Judge: Bernie Madoff Victims Can't Sue SEC

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Two victims of Bernard Madoff's massive Ponzi scheme can't sue the Securities and Exchange Commission for failing to stop the fraud, a federal judge in Manhattan ruled.

Phyllis Molchatsky and Steven Schneider sought $2.4 million in damages in their suit against the government, which they accused of failing to take "necessary and basic steps to determine if Madoff was misrepresenting his trading."

U.S. District Judge Laura Taylor Swain granted the government's motion to dismiss the action after finding the plaintiffs could not prove that the SEC had a duty to investigate Madoff.

"Plaintiffs have not identified any specific, non-discretionary mandate that the SEC conduct investigations under particular circumstances, or that such investigations be conducted in a particular manner," Swain wrote.

The government is often protected by immunity under the Federal Tort Claims Act, but the plaintiffs argued that the immunity had been waived because the government had a duty to investigate Madoff. 

Swain disagreed with the claim that the government was liable for SEC investigations that "were carried out in a sloppy manner and failed to comply with the dictates of common sense."

"Scandalous and outrageous as Plaintiffs' allegations are, Plaintiffs fail to identify any specific, mandatory duty that the SEC violated in its numerous instances of sloppy, uninformed, irresponsible behavior," the ruling states.

"That the conduct in question defied common sense and reeked of incompetency does not indicate that any formal, specific, mandatory policy was 'likely' violated."