Dichter-Mad Family Partners v. United States

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

DICHTER -MAD FAMILY PARTNERS, No. 11-55577

LLP; PHILIP JAY DICHTER ; CLAUDIA

GVIRTZMAN DICHTER ; RICHARD M. D.C. No.

GORDON , 2:09-cv-09061-

Plaintiffs-Appellants, SVW-FMO

v.

ORDER AND

UNITED STATES OF AMERICA , OPINION

Defendant-Appellee.

Appeal from the United States District Court

for the Central District of California

Stephen V. Wilson, District Judge, Presiding

Argued and Submitted

January 10, 2013—Pasadena, California

Filed February 12, 2013

Before: Stephen Reinhardt, Kim McLane Wardlaw,

and Richard A. Paez, Circuit Judges.

Order;

Per Curiam Opinion

2 DICHTER -MAD FAMILY PARTNERS V . UNITED STATES

SUMMARY*

Federal Tort Claims Act

The panel affirmed the district court’s dismissal of an

action alleging claims under the Federal Tort Claims Act.

The panel held that the district court correctly concluded

that it lacked jurisdiction to entertain appellants’ claims

because they fell within the “discretionary function”

exception to the United States’ waiver of sovereign immunity

in the Federal Tort Claims Act. The panel affirmed the

district court’s judgment of dismissal for lack of subject

matter jurisdiction, and adopted Parts I through V of the

district court’s April 20, 2010 opinion, Dichter-Mad Family

Partners, LLP v. United States, 707 F. Supp.2d 1016 (C.D.

Cal. 2010). The panel also held that the additional allegations

made in the Second Amended Complaint were insufficient to

overcome the discretionary function exception to the Act’s

waiver of sovereign immunity. Finally, the panel held that

the district court did not abuse its discretion in denying

appellants’ request for additional discovery.

COUNSEL

Richard H. Gordon (argued), Beverly Hills, California, and

Philip J. Dichter, Malibu, California, for Appellants.

*

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

DICHTER -MAD FAMILY PARTNERS V . UNITED STATES 3

Sparkle Sooknanan (argued), Lindsey Powell, Mark B. Stern,

and Tony West, United States Department of Justice,

Washington, D.C.; and André Birotte, Jr., United States

Attorney, Los Angeles, California, for Appellee.

ORDER

The opinion and appendix filed on January 28, 2013 are

withdrawn. A new opinion and appendix are filed

concurrently with this order.

IT IS SO ORDERED.

OPINION

PER CURIAM:

After careful de novo review of the record in this appeal,

we conclude that the district court correctly concluded that it

lacked jurisdiction to entertain Appellants’ claims because

they fall within the “discretionary function” exception to the

United States’ waiver of sovereign immunity in the Federal

Tort Claims Act. 28 U.S.C. § 2680(a). Thus, we affirm the

district court’s judgment of dismissal for lack of subject

matter jurisdiction and adopt Parts I through V of the district

court’s comprehensive and well-reasoned April 20, 2010

opinion, Dichter-Mad Family Partners, LLP v. United States,

707 F. Supp. 2d 1016 (C.D. Cal. 2010), as our own, and

attach it to this opinion as an Appendix.

4 DICHTER -MAD FAMILY PARTNERS V . UNITED STATES

We further hold, as the district court also concluded in an

unpublished order dismissing Appellants’ claims with

prejudice, that the additional allegations made in the Second

Amended Complaint1 are insufficient to overcome the

discretionary function exception to the Federal Tort Claims

Act’s waiver of sovereign immunity. Virtually all of the

newly alleged mandatory duties are not in fact mandatory

directives that would deprive the United States of its

discretionary function immunity. See Terbush v. United

States, 516 F.3d 1125, 1138 (9th Cir. 2008); Sabow v. United

States, 93 F.3d 1445, 1453 (9th Cir. 1996) (“[T]he presence

of a few, isolated provisions cast in mandatory language does

not transform an otherwise suggestive set of guidelines into

binding agency regulations.”). Those policies that are

arguably mandatory lack the causal relationship to the

plaintiffs’ alleged injuries required to establish jurisdiction,

even under a generous reading of the complaint. “Where, as

here, the harm actually flows from the prosecutor’s exercise

of discretion, an attempt to recharacterize the action as

something else must fail.” Gen. Dynamics Corp. v. United

States, 139 F.3d 1280, 1286 (9th Cir. 1998).

Finally, the district court did not abuse its discretion in

denying Appellants’ request for additional discovery. “As we

have explained, ‘broad discretion is vested in the trial court

to permit or deny discovery, and its decision to deny

discovery will not be disturbed except upon the clearest

showing that denial of discovery results in actual and

substantial prejudice to the complaining litigant.’” Hallett v.

Morgan, 296 F.3d 732, 751 (9th Cir. 2002) (alteration

1

The duties alleged in the Second Amended Complaint are taken from

the SEC Enforcement Manual, which the district court ordered the

government to produce.

DICHTER -MAD FAMILY PARTNERS V . UNITED STATES 5

omitted) (quoting Goehring v. Brophy, 94 F.3d 1294, 1305

(9th Cir. 1996)). A plaintiff seeking discovery must allege

“enough fact to raise a reasonable expectation that discovery

will reveal” the evidence he seeks. Bell Atlantic Corp. v.

Twombly, 550 U.S. 544, 556 (2007); see also Gager v. United

States, 149 F.3d 918, 922 (9th Cir. 1998) (“It is

well-established that the burden is on the party seeking to

conduct additional discovery to put forth sufficient facts to

show that the evidence sought exists.”) (internal quotation

marks and alterations omitted). The district court’s reasoned

finding that the plaintiffs failed to meet this burden was a

proper exercise of its discretion. See Hallett, 296 F.3d at 751.

AFFIRMED.

6 DICHTER -MAD FAMILY PARTNERS V . UNITED STATES

APPENDIX

1016 707 FEDERAL SUPPLEMENT, 2d SERIES

IT IS HEREBY ORDERED that Peti-

tioner Clifton Brown’s motion under 18 DICHTER–MAD FAMILY PARTNERS,

U.S.C. § 2255 will be GRANTED and he LLP; Philip Dichter; Claudia Gvirtz-

will be GRANTED an out-of-time appeal man Dichter; and Richard H. Gordon,

as the remedy for Counsel’s failure to file Plaintiffs,

an appeal.

v.

IT IS FURTHER ORDERED that the

Court will VACATE Petitioner Clifton UNITED STATES of America; Secu-

Brown’s July 3, 2008 dated Amended rities Exchange Commission, and

Judgment (Doc. No. 115 in Case No. Does 1–10, Defendants.

1:06CR99RWS) and REIMPOSE the No. CV 09–9061 SVW (FMOx).

same sentence so the time for appeal can

start to run again. See Rosinski v. United United States District Court,

States, 459 F.2d 59 (6th Cir.1972); United C.D. California.

States v. Phillips, 225 F.3d 1198, 1201 April 20, 2010.

(11th Cir.2000). The Court WILL EN-

Background: Investors in Ponzi scheme

TER a Second Amended Judgment.

brought a Federal Tort Claims Act

IT IS FURTHER ORDERED that the (FTCA) action against the Securities and

Clerk of the Court is ordered to prepare a Exchange Commission (SEC) and the

Second Amended Judgment in the matter United States, claiming SEC’s negligent

United States of America v. Clifton acts and omissions caused scheme to con-

Brown, No. 1:06CR99RWS in accordance tinue, perpetuate, and expand, and that the

with this order.

SEC failed to terminate Ponzi scheme de-

IT IS FURTHER ORDERED that Pe- spite its multiple opportunities to do so.

titioner Clifton Brown has the right to Defendants filed motions to dismiss.

appeal the reimposed sentence. The Clerk

Holding: The District Court, Stephen V.

of the Court shall file a notice of appeal for

Wilson, J., held that discretionary function

him within fourteen days from the entry

exception barred investors’ claims against

of the Second Amended Judgment. If

government based on SEC investigators’

Brown cannot afford counsel to represent

failure to discover Ponzi scheme and publi-

him on appeal, he should complete the in

forma pauperis application which the cize or prosecute it.

Clerk will provide him, and file it, along Motions granted.

with a motion requesting the Court to

appoint counsel to represent him. 1. United States O78(12)

IT IS FURTHER ORDERED that the Under discretionary function excep-

Clerk of the Court shall mail a copy of this tion to Federal Tort Claims Act (FTCA),

Memorandum and the accompanying judg- officers are only liable if (1) the officers’

ment, the Second Amended Judgment, and actions were prescribed by statute, regula-

the in forma pauperis affidavit (CJA 23)

tion, or policy, or (2) the officers’ conduct

to Petitioner Clifton Brown at Clifton

was not susceptible to analysis on social,

Brown, # 33172–044, F.C.I. Greenville,

economic, or political policy grounds. 28

P.O. Box 5000, Greenville, IL 62246.

