Molchatsky et al v. United States Of America

Filing 6

MEMORANDUM OF LAW in Support re: 5 MOTION to Dismiss for Lack of Jurisdiction.. Document filed by United States Of America. (Ehrlich, Jeffrey)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
––––––––––––––––––––––––––––––––––––x
:
PHYLLIS MOLCHATSKY and
:
STEVEN SCHNEIDER, M.D.,
:
:
Plaintiffs,
:
:
v.
:
:
UNITED STATES OF AMERICA,
:
:
Defendant.
:
:
––––––––––––––––––––––––––––––––––––x

09 CIV 8697 (LTS/AJP)

UNITED STATES OF AMERICA’S MEMORANDUM
OF LAW IN SUPPORT OF ITS MOTION TO DISMISS

PREET BHARARA
United States Attorney
Southern District of New York
SARAH S. NORMAND
Assistant United States Attorney
Southern District of New York
86 Chambers Street, Third Floor
New York, NY 10007
212-637-2709
[e-mail]

TONY WEST
Assistant Attorney General
PHYLLIS J. PYLES
Director, Torts Branch
MARY M. LEACH
Assistant Director, Torts Branch
JEFFREY PAUL EHRLICH
Trial Attorney, Torts Branch
Department of Justice
Benjamin Franklin Station
P.O. Box 888
Washington, D.C. 20044
202-353-2574
[e-mail]

TABLE OF CONTENTS
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARGUMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
I. The challenged actions involve elements of judgment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
II. The challenged actions are susceptible to policy analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

INTRODUCTION
Operating a massive Ponzi scheme, Bernard L. Madoff stole billions of dollars from
thousands of investors, including charities, pension funds, universities, and individuals.
Plaintiffs, two of Madoff’s investors, brought this suit under the Federal Tort Claims Act seeking
to recover their losses not from Madoff, but from the United States, based on the SEC’s allegedly
negligent investigations of Madoff’s wrongdoing.
But the manner in which the SEC investigates suspected violations of the securities laws
is grounded in policy and committed to the SEC’s discretion by Congress. Decisions made in the
course of such investigations are therefore shielded from liability by the discretionary function
exception to the FTCA. Indeed, how to staff cases, which leads to pursue, and from what sources
to obtain evidence—decisions made in the course of every investigation—are classic
discretionary judgments that courts have traditionally refused to second-guess.
Even assuming that the SEC acted negligently in the course of its Madoff investigations,
the discretionary function exception would still apply. Investigations are conducted to assist the
SEC in deciding whether to commence civil proceedings against suspected wrongdoers. Those
decisions, like prosecutors’ decisions whether to charge criminal suspects, are quintessentially
discretionary and subject to policy considerations. The discretionary function exception protects
all such decisions, and therefore bars Plaintiffs’ claims, regardless of whether the SEC’s
investigations were performed negligently.
Plaintiffs’ losses are undeniably tragic. And, for the purpose of this motion, the Court
may assume that they were preventable—if only the SEC had shut down Madoff’s scheme; or if
only it had employed better-qualified and more-experienced investigators, been more persistent
1

in its pursuit of the facts, or devoted additional time and resources to its examinations. In
enacting the discretionary function exception, however, Congress made clear its intent that courts
not use FTCA lawsuits to revisit such judgment calls by federal agencies. This lawsuit must
therefore be dismissed for lack of subject-matter jurisdiction.

FACTS1
Over a period of years, the SEC received several complaints that Madoff was running a
Ponzi scheme.2 Plaintiffs contend that although the SEC investigated these allegations of
wrongdoing by Madoff, its investigations were performed so negligently that the SEC failed to
appreciate what Madoff was up to and the need to stop him.
The SEC’s negligence, according to Plaintiffs, took many forms. “Inquiries were
delegated from SEC teams that had expertise in financial fraud to ones that did not.”3 “Critical

1

For purposes of this motion, the well-pleaded factual allegations of the Complaint are taken
as true. See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009) (“When there are well-pleaded
factual allegations, a court should assume their veracity and then determine whether they
plausibly give rise to an entitlement to relief.”).
2

Compl. ¶ 5.

