Zelaya v. United States

• Citation: 781 F.3d 1315
• Decision Date: 30 March 2015
• Docket Number: No. 13–14780.,13–14780.
• Parties: Carlos ZELAYA, individually, and George Glantz, individually and as trustee of the George Glantz Revocable Trust, for themselves and on behalf of all those persons similarly situated, Plaintiffs–Appellants, v. UNITED STATES of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

781 F.3d 1315

Carlos ZELAYA, individually, and George Glantz, individually and as trustee of the George Glantz Revocable Trust, for themselves and on behalf of all those persons similarly situated, Plaintiffs–Appellants

v.UNITED STATES of America, Defendant–Appellee.

No. 13–14780.

United States Court of Appeals, Eleventh Circuit.

March 30, 2015.

Gaytri Kachroo, Rebecca P. McIntyre, John H. Ray, III, Kachroo Legal Services, PC, Cambridge, MA, Brandon Ross Levitt, Hall Lamb & Hall, PA, Sean R. Santini, Santini Law Firm, Miami, FL, for Plaintiffs–Appellants.

Steve Frank, Phil MacWilliams, U.S. Department of Justice, Washington, DC, Wifredo A. Ferrer, Kathleen Mary Salyer, U.S. Attorney's Office, Miami, FL, for Defendant–Appellee.

Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 0:11–cv–62644–RNS.

Before TJOFLAT, JULIE CARNES, and GILMAN,^* Circuit Judges.

Opinion

JULIE CARNES, Circuit Judge:

The plaintiffs in this case, Carlos Zelaya and George Glantz, are victims of one of the largest Ponzi schemes in American history: the much-publicized Ponzi scheme orchestrated by R. Allen Stanford. All Ponzi operations eventually unravel, and when the scheme that had victimized Plaintiffs was publicly revealed to have been a fraud, Plaintiffs were taken by surprise. Yet, according to Plaintiffs, the federal agency entrusted with the duty of trying to prevent, or at least reveal, Ponzi schemes was not all that surprised. To the contrary, this agency, the United States Securities and Exchange Commission (“SEC”), had been alerted over a decade before that Stanford was likely running a Ponzi operation. According to Plaintiffs, notwithstanding its knowledge of Stanford's likely nefarious dealings, the SEC dithered for twelve years, content not to call out Stanford and protect future investors from his fraud. And even though the SEC eventually roused itself to take action in 2009, by then, of course, the money was long gone, and many people lost most of their investments.

Pursuant to the Federal Tort Claims Act, Plaintiffs sued the United States in federal court, alleging that the SEC had acted negligently. The federal government moved to dismiss, arguing that it enjoyed sovereign immunity from the lawsuit. The district court agreed, and dismissed Plaintiffs' case. Plaintiffs now appeal that dismissal to this Court. In reviewing the district court's dismissal, we reach no conclusions as to the SEC's conduct, or whether the latter's actions deserve Plaintiffs' condemnation. We do, however, conclude that the United States is shielded from liability for the SEC's alleged negligence in this case. We therefore affirm the district court's dismissal of the Plaintiffs' complaint.

I. Factual Background

As noted, this action arises from one of the largest Ponzi schemes in history.¹ In the 1990s and 2000s, financier R. Allen Stanford (“Stanford” or “Allen Stanford”) engineered investments in his Antiguan-based Stanford International Bank Ltd. (“Stanford Bank”) through a network of entities: Stanford Bank itself; Stanford Group, with more than twenty-five offices across the United States; Louisiana-based Stanford Trust Company; and Miami, Houston, and San Antonio-based Stanford Fiduciary Investor Services. Through this network, Stanford Bank issued high-interest certificates of deposit (“CDs”) to tens of thousands of investors across the globe, ultimately accumulating billions of dollars. Unbeknownst to these investors, however, Stanford Bank never invested this money in securities, as it had promised to do. Instead, the Bank funneled new infusions of cash to earlier investors and to Allen Stanford himself.

As early as 1997, the SEC had been alerted that Stanford was conducting a Ponzi scheme through the above companies. One of these companies, Stanford Group, had been registered with the SEC since 1995 as a broker-dealer and investment advisor, which meant that it was subject to SEC reporting requirements. Yet, despite four investigations between 1997 and 2004, the SEC took no action to stop the fraud until 2009.