U.S.C.A. § 2680(a).

, 2. Federal Civil Procedure O1832

Because Securities and Exchange

Commission’s (SEC) Office of Inspector

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1017

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

General’s report on agency’s failure to un- function exception to Federal Tort Claims

cover Ponzi scheme was both attached to Act (FTCA); government must prove that

and incorporated-by-reference into com- each of the allegedly wrongful acts, by

plaint, it was properly considered on mo- each allegedly negligent actor, is covered

tion to dismiss investors’ Federal Tort by the discretionary function exception.

Claims Act (FTCA) action against SEC for 28 U.S.C.A. § 2680(a).

failing to terminate Ponzi scheme despite 7. United States O78(12)

multiple opportunities to do so. 28 Discretionary function exception to

U.S.C.A. § 2674 et seq.; Fed.Rules Civ. Federal Tort Claims Act (FTCA) barred

Proc.Rule 10(c), 28 U.S.C.A. investors’ claims against government

3. United States O78(1) based on Securities and Exchange Com-

A federal agency cannot itself be sued mission’s (SEC) investigators’ failure to

under Federal Tort Claims Act (FTCA); discover Ponzi scheme and publicize or

prosecute it; SEC’s decisions of whether

FTCA only allows claims against the Unit-

and how to conduct investigations and en-

ed States. 28 U.S.C.A. § 2671.

forcement actions were discretionary, and

4. Federal Civil Procedure O1772 investors’ conclusory allegations failed to

A claim has facial plausibility when establish that SEC examiners were guided

the plaintiff pleads factual content that by any mandatory duties requiring them to

allows the court to draw the reasonable share information and coordinate their ac-

inference that the defendant is liable for tivities. Securities Exchange Act of 1934,

the misconduct alleged; a complaint that § 21(a)(1), (d)(1), 15 U.S.C.A. § 78u(a)(1),

offers mere labels and conclusions or a (d)(1); 28 U.S.C.A. § 2680(a); 17 C.F.R.

formulaic recitation of the elements of a § 202.5.

cause of action will not do. Fed.Rules 8. United States O78(12)

Civ.Proc.Rule 8(a), 28 U.S.C.A. Employment, supervision, and train-

5. United States O78(12) ing decisions fall squarely within the dis-

When established governmental poli- cretionary function exception to Federal

cy, as expressed or implied by statute, Tort Claims Act (FTCA). 28 U.S.C.A.

regulation, or agency guidelines, allows a § 2680(a).

government agent to exercise discretion, it 9. Federal Civil Procedure O1275.5

must be presumed, for purposes of discre- Federal Courts O33

tionary function exception to Federal Tort Where pertinent facts bearing on the

Claims Act (FTCA), that the agent’s acts question of subject matter jurisdiction are

are grounded in policy when exercising in dispute, discovery should be allowed;

that discretion; in contrast, if the applica- however, a court’s refusal to allow further

ble statute or regulation does not give the discovery before dismissing on jurisdic-

employee discretion, no presumption at- tional grounds is not an abuse of discretion

taches, and the court must determine when it is clear that further discovery

whether the decisions were of the kind would not demonstrate facts sufficient to

that are susceptible to policy analysis. 28 constitute a basis for jurisdiction.

U.S.C.A. § 2680(a).

10. Federal Civil Procedure O1275.5

6. United States O141(3) Federal Courts O33

United States bears the burden of Additional discovery was not warrant-

proving the applicability of discretionary ed prior to dismissal of Federal Tort

1018 707 FEDERAL SUPPLEMENT, 2d SERIES

Claims Act (FTCA) claim for lack of sub- ing a Federal Tort Claims Act (‘‘FTCA’’)

ject matter jurisdiction where plaintiffs action against the Securities and Exchange

failed to articulate a discrete discovery Commission (‘‘SEC’’) and the United

request that might cure the jurisdictional States (‘‘Government’’ or ‘‘Defendant’’).

deficiency and failed to otherwise specify Plaintiffs assert that the SEC ‘‘owes a

where they might discover the necessary duty of reasonable due care to all members

factual predicate for subject matter juris- of the general public including all investors

diction. 28 U.S.C.A. § 2680(a). in U.S. financial markets who are foresee-

ably endangered by its conduct.’’ (Compl.

11. Federal Civil Procedure O852.1

¶ 163.) Plaintiffs also assert that the

When an amended complaint is filed, SEC’s negligent acts and omissions

the previous complaint is rendered null ‘‘caused Madoff’s scheme to continue, per-

and void, and only the amended complaint petuate, and expand,’’ and that the SEC

remains legally operable; a plaintiff waives ‘‘fail[ed] to terminate Madoff’s Ponzi

all causes of action alleged in the original scheme despite its multiple opportunities

complaint which are not alleged in the to do so.’’ (Compl. ¶ 2; see also Compl.

amended complaint. ¶ 164.) Plaintiffs further assert that

‘‘Plaintiffs here were among those victim-

ized by Madoff. Plaintiffs made their in-

vestments in reliance on Madoff’s reputa-

Philip J. Dichter, Philip J. Dichter Law tion, clean regulatory record, and the

Offices, Malibu, CA, for Plaintiffs. SEC’s implied stamp of approval.’’

(Compl. ¶ 8.) Because of the SEC’s alleged

Richard M. Gordon, Beverly Hills, CA, negligence, Plaintiffs seek to recover their

pro se. losses from their investments with Madoff.

Jeffrey Paul Ehrlich, United States De-

partment of Justice, Washington, DC, for [1] Defendants have brought a pair of

Defendants. Motions to Dismiss, arguing that the Court

lacks jurisdiction to hear the claims under

ORDER GRANTING DEFENDANTS’ the FTCA, 28 U.S.C. § 2674 et seq. Un-

MOTIONS TO DISMISS FOR LACK der the ‘‘discretionary function exception’’

OF JURISDICTION [6, 7] to the FTCA, federal courts are barred

from adjudicating tort actions arising out

STEPHEN V. WILSON, District Judge. of federal officers’ discretionary acts. 28

I. INTRODUCTION U.S.C. § 2680(a). In brief, officers are

only liable if (1) the officers’ actions were

A. BACKGROUND prescribed by statute, regulation, or policy,

Plaintiffs were investors in Bernard Ma- or (2) the officers’ conduct was not suscep-

doff’s Ponzi scheme.1 Plaintiffs are bring- tible to analysis on social, economic, or

1. The plaintiffs are: -Claudia Gvirtzman Dichter (represented by

–Dichter–Mad Family Partners, LLP (a Philip Dichter), and

Florida partnership represented by attorney

-Richard M. Gordon (who is a lawyer repre-

Philip Dichter, an investor in the partner-

senting himself).

ship),

-Philip Dichter (who is a lawyer represent-

ing himself),

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1019

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

political policy grounds. See United Plaintiffs the benefit of any plausible infer-

States v. Gaubert, 499 U.S. 315, 322, 111 ences contained in the Report (as Plaintiffs

S.Ct. 1267, 113 L.Ed.2d 335 (1991).2 repeatedly urged the Court to do, see, e.g.

[2] The Complaint contains over fifty Compl. ¶ 1 n. 3, Sur-reply at 5 n. 1), the

pages of allegations summarizing the Court has reviewed the full Report and

SEC’s failure to uncover Madoff’s fraud. treats it as though it were fully included in

The Complaint also attaches five exhibits, Plaintiffs’ Complaint. Although this is an

the most substantial of which is the SEC unusual procedure, there is clear legal au-

Office of Inspector General’s 450–page In- thority permitting the Court to do so:

vestigation of Failure of the SEC to Un- Plaintiffs’ Complaint ‘‘reference[s]’’ the

cover Bernard Madoff’s Ponzi Scheme— Report ‘‘extensively,’’ and the factual alle-

Public Version [hereinafter ‘‘the Report’’], gations contained in the Report are ‘‘inte-

which was released in August 2009. gral to [their] claim.’’ United States v.

(Compl., Ex. A.) 3 Plaintiffs purport to Ritchie, 342 F.3d 903, 908 (9th Cir.2003)

adopt the ‘‘factual allegations or determi- (citations omitted). Thus, it is appropriate

nations made in the report’’ by ‘‘fully in- in this particular instance to consider the

corporat[ing] by reference’’ the Report as Report as part of Plaintiffs’ allegations for

a part of the Complaint. (Compl. ¶ 1 n. 3.) purposes of the present Motion to Dismiss.