3

Id. ¶ 6; see also, e.g., id. ¶ 43 (alleging that investigation was assigned to “staff who had no
experience with Ponzi schemes”), ¶ 49 (alleging that “top SEC staffer at the meeting had ‘zero
comprehension’ of what [a tipster] was explaining”), ¶ 51 (alleging that complaint was assigned
to staffer who was “very ill-trained, uninformed about industry practices, did not understand
financial instruments . . . [and who] [d]idn’t even have a basic understanding of finance”), ¶ 55
(alleging that complaint was assigned to staffer “who had never handled a Ponzi-scheme
investigation and had no understanding of options trading, an integral part of Madoff’s purported
strategy”), ¶ 86 (alleging that complaint was transferred “from the Investment Management team
to the Broker-Dealer team in the SEC’s Washington, D.C. office, when the former had relevant
experience, and the latter did not”), ¶ 114 (alleging that complaint was transferred “from the
Investment Management team to the Broker-Dealer team, when the former had relevant
experience, and the latter did not”), ¶ 153 (alleging that case was transferred “from the Boston
2

tasks were assigned to junior staffers who had no relevant training or experience.”4 Procedures
for tracking and planning investigations were ignored.5 Investigators failed to contact third
parties to attempt to verify Madoff’s claims.6 “Petty jealousies and inter-office rivalries led to
tipsters being disregarded and key resources of other SEC teams going unutilized.”7 Staff were

Broker-Dealer team to the New York Enforcement team, when the former had relevant
experience and history with Madoff, and the latter did not”).
4

Id. ¶ 6; see also, e.g., id. ¶ 35 (“Both examiners assigned to the case were only 2 years out of
college, and had no expertise or understanding of how Ponzi schemes operated.”), ¶ 70 (alleging
that staffers “‘weren’t familiar with securities laws’”), ¶ 124 (alleging that “the lion’s share of the
work was assigned to a junior staff attorney who had only recently graduated from law school
and joined the SEC nineteen months before the referral”), ¶ 145 (“But the staffer apparently was
too inexperienced to understand that she had already caught Madoff in serious wrongdoing, and
simply disregarded the commingling, which, if pursued, would itself have inevitably brought
down the scheme.”), ¶ 150 (alleging that “junior staffer’s inexperience and incompetence”
resulted in discovery of “nothing but a red herring”), ¶ 153 (alleging that “principal duties” were
assigned “to a junior staffer with no experience with Ponzi schemes”).
5

Id. ¶ 6; see also, e.g., id. ¶ 109 (alleging that “the Washington team had never entered the
opening of their case in the SEC’s internal case tracking system” and that “the New York team
never checked the system before launching its own investigation”), ¶ 114 (faulting SEC for
failing “to draft a planning memorandum to direct the investigation”).
6

Id. ¶ 6; see also, e.g., id. ¶ 9 (alleging “an agency culture of deference to powerful industry
figures”), ¶ 38 (“Critically, the team did not make any effort to obtain any other information
independently from third parties. . . .”), ¶ 43 (faulting SEC for failing to obtain records directly
from the Depository Trust Corporation, “instead . . . requesting them from Madoff”), ¶ 75
(faulting SEC for failing to confirm Madoff’s supposed trading activity with NASD), ¶ 80
(“Likewise, the team failed to consult the Chicago Board Options Exchange . . . despite the fact
that the . . . complaint questioned whether any of the options trades Madoff was purportedly
making through that exchange . . . had actually taken place.”), ¶ 102 (“Moreover, the team never
contacted any of Madoff’s counterparties to see if he was actually trading with them.”), ¶ 114
(alleging that SEC failed “to contact any other third parties to obtain confirmation of Madoff’s
claimed activities”), ¶ 153 (alleging failure “to ask DTC the size of Madoff’s positions there”).
7

Id. ¶ 6; see also, e.g., id. ¶ 68 (“The Broker-Dealer team never conferred with the Investment
Management team for support or information . . . due to a pervasive atmosphere of jealousy and
secrecy that prevented SEC teams from working together effectively.”), ¶ 125 (alleging that
tipster “inadvertently triggered a vendetta against himself by the supervisor, who would
3

“cowed” by Madoff’s power and influence “into giving him the benefit of the doubt,” despite
their suspicions that he was lying.8 And, finally, investigators failed to follow the right leads and
missed obvious signs that Madoff was, in fact, duping his investors.9 These mistakes, according
to Plaintiffs, allowed Madoff “to pass through the SEC’s investigations unscathed.”10

thereafter constantly denigrate him and the importance of the investigation”), ¶ 128 (“The
supervisor was angry, embarrassed, and unwilling to acknowledge her own lack of expertise, and
she ended up taking out her personal frustrations on [the tipster] and, in turn, on Madoff’s
victims.”), ¶ 150 (blaming failed investigation on “supervisors’ hostility towards” tipster).
8

Id. ¶ 6; see also, e.g., id. ¶ 35 (alleging that investigators “may have been overawed by
Madoff,” leading to a less rigorous examination), ¶ 103 (alleging that supervisor suspected
Madoff was lying, but “was hesitant to make trouble for someone so ‘well connected’”), ¶ 105
(“[S]upervisors . . . had become ‘captive’ regulators, who would turn a blind eye to the
suspicious activities of industry heavyweights like Madoff, who they considered ‘powerful and
well connected,’ rather than risk even the emptiest threats to their careers.”).
9

