Court Expresses Antipathy for S.E.C. in Handling of Madoff Case

A federal appeals court ruled on Wednesday that Bernard L. Madoff‘s investors cannot sue the Securities and Exchange Commission for not uncovering his fraud, but at the same time blasted the agency for its failings.

“Despite our sympathy for plaintiffs’ predicament (and our antipathy for the S.E.C.’s conduct),” the investors claims are barred because of a federal law that protects government agencies from lawsuits related to their discretionary use of investigatory powers, the United States Appeals Court for the Second Circuit said.

Notwithstanding the S.E.C.’s “regrettable inaction,” the court added, the commission is shielded from a negligence suit. The ruling upheld the 2011 dismissal of the case by the trial court judge in 2011.

The S.E.C. and other government agencies are protected by an exception to a law â€" the Federal Tort Claims Act â€" that allows citizens to sue the United States. The exception, in fact, is an “exception to an exception,” because the act is an exception to sovereign immunity law that typically immunizes the United States from suit.

A group of Madoff investors blamed the S.E.C. for its grossly negligent oversight of Madoff’s investment business. Relying on the damning report by the S.E.C.’s inspector general on the case, the investors cited the S.E.C.’s failure on multiple occasions to respond to questions raised about the Madoff business. In recapping the plaintiffs’ allegation, the three-judge appeals panel highlighted the agency’s deficiencies in handling the Madoff case.

“Plaintiffs allege in detail approximately eight separate complaints the S.E.C. received regarding Madoff and the S.E.C.’s inadequate and often incompetent response to each,” the court wrote. “As a result of the S.E.C.’s repeated failure to alert other branch offices of ongoing investigations, properly review complaints and staff subsequent inquiries, and follow up on disputed facts elicited in interviews, the S.E.C. missed many opportunities to uncover Madoff’s multibillion-dollar fraud.”

Mr. Madoff, 74, is serving an 150-year sentence in a federal prison in North Carolina after admitting in 2009 to orchestrating the largest Ponzi scheme in history.