This request is technically impermissible Although the inclusion of the Report

under Fed.R.Civ.P. 10(c), which only per-

results in an unusually long Complaint, the

mits the incorporation of a legally operable

Ninth Circuit has counseled that an overly

‘‘written instrument’’ such as a contract,

detailed complaint is acceptable under

check, letter, or affidavit. See, e.g., Ren-

Fed.R.Civ.P. 8(a) if, for example, it is ‘‘or-

nie & Laughlin, Inc. v. Chrysler Corp.,

ganized, [and is] divided into a description

242 F.2d 208, 209 & n. 209 (9th Cir.1957);

of the parties, a chronological factual back-

see also Wright & Miller, 5A Federal

ground, and a presentation of enumerated

Practice & Procedure § 1327 n. 1 (3d ed.

legal claims, each of which lists the liable

2009 update). In contrast, items such as

Defendants and legal basis therefor.’’

‘‘newspaper articles, commentaries and ed-

itorial cartoons’’ are not properly incorpo- Hearns v. San Bernardino Police Dept.,

rated into the complaint by reference. 530 F.3d 1124, 1132 (9th Cir.2008). In the

Perkins v. Silverstein, 939 F.2d 463, 467 n. present case, both the Complaint and the

2 (7th Cir.1991); see also Wright & Miller, Report satisfy these criteria. Accordingly,

5A Federal Practice & Procedure § 1327 because the Report is both attached to and

n. 2. incorporated-by-reference into the Com-

plaint, it is properly considered on the

That said, Defendants have not objected

Motion to Dismiss. (See also infra Part

to Plaintiffs’ attempt to incorporate the

III.A.)

Report by reference into the Complaint.

(See generally Defs.’ Motion; Defs.’ Re- Many of Plaintiffs’ allegations (including

ply.) Additionally, Fed.R.Civ.P. 8(e) re- the factual averments contained in the Re-

quires the Court to ‘‘construe[ ] pleadings port) identify decisions that, in hindsight,

so as to do justice.’’ In order for the could have and should have been made

Court to comply with Rule 8(e) and give differently. Other allegations reveal the

2. There are, of course, various other require- 3. This Order refers to the Office of Inspector

ments and exceptions in the FTCA. This brief General’s report as ‘‘the Report,’’ and pin-

summary only relates to the matter at issue citations to the Report are abbreviated as

here—the discretionary function exception. ‘‘Ex. A.’’

1020 707 FEDERAL SUPPLEMENT, 2d SERIES

SEC’s sheer incompetence in regulating operations that ‘‘should have’’ been done.

Madoff’s broker-dealer, market-making, (Compl. ¶¶ 34, 37, 39.)

and investment-management operations. The second warning sign came in May

What is lacking in the present Complaint, 2000, when industry analyst Harry Marko-

however, is any plausible allegation reveal- polos provided an eight-page complaint to

ing that the SEC violated its clear, non- the Boston SEC office. (Compl. ¶¶ 42–46;

discretionary duties, or otherwise under- Ex. A at 61–67.) The complaint provided

took a course of action that is not poten- evidence ‘‘questioning the legitimacy of

tially susceptible to policy analysis. Madoff’s reported returns.’’ (Compl. ¶ 42.)

Markopolos presented his findings to an

B. FACTUAL ALLEGATIONS

unqualified senior staff member (Compl.

The facts of the Madoff fraud need little ¶ 44), and although the staffer stated that

introduction. A thorough summary of Ma- he forwarded the matter to the New York

doff’s operations can be found in the re- office, he did not actually do so. (Compl.

cent decision In re Bernard L. Madoff Inv. ¶ 45.)

Secs. LLC, 424 B.R. 122, 127–32 (Bkrtcy.

The third warning sign came in March

S.D.N.Y.2010) (order affirming trustee’s 2001, when Markopolos submitted a second

determination of former investors’ net eq- complaint to the Boston office containing

uity). new, simplified information. (Compl.

In the present case, Plaintiffs’ central ¶¶ 47–50; Ex. A at 67–74.) This time, the

allegations are largely drawn from the In- matter was forwarded to New York, but

spector General’s Report, which Plaintiffs ‘‘after just one day’’ the lead enforcement

have incorporated by reference into the attorney in New York ‘‘rejected it out of

Complaint. (Compl. ¶ 1 n. 3.) The Com- hand.’’ (Compl. ¶ 49.) Although Marko-

plaint alleges the following. polos’s complaint was more detailed than

The first warning sign of Madoff’s fraud the average complaint, the attorney wrote

came in 1992, when Avellino & Bienes, a a short email stating ‘‘I don’t think we

firm that invested exclusively through Ma- should pursue this matter further.’’

doff’s brokerage, was exposed as a Ponzi (Compl. ¶¶ 49–50.) 4

scheme. (Compl. ¶¶ 29–40; Ex. A at 42– The fourth warning sign came in May

61.) Plaintiffs explain that the SEC’s in- 2001, when industry publications MAR-

vestigators were ‘‘woefully inexperienced’’ Hedge and Barron’s published articles dis-

in the area of Ponzi schemes (Compl. ¶ 32) cussing the secrecy of Madoff’s operations

and failed to obtain trading records from and the improbability of his consistently

the Depository Trust Corporation that strong returns. (Compl. ¶¶ 51–57; Ex. A

could have revealed that Madoff’s opera- at 74–77, 80–81, 86.) An SEC staff mem-

tions were fraudulent. (Compl. ¶¶ 35, 37.) ber in the Boston office asked the New

Because the SEC was focused on Avellino York team reviewing Markopolos’s com-

& Bienes rather than Madoff, the SEC plaint if they were interested in reading

staff failed to make a number of other the articles. (Compl. ¶ 55.) The New

‘‘common sense’’ inquiries into Madoff’s York team apparently did not read the

4. In full, the email stated: ‘‘As we discussed, nard Madoff, and some information about

after reviewing the complaint received (via Madoff and others identified in the complaint,

the [Boston office] ) from Harry Markopol[o]s I don’t think we should pursue this matter

of Rampart Investments about purported per- further.’’ (Ex. A at 72.)

formance claims for funds managed by Ber-

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1021

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

articles. (Id.) At the same time, the arti- Once the investigation commenced, the

cles piqued a Washington supervisor’s in- team focused its attention on potential

terest. (Compl. ¶ 56.) Although the su- front-running 5—with which it was more

pervisor wrote a note on the article stating familiar—rather than a Ponzi scheme.

that ‘‘[t]his is a great exam[ination] for (Compl. ¶¶ 65–67.) The team created a

us!,’’ no further actions were taken in the written plan, but the plan was ‘‘too nar-

Washington office. (Compl. ¶ 56; Ex. A at rowly focused’’ (Ex. A at 142) and the team

86.) did not follow through by obtaining rele-

The first major investigative event came vant information from third parties.

in May 2003, when a hedge fund manager (Compl. ¶ 70.) At one point, the Broker–

provided a complaint to the SEC’s Office Dealer team drafted a letter ‘‘to the [Na-

of Compliance Inspections and Examina- tional Association of Securities Dealers] to

tions in Washington D.C. (Compl. ¶¶ 58– confirm Madoff’s trading activity,’’ but re-

81; Ex. A at 77–145.) The fund manager’s frained from sending the letter because,

complaint summarized a number of red according to one staff member, ‘‘it would

flags that suggested that Madoff was run- have been too burdensome and time-con-

ning a Ponzi scheme. (Compl. ¶ 59.) The suming for the staff to review the docu-

Investment Management team in Wash- ments that the [National Association of

ington, which was more qualified to handle Securities Dealers] would have supplied in

an investigation into a Ponzi scheme, re- response.’’ (Compl. ¶¶ 69–98.) Similarly,

ferred the matter to the Washington of- ‘‘the team failed to consult Exchange,’’

fice’s Broker–Dealer team. (Compl. even though Madoff’s purported options

¶¶ 61–62.) The two teams never conferred trades were being processed through it.

on the investigation. (Compl. ¶ 62.) Com- (Compl. ¶ 74.) Instead of receiving this

pounding this failure to confer, the Bro- information from third parties that ‘‘would

ker–Dealer team employed a number of have assisted in independently verifying

inexperienced staff members at that time. [Madoff’s] trading activity,’’ the team

(Compl. ¶¶ 63–64.) One team member ex- ‘‘rel[ied] solely on verbal answers’’ from

plained that ‘‘[a]t the time TTT we were Madoff, which, according to the Office of

expanding rapidly,’’ (Compl. ¶ 63, quoting the Inspector General’s consultants, ‘‘is not

Ex. A, at 90) and various staff members an appropriate method of examination.’’

recalled that they received little-to-no for- (Compl. ¶¶ 70, 72, quoting Ex. A at 111 n.

mal training. (Compl. ¶¶ 63–64.) 74, 206 n. 143.) The team supervisor ad-

Upon receiving the case, the Washington mitted that it was ‘‘asinine’’ for the team

Broker–Dealer team inexplicably failed to not to obtain a proper audit trail, which

begin its investigation for nine months and Plaintiffs characterize as a ‘‘common-sense

failed to log its investigation into the procedure’’ in such an investigation.