See, e.g., id. ¶ 62 (faulting SEC staffer for failing to read articles, flagged by another staffer,
that suggested fraud by Madoff), ¶¶ 72-73 (alleging that SEC negligently focused its
investigation on “front-funning” rather than Madoff’s Ponzi scheme), ¶ 74 (alleging that
investigation failed to consider “numerous pertinent issues”), ¶ 84 (challenging SEC’s priorities;
“Supervisors determined that a new investigation probing mutual funds was more important than
following up on Madoff, whom they already knew was accused of operating what was later
discovered to be the largest Ponzi scheme in history.”), ¶ 94 (“Once again . . . the supervising
staff member decided, in knee-jerk fashion, to focus the inquiry exclusively on front-running.”),
¶ 132 (“Just as the earlier investigations had focused on front-running instead of the Ponzischeme scenario, the Enforcement team focused almost exclusively on determining whether
Madoff should register as an investment adviser or whether Madoff’s hedge fund investors’
disclosures were adequate. This focus clearly ignored the [inquiry’s] initial designation . . . of a
‘fraud investigation.’”), ¶ 135 (“The Enforcement team never followed up.”), ¶ 146 (accusing
SEC of “utterly failing to follow up obvious and necessary areas of further inquiry”).
10

Id. ¶ 5.
4

ARGUMENT
The Court must dismiss this case for lack of subject-matter jurisdiction, as Plaintiffs’
claims are barred by the discretionary function exception to the FTCA.
The United States is immune from liability absent its consent, and the terms of that
consent define a court’s jurisdiction to entertain a suit against the United States.11 The
“‘limitations and conditions upon which the Government consents to be sued must be strictly
observed and exceptions thereto are not to be implied.’”12 Thus, at the outset of a case against the
United States, the court must determine whether the United States has waived its immunity.
Absent a specific waiver, sovereign immunity bars suit for lack of subject-matter jurisdiction.13
The burden to establish jurisdiction rests squarely on the plaintiffs, as the party asserting it.14
The FTCA is a limited waiver of sovereign immunity; subject to several exceptions, it
authorizes suits against the United States for damages “caused by the negligent or wrongful act or
omission of any employee of the Government.”15 The discretionary function exception is one of
the exceptions. It provides that the United States may not be held liable “based upon the exercise
or performance or the failure to exercise or perform a discretionary function or duty on the part of
a federal agency or an employee of the Government, whether or not the discretion involved be

11

United States v. Mitchell, 445 U.S. 535, 538 (1980).

12

Lehman v. Nakshian, 453 U.S. 156, 161 (1981) (quoting Soriano v. United States, 352 U.S.
270, 276 (1957)).
13

FDIC v. Meyer, 510 U.S. 471, 475-76 (1994).

14

Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1994).

15

28 U.S.C. § 1346(b); see also 28 U.S.C. § 2674 (“The United States shall be liable . . . in
the same manner and to the same extent as a private individual under like circumstances. . . .”).
5

abused.”16 “If a claim falls within this exception, the court lacks jurisdiction to entertain the
claim.”17
In determining whether the discretionary function exception applies, the appropriate
inquiry is “whether the challenged acts . . . are of the nature and quality that Congress intended to
shield from tort liability.”18 To assist in this determination, the Supreme Court has prescribed a
two-part test. First, the challenged conduct must involve an “element of judgment or choice.”19
“This inquiry is mandated by the language of the exception; conduct cannot be discretionary
unless it involves an element of judgment or choice. Thus, the discretionary function exception
will not apply when a federal statute, regulation, or policy specifically prescribes a course of
action for an employee to follow.”20 Second, the conduct must involve considerations of public
policy.21 After all, “[t]he basis for the discretionary function exception was Congress’ desire to
‘prevent judicial “second-guessing” of legislative and administrative decisions grounded in

16

28 U.S.C. § 2680(a); see also In re “Agent Orange” Prod. Liab. Litig., 818 F.2d 210, 215
(2d Cir. 1987) (“[W]here . . . the Government is performing a discretionary function, the fact that
discretion is exercised in a negligent manner does not make the discretionary function exception
inapplicable.”).
17

Fazi v. United States, 935 F.2d 535, 537 (2d Cir. 1991).

18

United States v. Varig Airlines, 467 U.S. 797, 813 (1984).

