Molchatsky v. United States
778 F. Supp. 2d 421
S.D.N.Y.2011Background
- Plaintiffs sue the United States under the FTCA for negligent oversight by the SEC of Bernard Madoff's scheme, seeking damages after substantial investor losses.
- The SEC allegedly received numerous complaints from 1992–2008 but conducted flawed investigations and examinations of Madoff and BLMIS.
- The SEC's OIG issued a 457-page public report detailing failures, systemic breakdowns, and missed opportunities to uncover the Ponzi scheme.
- Plaintiffs rely on the OIG Report and Complaint to allege indepth failures across multiple SEC offices and investigations (1992–2008).
- Defendant moved to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), arguing the discretionary function exception bars FTCA claims.
- The Court granted the motion, concluding the FTCA's discretionary function exception precludes liability, and denied jurisdictional discovery.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the DFE bars FTCA claims here | DFE does not apply; alleged mandatory duties breached | SEC discretion to investigate/process counters FTCA waiver | DFE applies; discretionary SEC investigations shielded; jurisdiction lacking |
| Whether plaintiffs alleged non-discretionary duties under the 1934 Act | SEC violated mandatory duties in 1934 Act and internal policies | No non-discretionary duties identified; actions are policy-driven | No non-discretionary duties pled; injuries arise from discretionary decisions |
| Whether 15 U.S.C. § 78q(k)(2) creates a mandatory sharing duty outside DFE | Section 78q(k)(2) mandates sharing information with other authorities | Section 78q(k)(2) is discretionary to share information 'as appropriate' | Sharing obligation is discretionary; not a non-DFE duty |
| Whether internal SEC policies regarding reports/computer systems expose non-DFE claims | Violations of mandatory internal policies alleged via case-management failures | No identified mandatory duties; policies are not specified as non-discretionary | No non-discretionary policy duties identified; DFE applies |
| Whether plaintiffs are entitled to jurisdictional discovery | Discovery could reveal mandatory guidelines; needs investigation | Discovery denied where policies are publicly available and not hidden | Jurisdictional discovery denied; no showings of unknown mandatory duties |
Key Cases Cited
- Gaubert v. United States, 499 U.S. 315 (1991) (presumption of policy-based discretion when regulation allows discretion)
- Berkovitz v. United States, 486 U.S. 531 (1988) (requires discretion or policy analysis for DFE applicability)
- Coulthurst v. United States, 214 F.3d 110 (2d Cir. 2000) (plaintiff bears burden to plead non-discretionary duty; dismissal if only discretionary claims)
- United States v. S.A. Empresa De Viação Aérea Rio Grandense (Varig Airlines), 467 U.S. 797 (1984) (DFE interpretation influenced by legislative history)
- Treats International Enterprises, Inc. v. SEC, 828 F. Supp. 16 (S.D.N.Y. 1993) (illustrates limits of judicially manageable standards for SEC discretion)
- Sloan v. United States Department of Housing and Urban Development, 236 F.3d 756 (D.C. Cir. 2001) (FTCA discretionary function analysis in administrative investigations)
- Freeman v. United States, 556 F.3d 336 (4th Cir. 2009) (FTCA discovery standards in context of discretionary functions)
- Makarova v. United States, 201 F.3d 110 (2d Cir. 2000) (burden-shifting framework for subject-matter jurisdiction challenges)