SEC’s Super Tracking and Reporting Sys- (Compl. ¶ 77, quoting Ex. A at 109.)

tem (STARS), a computer database used The Washington team stopped its in-

to track examinations. (Compl. ¶¶ 65–67; vestigation in April 2004 because SEC su-

Ex. A at 85 n. 54.) This failure to log the pervisors ‘‘determined that a new investi-

investigation was consistent with the gation probing mutual funds was more

SEC’s regular practice at the time. (Id.) important than following up on Madoff.’’

5. Front-running is the practice in which a customers.’’ (Compl. ¶ 66.) See also Black’s

‘‘broker execut[es] orders on a security for its Law Dictionary 739 (9th ed. 2009) (defining

own account while taking advantage of ad- term in similar manner).

vance knowledge of pending orders from its

1022 707 FEDERAL SUPPLEMENT, 2d SERIES

(Compl. ¶ 78.) 6 At the end of the investi- commenced, the Broker–Dealer team nev-

gation, the team failed to produce a final er consulted the Investment Management

report, which according to the Report team for guidance and advice. (Compl.

was a ‘‘critical error’’ that later led to un- ¶¶ 86, 88.) Unlike the team that conduct-

necessary duplication of efforts. (Compl. ed the Washington investigation, the New

¶ 78, quoting Ex. A at 144.) York Broker–Dealer team failed to even

The second major investigation started draft a planning memorandum, let alone

in the Northeast Regional (New York) Of- follow it. (Compl. ¶ 87.) When conducting

fice in April 2004, just as the Washington the investigation, the team accepted Ma-

investigation was being put on indefinite doff’s assertions at face value, even though

hold. (Compl. ¶¶ 82–109.) The New York they knew or should have known that Ma-

investigation was prompted by the SEC’s doff was lying—for example, by saying

discovery of internal emails from a hedge that he was no longer trading options

fund that had invested with Madoff (which was contradicted by readily avail-

through a feeder fund that invested direct- able records, see Ex. A at 172, 207) and

ly in Madoff’s funds. Upon conducting that he was satisfied with foregoing hun-

due diligence, the hedge fund had decided dreds of millions of dollars in potential

to withdraw its investments from the Ma- management fees and receiving only bro-

doff feeder fund. (Compl. ¶¶ 82–83.) The kerage commissions instead. (Compl.

emails summarized the investor’s concerns ¶¶ 90–92.) The team focused its investiga-

about Madoff’s activities, and essentially tion on their own area of expertise (front-

tracked the issues raised in the Markopo- running and ‘‘cherry-picking’’ 7), while ig-

los reports and the articles that had ap- noring other potential areas of investiga-

peared in MARHedge and Barron’s. tion such as looking for a Ponzi scheme.

(Compl. ¶¶ 83–84.) (Compl. ¶¶ 88–89.) 8 They generally failed

The New York investigation proceeded to corroborate information with third par-

in a similar manner as the Washington ties or follow up on red flags such as

investigation. (Compl. ¶ 86.) The case Madoff’s auditor’s conflict of interest and

was transferred from an Investment Man- obvious inadequacy to audit a complex op-

agement team to an ill-equipped Broker– eration like Madoff’s. (Compl. ¶¶ 94–96.)

Dealer team; the Broker–Dealer team was In spite of these failings, the New York

not even assembled for seven months, and investigation came remarkably close to un-

did not begin working for yet another covering Madoff’s fraud in June 2005.

three months; and, once the investigation The team conducted a two-to-three month

6. One examiner later wrote that ‘‘[i]n early 8. One of the investigators explained that he

2004, [the Office of Compliance Inspections interpreted the initial complaint and referral

and Examinations] made it a priority to ex- as suggesting that the investigation ‘‘focus

amine mutual funds’ undisclosed payments to exclusively on whether Madoff was using his

broker-dealers,’’ (Ex. A at 125, quoting July 1, market making capability to cherry pick

2009 letter from Lori Richards to Inspector trades or to front run market making trades

General David Kotz), and contemporary rec- for the benefit of his hedge fund clients.’’

ords confirm this. (Ex. A at 125–26.) (Ex. A at 167, paraphrasing testimony of John

Nee.) Another team members explained that

‘‘he focused on abusive trading practices rath-

7. ‘‘[C]herry-picking is generally a scheme in

er than the other issues raised in the [referral]

which trades, once they are determined to be

e-mail, in part, because order leakage was a

favorable, are allocated to a favored account prominent issue at the time of the examina-

at the expense of other accounts.’’ (Ex. A at tion.’’ (Ex. A at 168, paraphrasing testimony

146 n. 92.) of Robert Sollazzo.)

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1023

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

on-site investigation (see Ex. A at 179) and they would likely have exposed the fraud.

had a formal interview with Madoff in late (Ex. A at 206–07.)

May (Ex. A at 193–95). Embarrassingly Almost immediately after the New York

for the SEC, it was during the May meet-

team closed its investigation, Harry Mar-

ing that the New York team first

kopolos provided the Boston office with a

learned—from Madoff himself—about the

third version of his report on Madoff’s

prior Washington investigation. (Compl.

alleged fraud, sparking off yet another in-

¶¶ 102–04.) Shortly after the interview,

vestigation in Madoff’s operations.

the examiners decided that they should

contact Madoff’s clients to corroborate his (Compl. ¶¶ 110–146.) Markopolos’s report

trading activity. (Ex. A at 219–21.) The summarized the many warning signs that

investigators successfully obtained useful Madoff was running a Ponzi scheme, and

information from one relevant third party referred the SEC to a handful of industry

(Barclays), but they failed to follow up on insiders who could corroborate Markopo-

it because of a mistaken belief that they los’s suspicions. (Compl. ¶¶ 111–16.)

could not obtain audit-trail data from Bar- Markopolos even recommended that the

clays’s foreign affiliates. (Compl. ¶ 101.) SEC simply compare Madoff’s purported

Another staffer stated that, to his under- over-the-counter options trading to the

standing, SEC had a general policy of not publicly-reported information regarding

contacting third parties to follow up on exchange-based options trading. (Compl.

leads. (Compl. ¶ 100.) The team also ¶ 115; see also Ex. C, at 6–7.) Markopolos

planned on requesting written responses explained that if Madoff were truly trading

to follow-up on their face-to-face meeting in options, his high-volume trades would

with Madoff, but ultimately failed to do so, have a visible effect in the market.

even though they had drafted such an (Compl. ¶ 115.).

inquiry letter. (Compl. ¶ 108; Ex. A at

The Boston office referred the matter to

203–04.)

the New York office, and emphasized to

When the New York investigators final- the New York staff that the report de-

ly suggested conducting on-site visits of

served close attention. (Compl. ¶ 117.)

Madoff’s clients, the team supervisor ve-

The New York office, instead of staffing

toed the suggestion. (Compl. ¶¶ 97–99.)

the matter with experts in Ponzi schemes,

A Washington investigator had explained

placed relatively inexperienced staff mem-

that he ‘‘was hesitant to make trouble for

bers on the case. (Compl. ¶ 118.) The

someone so ‘well connected’ ’’ (Compl. ¶ 97,

investigators failed to treat the matter as a

quoting Ex. A at 194), and the New York

Ponzi scheme investigation, and generally

supervisor ‘‘expressed a fear that he (and

the junior staffers) could be sued as indi- refused to credit Markopolos’s report be-

viduals if their inquiries to third parties cause of interpersonal tensions (Compl.

somehow damaged Madoff’s business.’’ ¶¶ 119–20, 122) and a misguided belief that

(Compl. ¶ 98.) Within days of the decision Markopolos was seeking a reward for un-

not to visit Madoff’s clients, the New York covering the fraud. (Compl. ¶ 121.) The

investigators began drafting their case- team also relied on the earlier New York

closing memorandum, and the case was team’s incorrect assertion that it had in

closed by September 2005. (Compl. fact investigated the Ponzi-scheme angle,

¶ 107.) Madoff himself believed that had which deterred the new team from fully

the investigators contacted third-party following up on Markopolos’s suggestions.

trading partners, account holders, and/or (Compl. ¶ 123.) Additionally, because the

trade-clearing and -settlement agencies, new team had failed to file a ‘‘matter un-

1024 707 FEDERAL SUPPLEMENT, 2d SERIES

der inquiry’’ report for two months, a new purported trading strategy was based on

tip—this time from an anonymous investor options trades. (Compl. ¶ 140.) Finally,

who stated that he had invested with Ma- the investigators made, in the Report’s

doff but withdrew his money when he be- description, an ‘‘inexplicable decision’’ not

gan suspecting fraud—was improperly ig- to send a letter to obtain information from

nored. (Compl. ¶¶ 124–25.) Because the Madoff’s purported European counterpar-

team felt outmatched by the technical as- ties. (Compl. ¶ 141; Ex. A at 371.) The

pects of Madoff’s operations, they forward- team closed the investigation in June 2006,

ed certain matters to the SEC’s Office of having overlooked various clear indications