19

See United States v. Gaubert, 499 U.S. 315, 328-29 (1991); Berkovitz v. United States, 486
U.S. 531, 536 (1988); In re World Trade Ctr. Disaster Site Litig., 521 F.3d 169, 195 (2d Cir.
2008).
20

Berkovitz, 486 U.S. at 536 (citation omitted); see also Gaubert, 499 U.S. at 324; Fazi, 935
F.2d at 538; In re World Trade Ctr., 521 F.3d at 195.
21

See Gaubert, 499 U.S. at 332; Berkovitz, 486 U.S. at 537; In re World Trade Ctr., 521 F.3d
at 195.
6

social, economic, and political policy through the medium of an action in tort.’”22 In making this
second determination, “it is unimportant whether the government actually balanced economic,
social, and political concerns in reaching its decision.”23 The relevant question is whether the
decision is “susceptible to policy analysis.”24
Application of this two-part test requires the Court to hold that the discretionary function
exception bars Plaintiffs’ claims. As the Supreme Court has observed, “whatever else the
discretionary function exception may include, it plainly was intended to encompass the
discretionary acts of the Government acting in its role as a regulator of the conduct of private
individuals.”25

I. The challenged actions involve elements of judgment.
The first part of the Supreme Court’s test is satisfied because the challenged actions
involve matters committed to the SEC’s discretion. Under the 1934 Securities Exchange Act, the
SEC has complete discretion in deciding whether, and to what extent, it should investigate
suspected violations of the securities laws. The Act specifically provides that “[t]he Commission
may, in its discretion, make such investigations as it deems necessary to determine whether any

22

Berkovitz, 486 U.S. at 536-37 (quoting Varig Airlines, 467 U.S. at 814).

23

In re Joint E. & S. Dists. Asbestos Litig., 891 F.2d 31, 37 (2d Cir. 1989).

24

Gaubert, 499 U.S. at 325 (emphasis added); see also In re Joint E. & S. Dists. Asbestos
Litig., 891 F.2d at 37 (holding that relevant question is “‘whether the decision is susceptible to
policy analysis’”) (emphasis added) (quoting United States Fidelity & Guar. Co. v. United States,
837 F.2d 116, 121 (3d Cir. 1988)).
25

Varig Airlines, 467 U.S. at 813-14.
7

person has violated, is violating, or is about to violate [the securities laws].”26 The Act further
provides that the SEC “is authorized in its discretion . . . to investigate any facts, conditions,
practices, or matters which it may deem necessary or proper to aid in the enforcement of such
provisions.”27 The SEC enjoys similar discretion in its examinations of brokers, dealers, and
investment advisors.28 Based on this sweeping grant of authority, federal courts uniformly
dismiss FTCA lawsuits challenging decisions by the SEC to investigate (or not) allegations of
wrongdoing.29

26

15 U.S.C. § 78u(a)(1) (emphasis added); see also Sprecher v. Von Stein, 772 F.2d 16, 18
(2d Cir. 1985) (holding that officials “undertaking an investigation authorized by the federal
securities laws” were “performing discretionary functions”); Sprecher v. Graber, 716 F.2d 968,
974 (2d Cir. 1983) (recognizing that “SEC investigations” and the “issuance of subpoenas” are
discretionary under the Act); Levy v. United States, No. 91-15490, 1992 WL 25450, at *1 (9th
Cir. Feb. 14, 1992) (“Thus, from the plain language of the statute, investigations are to be
performed at the discretion of the SEC.”); Bd. of Trade of Chicago v. SEC, 883 F.2d 525, 531
(7th Cir. 1989) (recognizing that “[i]nvestigation” under the act is “discretionary, not
mandatory”); SEC v. Better Life Club of Am., 995 F. Supp. 167, 180 (D.D.C. 1998)
(“Investigation . . . under [the Act] is discretionary. . . .”).
27

15 U.S.C. § 78u(a)(1) (emphasis added).

28

See, e.g., 15 U.S.C. 78q(a) & (b)(1) (“All records of [brokers and dealers] are subject at any
time, or from time to time, to such reasonable periodic, special, or other examinations by
representatives of the Commission . . . as the Commission . . . deems necessary or appropriate in
the public interest, for the protection of investors, or otherwise in furtherance of the purposes of
this title.”); 15 U.S.C. 80b-4(a) (“All records . . . of . . . investment advisers are subject at any
time, or from time to time, to such reasonable periodic, special, or other examinations by
representatives of the Commission as the Commission deems necessary or appropriate in the
public interest or for the protection of investors.”).
29

See, e.g., Levy, 1992 WL 25450, at *1 (affirming dismissal of FTCA claim challenging
SEC’s decision not to investigate third party); Standifer v. SEC, 542 F. Supp. 2d 1312, 1318
(N.D. Ga. 2008) (“The SEC is granted broad discretion by Congress to investigate possible
violations of the securities laws and to determine whether to bring civil or criminal actions to
remedy those violations. The FTCA does not apply to Plaintiffs’ claims.”) (citation omitted); Le
v. SEC, 542 F. Supp. 2d 1318, 1324 (N.D. Ga. 2008) (same); Better Life Club, 995 F. Supp. at
180 (dismissing FTCA counterclaims based on SEC’s decision to investigate); Leytman v. NYSE,
8

