Investors who lost billions in Bernie Madoff’s infamous Ponzi scheme may be angry with securities regulators for failing to catch him during his decades-long crime, but a federal appeals court ruled Wednesday the investors cannot sue them.
The Second U.S. Circuit Court of Appeals upheld a lower court’s rejection of claims by a number of defrauded Madoff clients who argued “the SEC [Securities and Exchange Commission] negligently failed to adequately investigate Bernard Madoff despite numerous warnings.”
The three-judge panel said SEC employees are shielded by what’s known as the Discretionary Function Exception, which protects the government from certain lawsuits even if a private employer could be held liable under similar circumstances.
“We recognized that challenging the SEC would be difficult but this was a case that needed to be fought,” said plaintiff’s attorney, Howard Elisofon. “We believe that our clients were wronged (both by Madoff and the SEC) and their rights needed to be vindicated.”
The judges said they have “sympathy” for the plaintiffs, and they called the SEC’s failure to uncover Madoff’s scheme “regrettable.” However, the judge said, “Congress’s intent to shield regulatory agencies’ discretionary use of specific investigative powers… is fatal to the plaintiffs’ claims.”
“We were disappointed,” said another of the plaintiff’s attorneys, Howard Kleinhendler, who told ABC News he plans to appeal to the United States Supreme Court. “The SEC completely failed. They failed to collect the facts. They failed to properly investigate. They broke down and should be held accountable.”
The SEC declined to comment on the decision.
Madoff pleaded guilty in 2009 to orchestrating a colossal fraud that cost his clients at least $17 billion. He is serving what amounts to a life sentence at a federal prison in North Carolina.