Economic Analysis, but due to miscommu- of Madoff’s fraud. (Compl. ¶¶ 144–47.)

nications running in both directions, these The team also failed to follow up on possi-

efforts failed to produce useful insights. ble charges related to Madoff’s various

(Compl. ¶¶ 128–30.) misrepresentations and non-disclosures

The unprepared New York investiga- during the interview and examinations.

tions team eventually proceeded with its (See Ex. A at 322–23.)

investigation and interviewed Madoff di- Following that investigation, the SEC

rectly. (Compl. ¶¶ 132–36.) At one point, received three more tips that might have

the interview produced potentially incrimi-

uncovered the fraud. (Compl. ¶¶ 148–53.)

nating information—Madoff’s account

The first was dismissed when Madoff’s

number with the Depository Trust Compa-

attorney told the SEC that the tipster was

ny—but the investigators failed to proper-

not actually a Madoff client (Compl. ¶ 150);

ly follow up on the matter. (Compl.

the second was yet another Markopolos

¶¶ 136–37.) When a junior staffer contact-

warning that was simply ignored because

ed the Depository Trust Company, the

the staff believed that it had fully exam-

staffer failed to recognize the significance

ined the Ponzi-scheme allegations (Compl.

of the fact that Madoff held his assets in

¶ 151; Ex. A at 354–55); and the third tip

commingled accounts, and the staffer also

(from the former Madoff investor whose

failed to ask about the size of the account.

earlier complaint had arrived just prior to

(Compl. ¶¶ 138–39; Ex. A at 323–24.) Ma-

doff himself has acknowledged that had the opening of the final investigation) was

the investigators simply asked to see the likewise ignored because the investigation

size of the account, they immediately was deemed complete. (Compl. ¶¶ 152–

would have discovered that Madoff’s trad- 53.)

ing positions were nowhere near as large More than two years after the closure of

as he had claimed. The staff believed, the final investigation, Madoff’s fraud was

based on Madoff’s representations, that exposed. (Compl. ¶¶ 154–55.) The fraud

the Depository Trust Company account could have been discovered at any number

held over $2 billion of securities; in fact,

of points in the previous sixteen years had

the account held only between $10 and $30

the SEC ‘‘performed its everyday, non-

million. (Ex. A at 332–33.)

discretionary functions with the most basic

The investigators also failed to recognize level of competence.’’ (Compl. ¶ 158.) At

the significance of the fact that the Nation- various points, even ‘‘a single action, per-

al Association of Securities Dealers told formed diligently and ably, or even with

them that Madoff had no option positions the most minimal competence, would have

on a particular date, even though Madoff’s exposed the scheme.’’ (Compl. ¶ 159.)

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1025

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

II. PRELIMINARY PROCEDURAL B. THE DOE DEFENDANTS ARE

ISSUES PERMISSIBLE

A. THE SECURITIES AND EX- As for the Doe Defendants, Gordon

CHANGE COMMISSION IS NOT properly points out that the Government

A PROPER DEFENDANT does not necessarily have standing to ob-

ject to their presence. For purposes of

The three Dichter Plaintiffs (that is, the this motion, then, the Doe Defendants’ lia-

Dichter–Mad investment partnership, Phil- bility is linked with that of the United

ip Dichter, and Claudia G. Dichter) volun- States.

tarily dismissed the SEC and the Doe

Defendants on January 11, 2010. III. LEGAL STANDARDS

[3] The SEC brings a separate Motion A. MOTION TO DISMISS FOR

to Dismiss Plaintiff Gordon’s claims LACK OF SUBJECT MATTER

against it. [Docket no. 7.] In its one-page JURISDICTION

motion, the SEC cites clear controlling [4] In order to comply with the notice

authority that bars Gordon’s claims. See, pleading standards of Fed.R.Civ.P. 8(a), a

e.g., FDIC v. Craft, 157 F.3d 697, 706 (9th plaintiff’s complaint ‘‘must contain suffi-

Cir.1998) (‘‘The FTCA is the exclusive cient factual matter, accepted as true, to

remedy for tortious conduct by the United ‘state a claim to relief that is plausible on

States, and it only allows claims against its face.’ ’’ Ashcroft v. Iqbal, ––– U.S.

the United States. Although such claims ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868

can arise from the acts or omissions of (2009) (quoting Bell Atlantic Corp. v.

United States agencies (28 U.S.C. § 2671), Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167

an agency itself cannot be sued under the L.Ed.2d 929 (2007)). ‘‘A claim has facial

plausibility when the plaintiff pleads factu-

FTCA.’’); see also Standifer v. SEC, 542

al content that allows the court to draw the

F.Supp.2d 1312, 1317 (N.D.Ga.2008) (‘‘The

reasonable inference that the defendant is

SEC cannot be sued under the FTCA.’’)

liable for the misconduct alleged.’’ Id. A

In Gordon’s Opposition,9 he does not complaint that offers mere ‘‘labels and con-

even attempt to argue that his claims clusions’’ or ‘‘a formulaic recitation of the

against the SEC are viable. Accordingly, elements of a cause of action will not do.’’

the SEC’s Motion is GRANTED. Gor- Id.; see also Moss v. U.S. Secret Service,

don’s claims against the SEC are DIS- 572 F.3d 962, 969 (9th Cir.2009) (citing

MISSED. Iqbal, 129 S.Ct. at 1951).10

9. Gordon’s ‘‘Opposition’’ brief is 37–pages Civ. 12(b)(1) rather than a motion to dismiss

long, well above the 25–page limit set by this for failure to state a claim under Fed.R.Civ.P.

Court. In addition, Gordon did not file his 12(b)(6), motions to dismiss on jurisdictional

substantive brief with this Court until March grounds are governed by the standard plead-

1, which was one week later than the dead- ing rules of Fed.R.Civ.P. 8(a). See Doe v.

line set by this Court’s Local Rules. The Holy See, 557 F.3d 1066, 1074 (9th Cir.2009)

Court accordingly STRIKES Gordon’s Oppo- (per curiam) (citing Twombly, 127 S.Ct. at

sition. However, as the document raises the 1964–65), cert. filed (June 25, 2009). In addi-

same issues as are raised in Plaintiffs’ joint tion, it should be noted that Twombly and

Opposition and Sur–Reply (which the Court Iqbal, while technically brought under Fed. R.

has considered despite its procedural irregu- Civ. 12(b)(6), focused their analysis on the

larities), the Court has addressed all the is- notice pleading requirements of Fed.R.Civ.P.

sues raised in Gordon’s stricken submission. 8(a). Twombly and Iqbal therefore state the

proper standard for addressing the sufficiency

10. Although the present motion is a motion to of Plaintiffs’ allegations with respect to the

dismiss for lack of jurisdiction under Fed. R. Court’s subject matter jurisdiction.

1026 707 FEDERAL SUPPLEMENT, 2d SERIES

Generally, the Court’s analysis is limited 2449, 101 L.Ed.2d 352 (1988) (quoting 28

to the contents of the complaint. See U.S.C. § 1346(b)). The FTCA provides,

Schneider v. Cal. Dept. Of Corrections, 151 however, that the government shall not be

F.3d 1194, 1197 n. 1 (9th Cir.1998) (cita- liable for ‘‘[a]ny claim based upon an act or

tions omitted). However, ‘‘[w]hen a plain- omission of an employee of the Govern-

tiff has attached various exhibits to the ment TTT based upon the exercise or per-

complaint, those exhibits may be consid- formance or the failure to exercise or per-

ered in determining whether dismissal [i]s form a discretionary function or duty on

proper.’’ Parks School of Business, Inc. v. the part of a federal agency or an employ-

Symington, 51 F.3d 1480, 1484 (9th Cir. ee of the Government, whether or not the

1995) (citation omitted). Likewise, the discretion involved be abused.’’ 28 U.S.C.

Court ‘‘may TTT consider certain materi- § 2680(a). This statutory provision,

als—documents attached to the complaint,

known as the ‘‘discretionary function ex-

documents incorporated by reference in

ception,’’ lies at the heart of the present

the complaint, or matters of judicial no-

motion. Because the FTCA is jurisdic-

tice—without converting the motion to dis-

tional, it must be emphasized that the

miss into a motion for summary judg-

present analysis is focused on jurisdiction-

ment.’’ United States v. Ritchie, 342 F.3d

al considerations rather than the merits of

903, 907 (9th Cir.2003).

Plaintiffs’ Complaint.

