Cohen v. United States

• Decision Date: 01 July 2013
• Docket Number: No. 12–1319.,12–1319.
• Citation: 722 F.3d 168
• Parties: Stanley BAER: Jesse L. Cohen; Alan Roth; Elaine Ruth Schaffer; Lenore H. Schupak, Appellants, v. The UNITED STATES of America.
• Court: U.S. Court of Appeals — Third Circuit

722 F.3d 168

Stanley BAER: Jesse L. Cohen; Alan Roth; Elaine Ruth Schaffer; Lenore H. Schupak, Appellants,

v.The UNITED STATES of America.

No. 12–1319.

United States Court of Appeals, Third Circuit.

Argued Feb. 12, 2013.

Filed July 1, 2013.

Helen D. Chaitman [Argued], Becker & Poliakoff, New York, NY, Attorney for the Appellants.

Stuart F. Delery, Paul J. Fishman, Mark B. Stern, Lindsey Powell [Argued], U.S. Department of Justice, Washington, DC, Attorneys for the Appellee.

Before: HARDIMAN and ALDISERT, Circuit Judges, and STARK,^* District Judge.

OPINION OF THE COURT

STARK, District Judge.

This case arises from the well-known Ponzi scheme operated by Bernard L. Madoff. Plaintiffs–Appellants Stanley Baer, Jesse L. Cohen, Alan Roth, Elaine Ruth Schaffer, and Lenore H. Schupak (“Appellants”) were customers of Bernard L. Madoff Investment Securities LLC (“BLMIS”). On March 7, 2011, Appellants brought suit against the United States under the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b), 2671 et seq. (“FTCA”), to recover damages for injuries resulting from the failure of the Securities and Exchange Commission (“SEC”) to uncover and terminate Madoff's Ponzi scheme in a timely manner. The District Court for the District of New Jersey dismissed the complaint based on lack of subject matter jurisdiction, finding that Appellants' claims were barred by the discretionary function exception (“DFE”) to the FTCA. See28 U.S.C. § 2680(a). The District Court also denied Appellants' requests for jurisdictional discovery and to amend the complaint. We will affirm.

I

As this is an appeal from the District Court's grant of a motion to dismiss, we, like the District Court, accept the well-pleaded factual allegations in the complaint as true and construe them in the light most favorable to Appellants. See Lora–Pena v. FBI, 529 F.3d 503, 505 (3d Cir.2008) (per curiam). The allegations contained in Appellants' complaint are derived substantially from a 457–page report prepared by the SEC's Office of Investigations (the “OIG Report”), which describes in detail the SEC's failed multi-year investigation of Madoff's Ponzi scheme:

The OIG investigation found that the SEC received numerous substantive complaints since 1992 that raised significant red flags concerning Madoff's hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading and should have led to a thorough examination and/or investigation of the possibility that Madoff was operating a Ponzi scheme. However, the OIG found that although the SEC conducted five examinations and investigations of Madoff based upon these substantive complaints, they never took the necessary and basic steps to determine if Madoff was misrepresenting his trading. [The OIG] also found that had these efforts been made with appropriate follow-up, the SEC could have uncovered the Ponzi scheme well before Madoff confessed.

(OIG Report at 456).¹

Appellants contend that had the SEC investigated BLMIS with even the most basic level of competence, Madoff's scheme would have been discovered and Appellants' losses would have been prevented. Their complaint alleges three causes of action under the FTCA: (1) that the SEC was negligent in its investigations of BLMIS; (2) that the SEC aided and abetted breaches of fiduciary duty committed by BLMIS; and (3) that the SEC aided and abetted the fraud perpetrated by BLMIS.² The government moved to dismissfor lack of jurisdiction, contending that the alleged misconduct fell within the discretionary function exception to the FTCA. The District Court agreed with the government and dismissed the complaint. The District Court also denied Appellants' motions seeking jurisdictional discovery and leave to amend the complaint. Appellants timely appealed.

II

We have appellate jurisdiction pursuant to 28 U.S.C. § 1291. We “exercise plenary review over application of the FTCA's discretionary function exception.” Merando v. United States, 517 F.3d 160, 163–64 (3d Cir.2008). “Questions of subject matter jurisdiction raised on a motion to dismiss under Rule 12(b)(1) are also reviewed de novo.” Free Speech Coal., Inc. v. Att'y Gen., 677 F.3d 519, 530 (3d Cir.2012).

Appellants “bear[ ] the burden of demonstrating that [their] claims fall within the scope of the FTCA's waiver of government immunity,” while the government “has the burden of proving the applicability of the discretionary function exception.” Merando, 517 F.3d at 164 (internal quotation marks omitted). As we explain, the District Court correctly concluded that it lacked subject matter jurisdiction.

