUSER, Plaintiff,
SEC’s Office of Inspector General reports
unless Plaintiffs can also plausibly allege                                 v.
that such reports are inaccurate or incom-               Theo WHITE, et al., Defendants.
plete. Plaintiffs shall identify, to the best
                                                         No. CIV S–93–0767 LKK GGH P.
of their ability, the specific type of conduct
governed by the alleged policies and the                     United States District Court,
specific time period during which the poli-                        E.D. California.
cies were effective.
  Plaintiffs are advised that if they are                             April 15, 2010.
unable to make a sufficient good faith in-          Background: State prisoner, who was
quiry within 30 days, their action will be          practicing Wiccan, brought action under
dismissed without prejudice for lack of             § 1983 and Religious Land Use and Insti-
subject matter jurisdiction. See Frigard            tutionalized Persons Act (RLUIPA)
v. United States, 862 F.2d 201, 204 (9th            against prison officials, alleging, among
Cir.1988) (per curiam); Fed.R.Civ.P. 41(b).         other things, that officials retaliated
Because dismissal for lack of subject mat-          against his filing of grievances and litiga-
ter jurisdiction is ordinarily without preju-       tion arising out of officials’ alleged failure
dice, Plaintiffs may not necessarily be             to accommodate his practice of religion.
barred from reinstating the action in the           Prisoner moved for preliminary injunction,
future. See Wright & Miller, Federal                seeking order enjoining officials from tak-
Practice & Procedure § 1350 & nn. 61–62             ing his religious articles and requiring
(collecting cases).                                 them to satisfy certain requirements with
                                                    respect to his religious services.
VII.   CONCLUSION
                                                    Holdings: The District Court, Lawrence
   Accordingly, Defendants’ Motions to
Dismiss for lack of subject matter jurisdic-        K. Karlton, Senior District Judge, held
tion are GRANTED. Plaintiffs may file               that:
an amended complaint containing new alle-           (1) it could entertain prisoner’s motion
gations that are reasonably aimed at satis-             even though interlocutory appeal was
fying Plaintiffs’ burden as described in this           pending;