When a motion to dismiss is granted,

ordinarily ‘‘any dismissal[,] TTT except one C. DISCRETIONARY FUNCTION

for lack of jurisdiction, improper venue, EXCEPTION

or failure to join a party under Rule 19[,]

The discretionary function exception

operates as an adjudication on the merits.’’

provides the government with immunity

Fed.R.Civ.P. 41(b) (emphasis added).

from suit for ‘‘[a]ny claim TTT based upon

B. FEDERAL TORT CLAIMS ACT the exercise or performance of the failure

to exercise or perform a discretionary

The Federal Tort Claims Act (‘‘FTCA’’)

function or duty on the part of a federal

‘‘gives federal courts jurisdiction over

claims against the United States for mon- agency or employee of the Government,

ey damages ‘for injury or loss of property, whether or not the discretion involved be

or personal injury or death caused by the abused.’’ 28 U.S.C. § 2680(a). ‘‘In this

negligent or wrongful act or omission of way, the discretionary function exception

any employee of the Government while serves to insulate certain governmental de-

acting within the scope of his office or cision-making from ‘judicial second guess-

employment, under circumstances where ing of legislative and administrative deci-

the United States, if a private person, sions grounded in social, economic, and

would be liable to the claimant in accor- political policy through the medium of an

dance with the law of the place where the action in tort.’ ’’ Terbush v. United States,

act or omission occurred.’ ’’ Sheridan v. 516 F.3d 1125, 1129 (9th Cir.2008) (quoting

United States, 487 U.S. 392, 398, 108 S.Ct. United States v. S.A. Empresa de Viacao

In the only post-Twombly circuit court to (5th Cir.2008)). In addition, the Ninth Cir-

address pleading standards in the FTCA con- cuit has explicitly applied Twombly when ana-

text, the Fifth Circuit cited Twombly as the lyzing a complaint under the discretionary

operative standard governing a jurisdictional function exception caselaw, but only had oc-

dispute like the present one. Castro v. United casion to do so under the Foreign Sovereign

States, 560 F.3d 381, 386 (5th Cir.2009) (cit- Immunities Act, not the FTCA. Doe v. Holy

ing Lane v. Halliburton, 529 F.3d 548, 557 See, 557 F.3d at 1073–74, 1084–85.

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1027

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

Aerea Rio Grandense (Varig Airlines), by statute, regulation, or agency guide-

467 U.S. 797, 104 S.Ct. 2755, 81 L.Ed.2d lines, allows a Government agent to exer-

660 (1984)); accord Marbury v. Madison, cise discretion, it must be presumed that

5 U.S. (1 Cranch) 137, 170, 2 L.Ed. 60 the agent’s acts are grounded in policy

(1803) (‘‘The province of the court is, sole- when exercising that discretion.’’ Id. In

ly, to decide on the rights of individuals, contrast, if the applicable statute or regu-

not to inquire how the executive, or execu- lation does not give the employee discre-

tive officers, perform duties in which they tion, no presumption attaches, and the

have discretion.’’). court must determine whether the deci-

Whether a given action by a government sions were ‘‘of the kind’’ that are ‘‘suscepti-

employee is protected by the discretionary ble to policy analysis.’’ Gaubert, 499 U.S.

function exception involves a two-part in- at 323, 325, 111 S.Ct. 1267.

quiry. Where there is no statute, regulation, or

First, the court must determine whether policy on point (either conferring discre-

the challenged action involves an ‘‘element tion or limiting discretion), the relevant

of judgment or choice.’’ United States v. question is not whether the decision was

Gaubert, 499 U.S. 315, 322, 111 S.Ct. 1267, the result of an actual policy-based deci-

113 L.Ed.2d 335 (1991). If ‘‘a federal stat- sion-making process. As the Ninth Circuit

ute, regulation, or policy specifically pre- has repeatedly explained, ‘‘we do not need

scribes a course of action for the employee actual evidence that policy-weighing was

to follow,’’ then the employee can be held undertaken.’’ Terbush, 516 F.3d at 1136 n.

liable for failing to follow the prescribed 5 (citing Gaubert, 499 U.S. at 324–25, 111

directive. Id. (emphasis added). S.Ct. 1267). Instead, ‘‘[t]he focus of the

Second, ‘‘even assuming the challenged inquiry is TTT on the nature of the actions

conduct involves an element of judgment, taken and on whether they are susceptible

it remains to be decided whether that to policy analysis.’’ See Gaubert, 499 U.S.

judgment is of the kind that the discretion- at 325, 111 S.Ct. 1267 (emphasis added);

ary function exception was designed to see also GATX/Airlog Co., 286 F.3d at

shield.’’ Id. ‘‘Because the purpose of this 1178 (‘‘[T]he question is not whether policy

exception is to prevent judicial second- factors necessary for a finding of immunity

guessing of legislative and administrative were in fact taken into consideration, but

decisions grounded in social, economic, and merely whether such a decision is suscep-

political policy TTT, the exception protects tible to policy analysis.’’); Nurse v. United

only governmental actions and decisions States, 226 F.3d 996, 1001 (9th Cir.2000)

based on considerations of public policy.’’ (‘‘the challenged decision need not actually

Id. at 323, 111 S.Ct. 1267. be grounded in policy considerations so

[5] In assessing the second step, it is long as it is, by its nature, susceptible to a

important to keep in mind that ‘‘if a regu- policy analysis.’’); Childers v. United

lation allows the employee discretion, the States, 40 F.3d 973, 974 n. 1 (9th Cir.1994)

very existence of the regulation creates a (‘‘The application of the exception does not

strong presumption that a discretionary depend, however, on whether federal offi-

act authorized by the regulation involves cials actually took public policy consider-

consideration of the same policies which ations into account. All that is required is

led to the promulgation of the regula- that the applicable statute or regulation

tions.’’ Id. at 324, 111 S.Ct. 1267 (empha- gave the government agent discretion to

sis added). Thus, ‘‘[w]hen established gov- take policy goals into account.’’); Lesoeur

ernmental policy, as expressed or implied v. United States, 21 F.3d 965, 969 (9th

1028 707 FEDERAL SUPPLEMENT, 2d SERIES

Cir.1994) (‘‘[Appellants] argue that the dis- rejected ‘‘a rigid dichotomy between ‘plan-

cretionary function exception cannot apply ning’ and ‘operational’ decisions and activi-

in the absence of a ‘conscious decision.’ ties.’’ Terbush, 516 F.3d at 1130 (citing

The statute is not so limitedTTTT The lan- Gaubert, 499 U.S. at 324, 111 S.Ct. 1267).

guage is directed at the nature of the The courts have likewise rejected the ar-

conduct, and does not require an analysis gument that the government is per se im-

of the decision-making process.’’) (quoting mune when conducting ‘‘uniquely govern-

In re Consol. United States Atmos. Test- mental functions,’’ as such an analysis

ing Litig., 820 F.2d 982, 988–89 (9th Cir. would ‘‘push the courts into the ‘non-gov-

1987)). ernmental’-‘governmental’ quagmire that

The Ninth Circuit has noted that ‘‘the has long plagued the law of municipal cor-

distinction between protected and unpro- porations.’’ Indian Towing Co. v. United

tected decisions can be difficult to appre- States, 350 U.S. 61, 64, 76 S.Ct. 122, 100

hend, but this is the result of the nature of L.Ed. 48 (1955); see also United States v.

government actions—they fall ‘along a Olson, 546 U.S. 43, 46, 126 S.Ct. 510, 163

spectrum, ranging from those totally di- L.Ed.2d 306 (2005) (reaffirming Indian

vorced from the sphere of policy analysis, Towing ).

such as driving a car, to those fully

grounded in regulatory policy, such as the D. PROCEDURAL CONSIDER-

regulation and oversight of a bank.’ ’’ Sol- ATIONS RELATING TO THE

dano v. United States, 453 F.3d 1140, 1145 DISCRETIONARY FUNCTION

(9th Cir.2006) (quoting Whisnant v. Unit- EXCEPTION

ed States, 400 F.3d 1177, 1181 (9th Cir. [6] In deciding whether to grant De-

2005)). This distinction is drawn in part fendant’s Motion to Dismiss for lack of

from the Supreme Court’s discussion in subject matter jurisdiction, the Court

Gaubert, in which the Court explained: ‘‘must accept as true the factual allegations

There are obviously discretionary acts in the complaint.’’ Terbush v. United

performed by a Government agent that States, 516 F.3d 1125, 1128 (9th Cir.2008)

are within the scope of his employment (citing GATX/Airlog Co. v. United States,

but not within the discretionary function 286 F.3d 1168, 1173 (9th Cir.2002)). ‘‘The

exception because these acts cannot be United States bears the burden of proving

said to be based on the purposes that the applicability of the discretionary func-

the regulatory regime seeks to accom- tion exception.’’ Id. (citing Prescott v.

plish. If one of the officials involved in United States, 973 F.2d 696, 702 (9th Cir.

this case drove an automobile on a mis- 1992)). The government must prove that

sion connected with his official duties each of the allegedly wrongful acts, by

and negligently collided with another each allegedly negligent actor, is covered

car, the exception would not apply. Al- by the discretionary function exception.

though driving requires the constant ex- GATX/Airlog, 286 F.3d at 1174 (‘‘[W]hen

ercise of discretion, the official’s deci- determining whether the discretionary

sions in exercising that discretion can function exception is applicable, ‘the prop-

hardly be said to be grounded in regula- er question to ask is not whether the Gov-

tory policy. ernment as a whole had discretion at any

Gaubert, 499 U.S. at 325 n. 7, 111 S.Ct. point, but whether its allegedly negligent

1267. agents did in each instance.’ ’’) (citing In re

In addition to these general principles, it Glacier Bay, 71 F.3d 1447, 1451 (9th Cir.

should also be noted that the courts have 1995)) (alterations omitted). In examining

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1029

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

each of the government’s particular acts, sis.’’ Gaubert, 499 U.S. at 323–25, 111

‘‘the question of how the government is S.Ct. 1267.

alleged to have been negligent is critical.’’