The decision in Levy v. United States is particularly pertinent. There, the plaintiff brought
an FTCA lawsuit challenging the SEC’s failure to investigate and disclose the insolvency of a
third-party corporation.30 The plaintiff later acquired that corporation, “thereby incurring
significant damages.”31
In affirming the district court’s dismissal, the court of appeals quoted the FTCA’s
legislative history to support two points. First, the court noted that the discretionary function
exception, according to the legislative history, was “‘designed to preclude application of the
[FTCA] to a claim based upon an alleged abuse of discretionary authority by a regulatory or
licensing agency—for example, the . . . Securities and Exchange Commission.’”32 Thus,
Congress specifically noted that the SEC’s discretionary authority as a regulatory agency falls
within the scope of the discretionary function exception. Second, the court quoted the statement
in the legislative history that it was “‘neither desirable nor intended that the . . . propriety of a
discretionary administrative act should be tested through the medium of a damage suit for

No. 95 CV 902, 1995 WL 761843, at *3 (E.D.N.Y. Dec. 6, 1995) (“The decision of whether or
not to investigate . . . is left in the discretion of the Commission. Even if the Commission abuses
that discretion, the court may not intervene.”); cf. Redmond v. United States, 518 F.2d 811, 81417 (7th Cir. 1975) (affirming dismissal, based on misrepresentation exception, of FTCA lawsuit
based on SEC’s failure to warn plaintiff before he was defrauded by securities dealer; holding
that “how best to fulfill” the government’s “duty to maintain law and order . . . is wholly within
the discretion of its officers, and [28 U.S.C. § 2680(a)] excepts from the [FTCA] both
discretionary functions and discretionary duties”).
30

1992 WL 25450, at *1.

31

Id.

32

Id. at *2 (quoting Hearings on H.R. 5373 and H.R. 6463 before the H. Comm. on the
Judiciary, 77th Cong. 28, 33 (1942) (statement of Assistant Attorney General Francis M. Shea))
(emphasis added).
9

tort.’”33 Based on this legislative history, and on the robust discretion provided to the SEC by the
1934 Act, the court concluded that the SEC’s failure to investigate and disclose the insolvency of
a third party “was precisely the kind of conduct” that the discretionary function exception was
intended to protect.34
The discretionary function exception covers not only the extent to which the SEC
investigated Madoff, but also the manner in which it investigated him. Indeed, courts have long
recognized that “the sifting of evidence, the weighing of its significance, and the myriad other
decisions made during investigations plainly involve elements of judgment and choice.”35
In their Complaint, Plaintiffs seek to avoid the discretionary function exception by
alleging that “the SEC staff who investigated Madoff . . . were not crafting policy or making
rules[, but were] carrying out their usual and regular obligations.”36 But Plaintiffs’ suggestion
that investigators’ day-to-day activities are not protected by the discretionary function exception
is contradicted by precedent. As the Second Circuit has recognized, “the discretionary function

33

Id.

34

Id.

35

Sloan v. HUD, 236 F.3d 756, 762 (D.C. Cir. 2001); see also Wang v. United States, 61 Fed.
Appx. 757, 759 (2d Cir. 2003) (holding that conduct of investigative agents “involving an
element of discretion, which discretion is based on ‘considerations of public policy,’ is
bulletproof from liability under the operative discretionary function exception”) (citation
omitted); Hobdy v. United States, 762 F. Supp. 1459, 1462 (D. Kan. 1991) (“[T]o the extent that
plaintiff seeks to challenge the manner or thoroughness of the . . . investigation, plaintiff’s claim
is barred by the discretionary function exception.”); Bradley, 615 F. Supp. at 209 (“Deciding how
to investigate, who to investigate, and how to present evidence to the proper authorities are
classic examples of immunized prosecutorial conduct.”).
36

Compl. ¶ 3; see also id. ¶ 14 (“The misconduct of the SEC staff had nothing to [do] with
rule-making or policy analysis and implementation.”).
10

exception bars claims based on day-to-day management decisions if those decisions require
judgments as to which of a range of permissible courses is wisest.”37
During its Madoff investigations, the SEC was regularly required to make such decisions.
There was no statute, regulation, or mandatory directive that compelled the assignment of a
particular investigation to a particular “team.” Nor was there any mandate that the SEC employ
investigators with certain qualifications or levels of experience. There was no requirement that
SEC staffers seek documents or information from sources other than Madoff; indeed, the 1934
Act expressly provides that the SEC “may require . . . any person to file with it a statement in
writing, under oath or otherwise as the Commission shall determine, as to all the facts and
circumstances concerning the matter to be investigated.”38 Finally, there was no statute,
regulation, or mandatory policy that required the SEC to follow one lead over another, or to
investigate one aspect of alleged wrongdoing in addition to others. Again, the 1934 Act
specifically authorizes the SEC, “in its discretion . . . to investigate any facts, conditions,
practices, or matters which it may deem necessary or proper. . . .”39