III

The FTCA waives the federal government's sovereign immunity with respect to tort claims for money damages. See28 U.S.C. § 1346(b)(1). The discretionary function exception limits that waiver, eliminating jurisdiction for claims based upon the exercise of a discretionary function on the part of an employee of the government. See28 U.S.C. § 2680(a). Specifically, pursuant to the DFE, the government retains sovereign immunity with respect to “[a]ny claim ... 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 abused.” Id. In this way, the discretionary function exception draws a “boundary between Congress' willingness to impose tort liability upon the United States and its desire to protect certain governmental activities from exposure to suit by private individuals.” United States v. Varig Airlines, 467 U.S. 797, 808, 104 S.Ct. 2755, 81 L.Ed.2d 660 (1984). Congress enacted the DFE to “prevent judicial ‘second-guessing’ of legislative and administrative decisions grounded in social, economic, and political policy through the medium of an action in tort.” Id. at 814, 104 S.Ct. 2755.

To determine whether the DFE applies, courts employ a two-part test. First, a court must “consider whether the action is a matter of choice for the acting employee. This inquiry is mandated by the language of the exception; conduct cannot be discretionary unless it involves an element of judgment or choice.” Berkovitz v. United States, 486 U.S. 531, 536, 108 S.Ct. 1954, 100 L.Ed.2d 531 (1988). Second, a court must determine whether the judgment exercised “is of the kind that the discretionary function exception was designed to shield.” Id. This is because the DFE “protects only governmental actions and decisions based on considerations of public policy.” Id. at 537, 108 S.Ct. 1954. Notably, “if a regulation allows the employee discretion, the very existence of the regulation creates a strong presumptionthat a discretionary act authorized by the regulation involves consideration of the same policies which led to the promulgation of the regulations.” United States v. Gaubert, 499 U.S. 315, 324, 111 S.Ct. 1267, 113 L.Ed.2d 335 (1991).

IV

Appellants contend that the SEC is not protected from liability under the DFE because neither part of the two-part test is satisfied here. In particular, Appellants argue that the SEC conduct challenged by their complaint violated numerous mandatory, non-discretionary statutes and regulations. Appellants further assert that any discretion exercised by the SEC is not susceptible to policy analysis.

In most respects, Appellants' arguments repeat those uniformly rejected by other courts that have considered suits against the SEC brought by victims of the Madoff Ponzi scheme. After briefly describing how we reach the same conclusions as these other courts on the overlapping issues, we focus on the two bases on which Appellants seek to distinguish their complaint.

A

Appellants contend that the SEC violated several mandatory internal procedures during the BLMIS investigation by: (1) failing to obtain trading verifications; (2) failing to commence investigations promptly; (3) failing to draft closing reports; and (4) failing to log investigations into the SEC's examination tracking system. Appellants have not demonstrated, however, that the procedures on which they rely are anything more than discretionary guidelines for SEC personnel.

For example, although Appellants argue that “[t]rading verifications must be obtained from third parties,” such as the National Association of Securities Dealers (App. Br. at 30) (emphasis added), they cite no source for such a mandatory duty. To the contrary, the OIG Report—which forms the basis for Appellants' complaint—states that “verifying trading activity from an independent source was not an ‘essential’ part of a Ponzi scheme investigation.” (OIG Report at 325) (emphasis added). Likewise, Appellants contend in their briefing that “[i]nvestigations must be commenced promptly and MUIs [ (Matters Under Inquiry) ] must be opened at the beginning of the investigation” (App. Br. at 30) (emphasis added), but they ground this assertion in no regulation, and even their complaint only alleges that “MUI's should be opened promptly,” that is within “days, hours, [or] weeks” (A49 ¶ 61, A64 ¶ 129) (emphasis added). Appellants' contention that SEC employees “ must draft closing reports at the end of investigations” (App. Br. at 30) (emphasis added) is belied by the portion of the OIG Report on which they rely, which states, instead, that preparing “a closing report at the conclusion of an examination is ‘good practice’ ” (OIG Report at 136). Similarly, although Appellants allege that “[i]nvestigations must be logged into the SEC's STARS tracking system” (App. Br. at 30) (emphasis added), they base this assertion on 15 U.S.C. § 78q(k),³ which provides that the “Commission and the examining authorities ... shall eliminate any unnecessary and burdensome duplication” and “shall share such information ... as appropriate to foster a coordinated approach” (emphasis added). As the emphasized statutory language illustrates, an element of discretion is involved in determining what...