Whisnant v. United States, 400 F.3d 1177, E. ILLUSTRATIVE CASELAW

1185 (9th Cir.2005) (emphasis added) (cit- As explained by a leading treatise,

ing Glacier Bay, 71 F.3d at 1451). The ‘‘cases under the [Federal Tort Claims]

central question is whether, ‘‘at this stage Act can be roughly grouped into there

of the case’’—and under the standard of categories: (1) claims based upon [non-

proof applicable at this stage—‘‘the gov- regulatory] determinations or decisions or

ernment has [or has] not established that other acts of choice or judgment of govern-

choices exercised by government officials ment officials and administrators; (2)

involved policy judgments.’’ Prescott, 973 claims based upon the regulatory activities

F.2d at 703. of regulatory agencies or officials; and (3)

These considerations can be summarized claims arising from the design or execution

succinctly by reference to the two-step of public works and other authorized gov-

analysis set forth in Gaubert, 499 U.S. at ernmental programs.’’ Lester S. Jayson &

322–25, 111 S.Ct. 1267. The government Robert C. Longstreth, 2 Handling Federal

can meet its initial burden in one of two Tort Claims, § 12.05[1] (2009 update).

ways, and the plaintiffs can respond to ‘‘Whatever else the discretionary func-

each showing in one of two ways. tion exception may include, TTT it plainly

First, the government may show that a was intended ‘to encompass the discretion-

statute, regulation or policy confers discre- ary acts of the Government acting in its

tion on the government actor; this gives role as regulator of the conduct of private

rise to a ‘‘strong presumption’’ that the individuals.’ ’’ Jayson & Longstreth, Fed-

alleged harmful act was guided by policy eral Tort Claims, § 12.07 (quoting United

judgment. Id. at 324, 111 S.Ct. 1267. States v. Varig Airlines, 467 U.S. 797, 813–

Second, the government may show that 14, 104 S.Ct. 2755, 81 L.Ed.2d 660 (1984)).

the actor’s course of action was ‘‘of the That is not to say that regulatory actions

kind’’ that is ‘‘susceptible to policy analy- enjoy blanket immunity: the ‘‘uniquely

sis.’’ Id. at 323, 325, 111 S.Ct. 1267. Ei- government functions’’ approach was re-

ther of these showings will satisfy the gov- jected by the Supreme Court over half-a-

ernment’s ‘‘burden of proving application century ago. See Indian Towing, 350 U.S.

of the discretionary function exception.’’ at 64, 76 S.Ct. 122. But at the very least,

Blackburn v. United States, 100 F.3d 1426, it appears from the caselaw and secondary

1436 (9th Cir.1996). authorities that regulatory actions are

‘‘[O]nce the Government met its burden, more likely to be deemed ‘‘discretionary

TTT the party opposing [the application of functions’’ than non-regulatory actions are.

the discretionary function exception] ha[s] A leading case involving government

to present sufficient evidence to withstand regulators is United States v. Gaubert, 499

dismissal’’ for lack of jurisdiction. Id. Un- U.S. 315, 111 S.Ct. 1267, 113 L.Ed.2d 335

der Gaubert, the plaintiffs may meet their (1991). In that case, the plaintiff alleged

the burden by showing either (1) that that the Federal Home Loan Bank Board

there are mandatory rules prescribing the and the Federal Home Loan Bank Dallas

actor’s course of action, or (2) that the branch ‘‘had been negligent in carrying out

actor’s course of action was not ‘‘of the their supervisory activities’’ following their

kind’’ that is ‘‘susceptible to policy analy- take-over of a failing Texas savings-and-

1030 707 FEDERAL SUPPLEMENT, 2d SERIES

loan. Id. at 318, 111 S.Ct. 1267. The Ultimately, the Court rejected the plain-

plaintiff, who was the chairman and largest tiff’s argument ‘‘that the challenged ac-

shareholder of the thrift, sought to recover tions fall outside the discretionary function

the lost value of his shares and the value of exception because they involved the mere

his personal guarantee of the corporation’s application of technical skills and business

debts, amounting to $100 million in total. expertise.’’ Id. at 331, 111 S.Ct. 1267.

Id. at 319–20, 111 S.Ct. 1267. In particu- The Court explained that the day-to-day

lar, the plaintiff alleged that the Federal operations of a bank require more than

Home Loan Bank Dallas branch had pres- mere ‘‘mathematical calculations’’ that ‘‘in-

sured the failed thrift’s sitting officers and volve no choice or judgment in carrying

directors to resign and then recommended

out the calculations.’’ Id. Importantly, the

their replacements. Id. at 319, 111 S.Ct.

Court also noted that ‘‘neither party has

1267. The Dallas branch then became sig-

identified formal regulations governing

nificantly involved in the thrift’s day-to-

the conduct in question.’’ Id. at 329, 111

day operations. Id. at 319–20, 111 S.Ct.

S.Ct. 1267 (emphasis added). The Court

1267. The plaintiff’s allegations centered

on the ‘‘alleged negligence of federal offi- identified broad statutory grants of discre-

cials in selecting the new officers and di- tion to the Federal Home Loan Bank to

rectors and in participating in the day-to- engage in formal supervisory actions, and

day management of’’ the thrift. Id. at 320, found no prohibition on the agency’s use of

111 S.Ct. 1267. less formal supervisory tools. Id. The

Court also identified a formal policy state-

The Supreme Court, after restating the

basic two-part test for the discretionary ment from the government in which the

function exception, held that ‘‘[d]ay-to-day agency explained its policy ‘‘that supervi-

management of banking affairs, like the sory actions must be tailored to each case,’’

management of other businesses, regularly ranging from ‘‘informal supervisory guid-

requires judgment as to which of a range ance and oversight,’’ to implementation of

of permissible courses is the wisest.’’ Id. a ‘‘supervisory agreement,’’ and, in the

at 325, 111 S.Ct. 1267. In this regard, the most problematic cases, an immediate

Court rejected the proposed distinction be- ‘‘cease-and-desist order.’’ Id. at 330–31, 111

tween ‘‘policymaking’’ and ‘‘operational’’ S.Ct. 1267 (quoting FHLBB Resolution

functions. Id. In order to determine No. 82–381 (May 26, 1982)).

whether the alleged acts were discretion- Notably, the Court approvingly quoted

ary or not, the Court reviewed the com- from the lower court’s explanation that the

plaint’s allegations of the government’s in- agency undertook its day-to-day role in an

volvement in the thrift’s day-to-day affairs. effort to further ‘‘social, economic, or polit-

These allegations focused on the govern- ical policies’’:

ment’s involvement in day-to-day manage-

First, they sought to protect the solven-

ment decisions, hiring and salary decisions,

cy of the savings and loan industry at

operational matters, financial matters, as-

large, and maintain the public’s confi-

set management, and legal affairs. Id. at

327–28, 111 S.Ct. 1267. The government dence in that industry. Second, they

became involved in strategic planning, for sought to preserve the assets of [the

example by recommending that the thrift thrift] for the benefit of depositors and

change from being state-chartered to be- shareholders, of which [plaintiff] was

coming federally-chartered, and by giving one.

advice regarding a potential bankruptcy Id. at 332, 111 S.Ct. 1267 (quoting 885 F.2d

filing. Id. at 328, 111 S.Ct. 1267. 1284, 1290 (5th Cir.1989)). In this regard,

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1031

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

the Supreme Court highlighted the fact In Glacier Bay, the Ninth Circuit held

that ‘‘[t]here are no allegations that the that hydrographers for the National

regulators gave anything other than the Oceanic and Atmospheric Administration

kind of advice that was within the purview could be sued for their non-discretionary

of the policies behind the statutes.’’ Id. at actions made while preparing nautical

333, 111 S.Ct. 1267. For example, the charts. 71 F.3d at 1452–54. The govern-

plaintiff admitted ‘‘the regulators replaced ment had argued that its supervising hy-