37

Fazi, 935 F.2d at 538; see also Gaubert, 499 U.S. at 325 (“A discretionary act is one that
involves choice or judgment; there is nothing in that description that refers exclusively to
policymaking or planning functions. Day-to-day management of banking affairs, like the
management of other businesses, regularly requires judgment as to which of a range of
permissible courses is the wisest. Discretionary conduct is not confined to the policy or planning
level.”); Varig Airlines, 467 U.S. at 813 (“[I]t is the nature of the conduct, rather than the status
of the actor, that governs whether the discretionary function exception applies in a given case.”).
38

15 U.S.C. § 78u(a)(1) (emphasis added).

39

Id. (emphasis added); cf. Treats Int’l Enters. v. SEC, 828 F. Supp. 16, 18 (S.D.N.Y. 1993)
(holding that statutes and regulations pertaining to SEC supply no “judicially manageable
standards for judging how and when the SEC should exercise its discretion to investigate
possible securities violations”).
11

Further, the SEC conducts its investigations to inform its decision whether to commence
civil proceedings against suspected violators—a decision that is unquestionably committed to its
discretion. Indeed, the 1934 Act specifically provides that “[w]henever it shall appear to the
Commission that any person is engaged or is about to engage in acts or practices constituting a
violation of [the securities laws], it may in its discretion bring an action in the proper district
court of the United States . . . to enjoin such acts or practices.”40 The plain language of the Act
thus establishes that the SEC’s failure to seek injunctive relief against Madoff, for whatever
reason, was discretionary.41
Because the ultimate decision whether to commence civil proceedings against Madoff
was wholly within the SEC’s discretion, the discretionary function exception bars Plaintiffs’
claims, even if the SEC’s decision was based on flawed information or faulty investigative

40

15 U.S.C. § 78u(d)(1) (emphasis added).

41

See, e.g., Bd. of Trade, 883 F.2d at 531 (recognizing that prosecution under the Act is
“discretionary, not mandatory”); id. at 530 (“Refusal to prosecute is a classic illustration of a
decision committed to agency discretion.”); Better Life Club, 995 F. Supp. at 180 (holding that
“prosecution under [the Act] is discretionary”); cf. Wright v. United States, 719 F.2d 1032, 1035
(9th Cir. 1983) (“The decision whether or not to prosecute a given individual is a discretionary
function for which the United States is immune from liability.”); Gray v. Bell, 712 F.2d 490, 513
(D.C. Cir. 1983) (“Prosecutorial decisions as to whether, when and against whom to initiate
prosecution are quintessential examples of governmental discretion in enforcing the criminal law,
and, accordingly, courts have uniformly found them to be immune under the discretionary
function exception.”); Bradley v. United States, 615 F. Supp. 206, 209 (E.D. Pa. 1985), aff’d sub
nom. Pooler v. United States, 787 F.2d 868 (3d Cir. 1986) (“The decision to prosecute a given
individual is the quintessential example of discretionary conduct. That prosecutors possess wide
latitude in this regard has never been questioned and the reasons supportive of its existence have
often been used to analyze the availability of the discretionary function exception in similar
FTCA situations.”) (citations omitted).
12

techniques. Two decisions are particularly illustrative of this point.42
In Fisher Bros. Sales, Inc. v. United States, the FDA received information from an
anonymous caller that fruit imported from Chile had been injected with cyanide.43 The FDA took
steps to see if there was any tainted fruit, and an FDA laboratory concluded that a couple of
grapes were tainted.44 Based on the information before him, including the laboratory report, the
FDA Commissioner exercised his discretion to refuse entry of any Chilean fruit into the United
States and to withdraw all such fruit already in domestic distribution channels, causing the
plaintiffs to suffer significant losses.45
Recognizing that they could not attack the Commissioner’s discretionary decisions to ban
and remove the fruit, the plaintiffs instead alleged that the “laboratory’s tests were negligently
performed because the procedures used conformed neither to the FDA’s Regulatory Procedures
Manual nor to good laboratory practices generally.”46 But the court rejected this characterization
of the case and held that plaintiffs may not “by the manner in which they draft their complaints
. . . dictate that their claims are ‘based upon’ one government employee’s actions and not
another’s.”47 The court concluded:

42

See Fisher Bros. Sales, Inc. v. United States, 46 F.3d 279, 282 (3d Cir. 1995) (en banc);
Gen. Dynamics Corp. v. United States, 139 F.3d 1280, 1283 (9th Cir. 1998).
43

46 F.3d at 282.

44

Id. at 282-83.

45

Id. at 283.

46

Id. at 285-86.

