Madoff Investor Lawsuit Against the SEC Dismissed: In an April 20, 2010 order (here), Central District of California Judge Stephen V. Wilson granted the motion of the SEC to dismiss the suit brought against the agency by Madoff investors under the Federal Tort Claims Act.


The investors had alleged that the SEC "owed a duty of reasonable care to all members of the general public" and that the agency’s negligent acts and omissions "caused Madoff’s scheme to continue, perpetuate and expand," alleging specifically that the SEC "failed to terminate Madoff’s Ponzi scheme despite multiple opportunities to do so."


The SEC moved to dismiss arguing that the court lacked jurisdiction over the FTCA claims, due to the statute’s "discretionary function exception," which bars federal courts from adjudicating tort actions arising out of federal officers’ discretionary acts.


Judge Wilson said that the plaintiffs’ allegations "identify decisions that, in hindsight, could have and should have been made differently," while others "reveal the SEC’s sheer incompetence." However, Judge Wilson also found that the complaint lacks "any plausible allegation revealing that the SEC violated its clear, non-discretionary duties." Judge Wilson granted the motion to dismiss, but did grant the plaintiffs 30 days leave to amend their complaint to attempt to allege that "the SEC failed to conform to its mandatory duties."


It won’t help them overcome the jurisdictional hurdle, but the plaintiffs undoubtedly will be tempted to allege in their amended complaint that at the same time the agency failed to investigate Madoff, senior SEC enforcement department attorneys were spending up to eight hours a day viewing pornography on their work computers.


An April 22, 2010 article about the ruling in the Madoff investors’ lawsuit against the SEC can be found here.


D&O Dispute Over Stanford Defense Fees to be Heard in September: In an April 21, 2010 order (here), Southern District of Texas Judge Nancy Atlas set a September 1, 2010 date for the commencement of the hearing on the motion for preliminary injunction of jailed financier R. Allen Stanford and three others to compel the Stanford Group’s D&O insurers to fund the individuals’ defense against criminal allegations. The insurers contend that coverage under the policy is precluded by the policy’s money laundering exclusion.


As readers will recall, on March 15, 2010, the Fifth Circuit had remanded the coverage dispute back to the district court for a factual determination whether or not the money laundering exclusion has been triggered (that is, whether or not there has "in fact" been money laundering as that term is defined in the policy). The Fifth Circuit also ruled that the insurers must continue to advance defense expense until the factual determination has been made.


Judge Atlas’s scheduling order not only establishes the schedule for the evidentiary ruling but also sets a schedule for factual discovery as well. It seems probable that at some point fairly early in the discovery process, one of the individual defendants will feel compelled to take the fifth in response to a deposition question. Similarly the individuals are likely at the September hearing to assert their Fifth Amendment rights from the witness stand.


While an individual’s assertion of their Fifth Amendment rights cannot be held against them in a criminal trial, there is substantial precedent that in a civil trial a finder of fact can draw "adverse inferences" from an individual’s assertion of their Fifth Amendment rights. The individuals and their attorneys will face the formidable challenge of attempting to establish that there was no money laundering within the meaning of the policy without themselves being able to testify on their own behalf.


In any event, as reflected in the April 22, 2010 article about Judge Atlas’s scheduling order (here), the September hearing "could give a preview of the criminal trial in January."


Abacus: Sung to the Tune of "Springtime for Hitler"?: A loyal reader alerted me to the following letter to the editor that appeared in the April 24, 2010 New York Times:


The investment deal that Goldman Sachs created sounds like something out of the Mel Brooks show "The Producers": plotting to make more money with a flop than with a hit!

Daniel Pitt Stoller
Bayside, Queens, April 19, 2010


Mr. Stoller’s letter is pretty funny. While I appreciate the humor of his comment, I do think it unintentionally points out something about the infamous Abacus deal that, in light of intervening events, might be easy to overlook.


The fact is that, in the Mel Brooks movie, "Springtime for Hitler" turned into an unexpected hit, even though, like the Abacus CDO, it was "built to fail."


John Paulson may well have felt confident that a mortgage meltdown was coming, but as Max Bialystock found out in the movie, fate and fortune can be fickle. It all turned out great for Paulson and he became a wealthy man, but there were no guarantees. Sometimes unexpected things can happen. Neither Abacus nor Springtime for Hitler, as truly awful as they both were, were guaranteed to fail.


In any event, all of this calls for a "built to fail" video tribute. Keep a close watch for Mel Brooks (who won an academy award for the movie screenplay), appearing briefly to sing "Don’t be stupid, be a smarty/Come and join the Nazi Party."


And if you consider this video from just the right perspective, I am sure you will find a whole lot of Fabrice ("Fabulous Fab") Tourre in it, too.