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SEC Cannot Be Sued for Negligence in Madoff Action
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On Wednesday, a three-judge panel of the 2nd U.S. Circuit Court of Appeals upheld the dismissal of lawsuits brought against the SEC by victims of the Madoff Ponzi scheme and observed the SEC’s “regrettable inaction” was protected by a law that shields federal agencies from any liability in use of discretionary powers.

Several similar lawsuits brought by former Madoff investors against the SEC, that had been earlier dismissed, were consolidated in the appeal.


The investors had based their lawsuit on a 2009 report by the office of the Inspector General of the Securities and Exchange Commission that detailed how the SEC had failed to follow up on leads on the Ponzi scheme and how the agency had missed warning signals while investigating Bernard L. Madoff Investment Securities LLC.

Howard Kleinehendler, a lawyer representing eight plaintiffs who collectively lost $50 million in the Madoff scheme said that he would seek a Supreme Court review on the matter. He found it unconscionable that taxpayers pay money for the upkeep of an agency, but can’t hold it accountable for blatant negligence.

The opinion issued by the 2nd Circuit observed the court had “sympathy for Plaintiff’s predicament (and our antipathy for the SEC’s conduct).” Earlier this year, the 9th Circuit also dismissed claims brought against the SEC by former Madoff clients in a separate case.

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The 2nd Circuit ruling upheld the April 2011 decision by U.S. District Judge Laura Taylor Swain in Manhattan, dismissing the lawsuit brought against SEC by victims of the Madoff scheme.

Bernard Madoff had pleaded guilty in March 2009 to running a $65-billion Ponzi scheme and was sentenced to 150 years in prison.



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