47

Id. at 286; see also Gen. Dynamics, 139 F.3d at 1283 (“Courts are not required to, and
should not, simply look at the surface of a complaint for the purpose of ascertaining the true basis
13

The reality here is that the injuries of which the plaintiffs complain were
caused by the Commissioner’s decisions and, as a matter of law, their claims are
therefore “based upon” those decisions. Any other view would defeat the purpose
of the discretionary function exception. In situations like this where the injury
complained of is caused by a regulatory policy decision, the fact of the matter is
that there is no difference in the quality or quantity of the interference occasioned
by judicial second guessing, whether the plaintiff purports to be attacking the data
base on which the policy is founded or acknowledges outright that he or she is
challenging the policy itself.48
Similarly, in General Dynamics Corporation v. United States, government auditors
negligently reported that General Dynamics had committed fraud in the course of performing a
government contract.49 Based on that report, the Department of Justice initiated criminal and civil
litigation against the corporation. Upon learning that the auditors’ report was flawed, the
government dropped the charges, but General Dynamics then brought its own lawsuit under the
FTCA based on the negligently prepared audit.
The court began with the observation that “no one doubts that prosecutorial discretion is
covered” by the discretionary function exception.50 It then recognized General Dynamics’
complaint for what it was—an attempt to circumvent the discretionary function exception by
“postur[ing] its case as an attack on the [auditors] rather than as an attack on the prosecutors.”51
The court rejected this “ancient tactic”:
We see no reason to accord amaranthine obeisance to a plaintiff’s

of an attack upon something the government has done.”).
48

Fisher Bros., 46 F.3d at 286.

49

139 F.3d at 1282.

50

Id. at 1283.

51

Id.
14

designation of targeted employees. . . . We may take cognizance of the fact that a
target has been selected for the purpose of evading the discretionary choice of the
persons who actually caused the damage—here the prosecutors, who were
pushing a criminal (and civil) attack upon General Dynamics and its employees.52
The court concluded that where “the harm actually flows from the prosecutor’s exercise of
discretion, an attempt to recharacterize the action” as one for negligent investigation “must
fail.”53
In Fisher Bros. and General Dynamics, the courts held that plaintiffs may not avoid
dismissal by looking behind discretionary, injury-causing decisions and arguing instead that their
claims are really “based upon” separate, non-discretionary acts. Likewise, here, Plaintiffs cannot
circumvent the discretionary function exception by focusing on the SEC’s investigative
techniques rather than the ultimate, discretionary decision whether to prosecute Madoff. Simply
put, the discretionary function exception bars Plaintiffs’ suit because it is, at bottom, “based
upon” a discretionary act—the failure to commence civil proceedings to stop Madoff.

52

Id.

53

Id. at 1286; see also Franklin Sav. Corp. v. United States, 180 F.3d 1124, 1132 n.11 (10th
Cir. 1999) (“To allow plaintiffs to avoid the discretionary-function bar by alleging that RTC
employees breached a specific duty to report information, even though the harmful decisions
based on the information were themselves discretionary, would be in tension with precedent.”);
Johnson v. United States, 949 F.2d 332, 339-40 (10th Cir. 1991) (applying discretionary function
exception to bar claim challenging agency’s “information gathering activity,” which was
mandatory, because it was “inextricably tied to” and “a component of the overall policy
decision,” which was discretionary); Myslakowski v. United States, 806 F.2d 94, 97 (6th Cir.
1986) (“[E]ven the negligent failure of a discretionary government policymaker to consider all
relevant aspects of a subject matter under consideration does not vitiate the discretionary
character of the decision that is made.”); Jayvee Brand, Inc. v. United States, 721 F.2d 385, 389
(D.C. Cir. 1983) (“[M]aking a discretionary decision without following mandated procedures
should be characterized, for the purposes of the FTCA, as an abuse of discretion. It follows that
the discretionary function exception applies and the district court was without jurisdiction to
entertain this suit.”).
15

Because both the SEC’s investigations of Madoff and its ultimate decision whether to
prosecute him were committed to the SEC’s discretion, the first part of the discretionary function
test is met.

II. The challenged actions are susceptible to policy analysis.
The second part of the discretionary function test is met because each of the challenged
actions is susceptible to policy analysis. Whether to commence an investigation and, ultimately,
civil proceedings against a suspected violator of the securities laws involves classic
considerations of how best to use limited agency resources. As Judge Easterbrook, writing for the
court in Board of Trade v. SEC, observed:
Doing nothing may be the most constructive use of the Commission’s
resources. Congress gives the SEC a budget, setting a cap on its personnel. With
limited numbers of staff-years, the Commission must enforce several complex
statutes. To do this intelligently the Commissioners must assign priorities.
Prosecuting [one suspected wrongdoer] means less time for something
else—investigating claims of fraud in issuing new stock or conducting a takeover
contest, resolving disputes under the Investment Company Act, and so on.
Agencies may find it worthwhile to give short shrift to a particular claim if the
aggrieved party can file its own suit . . . , for turning the subject over to private
litigation frees up time without necessarily diminishing the enforcement of the
statute. Yet even when the aggrieved party cannot vindicate its own rights, . . .
even when the person complaining about failure to prosecute is a defendant whose
business is going down the tubes—decisions about the best use of the staff’s time
are for the prosecutor’s judgment.54
Moreover, these decisions are better made by federal agencies than courts, which are
constrained by the particular allegations in the cases they consider.
Courts cannot intelligently supervise the Commission’s allocation of its
staff’s time, because although judges see clearly the claim the Commission has
54

