SEC Absorbs Body Blows But Remains Undefeated in Lawsuits Against It

The SEC has been named as a defendant in a series of unusual lawsuits recently. One of the cases, a lawsuit brought by alleged Ponzi schemer Allen Stanford, was voluntarily dropped last month and now a second case filed by Madoff victims has been dismissed by a federal court.

In 2009, two Madoff investors sued the SEC under the Federal Tort Claims Act alleging that they were damaged by the agency's gross negligence in its oversight, investigations, and examinations of Bernard Madoff and his firm. On Tuesday of this week, Judge Laura Taylor Swain dismissed the case for lack of subject matter jurisdiction. In short, the court ruled that the decisions of the SEC regarding whom to investigate and how to conduct such investigations were discretionary and shielded from suit by sovereign immunity.

The SEC did not escape harsh criticism from the court, however. The court noted that the plaintiffs' allegations described conduct that "defied common sense and reeked of incompetency." It stated that:

“Scandalous and outrageous as Plaintiffs' allegations (and findings of the OIG Report on which they are based) are, Plaintiffs fail to identify any specific, mandatory duty that the SEC violated in its numerous instances of sloppy, uninformed, irresponsible behavior....That the conduct in question defied common sense and reeked of incompetency does not indicate that any formal, specific, mandatory policy was "likely" violated.