In its first investigation, begun in 1997, the SEC discovered that Stanford had contributed $19 million in cash to Stanford Group, which caused the SEC “concern[ ] that the cash contribution may have come from funds invested by customers at [Stanford Bank].” The Branch Chief of the Fort Worth, Texas SEC office conducting the investigation considered the purported returns on Stanford Bank's CDs to be “absolutely ludicrous” and believed that they were not “legitimate CDs.” The Assistant District Administrator heading the investigation warned the Branch Chief to “keep your eye on these people [referencing Stanford] because this looks like a Ponzi scheme to me and someday it's going to blow up.” The following year, the successor of that Assistant District Administrator stated, “[A]s far as I was concerned at that period of time[,] ... we all thought it was a Ponzi scheme to start with. Always did.” The investigating group concluded, “[P]ossible misrepresentations. Possible Ponzi scheme.” Still, the SEC took no action against Stanford.

In the SEC's second investigation, begun in 1998, the investigators decided that “Stanford was operating some kind of fraud” through Stanford Group. They noted that Stanford Group was “extremely dependent upon [Stanford Bank's very generous commission] compensation to conduct its day-to-day operations.” Despite this, the SEC did nothing.

In 2002, the SEC investigated Stanford a third time, determining that Stanford Group should be assigned the SEC's highest risk rating because of the SEC's “suspicions the international bank [Stanford Bank] was a Ponzi scheme” and because Stanford Bank's “consistent above-market reported returns” were likely illegitimate. Notwithstanding this concern, the SEC, once again, did nothing.

In 2004, the SEC conducted a fourth investigation of Stanford, again reaching the conclusion that Stanford Bank “may in fact be a very large Ponzi scheme.” Sitting on this information for five more years, the SEC finally took enforcement action against Stanford and his various business entities in 2009.² By then though, most of the investors' money was gone, and the SEC has been able to recover only $100 million of the $7 billion invested in Stanford Bank.

Plaintiffs Zelaya and Glantz were two of the many investors who thought they were purchasing legitimate securities. Zelaya invested $1 million and Glantz invested approximately $650,000. Both plaintiffs have lost almost their entire investments.

II. Procedural Background

Pursuant to the Federal Tort Claims Act (“FTCA”), and alleging one count of negligence based on the SEC's failure to act upon its knowledge of Stanford Group's participation in the Stanford Bank Ponzi scheme, Plaintiffs filed suit in 2011 against the United States (“the Government”) in the United States District Court for the Southern District of Florida. In their initial complaint, Plaintiffs identified two separate statutory duties that the SEC had allegedly breached through its inaction. First, Plaintiffs asserted a “notification claim” pursuant to the Securities Investor Protection Act of 1970, 15 U.S.C. §§ 78aaa -lll. Specifically, Plaintiffs relied on § 78eee(a)(1), which provides that “[i]f the [SEC] is aware of facts which lead it to believe that any broker or dealer subject to its regulation is in or is approaching financial difficulty, it shall immediately notify SIPC.” SIPC is an acronym for the Securities Investor Protection Corporation, which is a nonprofit corporation with which Stanford Group, as a registered broker-dealer, was required to maintain membership. Plaintiffs note that although Stanford Group was subject to regulation by the SEC and the SEC had allegedly concluded that Stanford Group was involved in a Ponzi scheme, the SEC failed to notify SIPC, as required by § 78eee(a)(1).

Second, Plaintiffs also raised a “registration claim” pursuant to 15 U.S.C. § 80b–3(c). Plaintiffs contend that § 80b–3(c) required the SEC to revoke the registration of Stanford Group, but the SEC failed to do so.

The Government responded with a motion to dismiss. As discussed below, while the FTCA, as a general matter, waives what would otherwise be the federal government's sovereign immunity from legal actions for torts committed by its employees, there are exceptions to that general waiver. In its motion to dismiss, the Government argued that one of those exceptions, the “discretionary function exception,” barred Plaintiffs' claims based on the alleged breach of both of the above statutory duties. Given the application of this exception, the Government contended that the district court lacked subject matter jurisdiction.

The district court granted the Government's motion to dismiss with regard to the registration claim, holding that the discretionary function exception applied and therefore preserved the Government's sovereign immunity on that claim. The district court, however, denied the Government's motion to dismiss with regard to Plaintiffs' notification claim.

Plaintiffs then filed an amended complaint, re-alleging the surviving notification claim as the sole basis for their negligence action. The Government again moved to dismiss, this time raising the “misrepresentation exception” as a bar to its capacity to be sued under the FTCA. Although it had earlier rejected the application of the discretionary function exception to the notification claim, the district court agreed that the misrepresentation exception did apply and that it precluded this claim. As a result, the court concluded that it likewise lacked subject matter jurisdiction on the notification claim and therefore granted the Government's motion to dismiss. With no remaining claims, the court entered a final judgment for the Government. Plaintiffs filed the present appeal, contending that the district court should not have dismissed either the registration claim or the...