883 F.2d at 531 (citations omitted).
16

declined to redress, they do not see at all the tasks the staff may accomplish with
the time released. Agencies must compare the value of pursuing one case against
the value of pursuing another; declining a particular case hardly means that the
SEC’s lawyers and economists will go twiddle their thumbs; case-versus-case is
the daily tradeoff. Judges compare the case at hand against a rule of law or an
abstract standard of diligence and do not see the opportunity costs of reallocations
within the agency. That fundamental difference in the perspectives of the two
bodies is why agencies (and other prosecutors) rather than courts must make the
decisions on pursuing or dropping claims. Resource allocation is not a task
governed by “law.” It is governed by budgets and opportunities. Agencies “take
Care that the Laws be faithfully executed” by doing the best they can with the
resources Congress allows them. Judges could make allocative decisions only by
taking over the job of planning the agency’s entire agenda, something neither
authorized by statute nor part of their constitutional role.55
The SEC’s decision whether to seek injunctive relief against Madoff is plainly susceptible
to these policy considerations. So, too, is the manner in which the SEC investigated Madoff.
“Investigations by federal law enforcement officials . . . clearly require investigative officers to
consider relevant political and social circumstances in making decisions about the nature and
scope of a criminal investigation.”56 The challenged conduct here—for example, whether to refer

55

Id. (citations omitted).

56

Sabow v. United States, 93 F.3d 1445, 1453 (9th Cir. 1996); see also Valdez v. United
States, No. 08 Civ. 4424(RPP), 2009 WL 2365549, at *6 (S.D.N.Y. July 31, 2009) (holding that
second part of test was satisfied because “a DEA agent’s decision to conduct an investigation in a
particular manner is subject to several policy considerations”); id. at *7 (“Plaintiff[] claims that
Agent Mercurio was negligent and reckless in failing to interview Gil, conduct a line-up, show
Gil a photo-array, or otherwise further investigate Plaintiff’s claims of mistaken identity. These
kinds of decisions about how to conduct investigations fall squarely within the discretionary
function exception.”); Woods v. United States, Civ. Action No. 07-593 (DMC), 2007 WL
3243852, at **3-4 (D.N.J. Nov. 1, 2007) (“The second prong of the test for the discretionary
function exception is also satisfied because public policy considerations are involved. How a
government agent should conduct an investigation is the paradigm decision that is protected by
the discretionary function exception.”); Rourke v. United States, 744 F. Supp. 100, 103 (E.D. Pa.
1988) (“[T]o the extent that Rourke seeks compensation for having been erroneously arrested and
charged due to a flawed investigation, the discretionary function exception precludes the claims
against the government in that the manner of conducting an investigation . . . [is] the kind of
‘quintessentially’ discretionary activit[y] for which sovereign immunity has not been waived.”).
17

a complaint to a particular investigative team, to obtain evidence from one source or another, or
to assign significance to a specific fact—are all decisions that are susceptible to policy analysis.
“[W]hen the sole complaint [in a lawsuit] is addressed, as here, to the quality of the
investigation as judged by its outcome, the discretionary function [exception] should . . . and . . .
does apply. Congress did not intend to provide for judicial review of the quality of investigative
efforts.”57
Because both the SEC’s investigations of Madoff and its ultimate decision whether to
prosecute him are susceptible to policy analysis, the second part of the discretionary function test
is met.

57

Pooler, 787 F.2d at 871.
18

CONCLUSION
The challenged conduct in this case is committed to the SEC’s discretion and grounded in
policy. Plaintiffs’ suit is therefore barred by the discretionary function exception, and the Court
must dismiss it for lack of subject-matter jurisdiction.

Respectfully submitted,
PREET BHARARA
United States Attorney
Southern District of New York

TONY WEST
Assistant Attorney General
PHYLLIS J. PYLES
Director, Torts Branch

s/ Sarah S. Normand
SARAH S. NORMAND
Assistant United States Attorney
Southern District of New York
86 Chambers Street, Third Floor
New York, NY 10007
212-637-2709
[e-mail]

MARY M. LEACH
Assistant Director, Torts Branch
s/ Jeffrey Paul Ehrlich
JEFFREY PAUL EHRLICH
Trial Attorney, Torts Branch
Department of Justice
Benjamin Franklin Station
P.O. Box 888
Washington, D.C. 20044
202-353-2574
[e-mail]

19