[the thrift’s] management in order to pro- drographers retained discretion when re-

tect the [federal savings and loan insur- viewing and approving the charts, and that

ance corporation’s] insurance fund.’’ Id. at this final level of discretion immunized all

332, 111 S.Ct. 1267. of the allegedly negligent conduct during

‘‘In the end,’’ the Court concluded, ‘‘Gau- the oceanic surveys and drafting of the

bert’s amended complaint alleges nothing charts. Id. at 1451. The court explained

more than negligence on the part of the that the final review was indeed discretion-

ary, because the supervisors had to decide

regulators.’’ Id. at 334, 111 S.Ct. 1267.

whether the survey was sufficiently accu-

The Court explained that even day-to-day

rate and whether the social, economic, and

regulatory decisions were protected by the

political benefits of conducting further sur-

discretionary function exception: ‘‘If the

veys outweighed the costs of doing so. Id.

routine or frequent nature of a decision

at 1454. However, the court also deter-

were sufficient to remove an otherwise

mined that the discretionary final review

discretionary act from the scope of the

could not insulate the surveying staff’s

exception, then countless policy-based de-

negligent acts that violated the surveyors’

cisions by regulators exercising day-to-day

mandatory duties. Id. at 1451. Instead,

supervisory authority would be actionable.

the court explained that the relevant ques-

This is not the rule of our cases.’’ Id.

tion is whether ‘‘each person taking an

Gaubert, then, is a guidepost for two allegedly negligent action had discretion,’’

reasons: one, because it is the most recent not whether ‘‘the Government as a whole

Supreme Court authority in this area, and had discretion at any point.’’ Id.11

two, because it involved a roughly analo-

The court then engaged in a close analy-

gous factual scenario—the conduct of fi-

sis of the surveyors’ actions to determine if

nancial regulators in their day-to-day reg-

they violated any non-discretionary duties.

ulatory activities. (Additional cases that

Id. at 1452–54. To find these mandatory

specifically discuss the SEC are discussed

duties, the court looked to ‘‘the Depart-

infra.) It is worth noting, then, that Gau- ment of Commerce’s ‘Hydrographic Manu-

bert’s reasoning weighs heavily in favor of al’ and [ ] the 1964 and 1975 Project In-

Defendant’s position. structions specifically drafted for the two

A pair of other cases are worth discuss- surveys [at issue].’ ’’ Id. at 1452. The

ing at length. These cases set forth prin- court noted that, contrary to the govern-

ciples that have guided the Ninth Circuit’s ment’s assertion, such internal guidelines

analysis where cases involve a combination were in fact ‘‘binding for purposes of the

of discretionary and non-discretionary discretionary function inquiry.’’ Id. at

duties. 1452 n. 1. The court found that the Hydro-

11. The court also noted, however, that the negligent acts proximately caused the plain-

presence of a discretionary final review might tiff’s harm. Id. (citing Routh v. United States,

affect the merits of the claim because the 941 F.2d 853, 855 (9th Cir.1991).)

plaintiff would be unable to show that the

1032 707 FEDERAL SUPPLEMENT, 2d SERIES

graphic Manual and Project Instructions for the auditors’ professional negligence

established a number of mandatory proce- rather than the prosecutors’ clearly discre-

dures for conducting oceanic surveys. Id. tionary decision to prosecute, was improp-

at 1451–52. Much of the ‘‘discretion’’ erly attempting to plead around the discre-

available to the surveyors involved purely tionary function exception. Id. at 1283–84.

scientific judgments, not judgments based The court refused to ‘‘accord amaranthine

on ‘‘economic, political and social policy’’ obeisance to a plaintiff’s designation of tar-

that would be shielded from scrutiny under geted employees’’ when, in sum and sub-

the FTCA. Id. at 1453. Notably, the court stance, the complaint was alleging prosecu-

contrasted the 1964 survey instructions torial misconduct. Id. at 1283.

with the 1975 survey instructions and

found that the former contained mandato- The General Dynamics court distin-

ry language—‘‘[a]ll indications of shoals guished Glacier Bay by emphasizing that

shall be thoroughly investigated’’—where- the central focus is the nature of the

as the latter did not contain such language, allegedly harmful act. Id. at 1284–85.

and instead stated that surveys ‘‘should be Obviously, ‘‘many actions within an agency

guided by [27 different] considerations TTT pass through the hands of somebody with

and [the surveyor’s] past experience in some discretion at some stage’’; the mere

similar areas.’’ Id. at 1453 (quoting Hy- presence of discretion at one stage in the

drographic Manual and 1964 Survey In- process does not automatically immunize

structions). Accordingly, the earlier 1964 the non-discretionary negligent conduct

survey was deemed non-discretionary, that precedes. Id. at 1284. Accordingly,

whereas the 1975 survey—requiring sur- when an oceanic chart is negligently inves-

veyors to carefully balance 27 different tigated and drafted in violation of manda-

considerations—was discretionary. Id. tory rules, the presence of a discretionary

Three years later, the Ninth Circuit final review does not immunize the negli-

clarified its holding in Glacier Bay, ex- gent investigations and drafting. Id. In

plaining that in some instances, an under- this regard, the court noted that Glacier

lying violation of a mandatory duty will be Bay involved a ‘‘tight coupling between

immune from suit if another government hydrographers, reviewers, charts, and re-

agent’s own exercise of discretion inter- sults.’’ Id. at 1284.

vened prior to the plaintiff’s injury. The

But when an actor with ‘‘broad based

court explained that the discretionary

discretion’’ such as the prosecutor in Gen-

function exception applies whenever a ‘‘ro-

eral Dynamics undertakes ‘‘a totally sepa-

bust exercise of discretion intervenes be-

rate exercise of discretion’’ that is indepen-

tween an alleged government wrongdoer

and the harm suffered by a plaintiff.’’ dent of the underlying negligent act, all of

General Dynamics Corp. v. United States, the government’s acts are immunized—

139 F.3d 1280, 1285 (9th Cir.1998). The including the earlier actions that may have

court proceeded to distinguish the case at violated mandatory duties. Id. at 1285.

hand from Glacier Bay. The plaintiff in The court explained that prosecutors have

General Dynamics alleged that govern- ‘‘access to a great deal of information be-

ment auditors had negligently performed yond that submitted by any one agency’’

an audit that led prosecutors to indict the such as the negligent auditors. Because

plaintiff for defrauding the United States, ‘‘the prosecutors could have had even more

a charge which the plaintiff successfully information if they had chosen to pursue

defended. Id. at 1282. The court held it,’’ the prosecutor’s decision to prosecute

that the plaintiff, by attempting to recover the plaintiff was a sufficiently ‘‘robust ex-

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1033

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

ercise of discretion’’ to trigger application banning the importation of Chilean fruit

of the discretionary function exception. based on a negligently conducted laborato-

Id. As a result, all of government’s negli- ry test concluding that the fruit contained

gent acts were immunized—even the ones cyanide. 46 F.3d at 282–83. Recognizing

that violated non-discretionary auditing that the Commissioner’s decision to ban

principles. the fruit was a discretionary function, the

Although they are factually distinguish- fruit growers alleged injury ‘‘based upon’’

able from the present case, two out-of- the negligence of the laboratory techni-

circuit decisions are also worth noting in cians, who were bound by the agency’s

order to show that the reasoning in Gen- Regulatory Procedures Manual. Id. at

eral Dynamics has been adopted in other 286. The Third Circuit rejected this char-

circuits.12 In Sloan v. United States acterization of the claim, reasoning that

Dept. of Housing and Urban Develop- ‘‘[t]he reality here is that the injuries of

ment, 236 F.3d 756 (D.C.Cir.2001), a con- which the plaintiffs complain were caused

tractor sued the Department of Housing by the Commissioner’s decisions and, as a

and Urban Development under the FTCA matter of law, their claims are therefore

for negligently conducting an audit of his ‘based upon’ those decisions.’’ Id. The

construction site and for suspending him court concluded that ‘‘a claim must be

from government contract work based on ‘based upon’ the exercise of a discretionary

the erroneous audit. 236 F.3d at 758–59. function whenever the immediate cause of

On appeal from the district court’s dis-

the plaintiff’s injury is a decision which is

missal of the complaint for lack of sub-

susceptible of policy analysis and which is

ject matter jurisdiction, the contractor

made by an official legally authorized to

contended that while the suspension of

make it.’’ Id. at 282.

his government contract work was a dis-

cretionary function, the audit was not a F. UNDERLYING POLICIES OF

discretionary function because it was gov-

THE DISCRETIONARY FUNC-

erned by standards of professional prac-

TION EXCEPTION

tice. Id. at 761. The court rejected that

contention, holding that there was ‘‘no Before analyzing the parties’ specific ar-

meaningful way in which the allegedly guments, it is also helpful to explain the

negligent investigatory acts could be con- policies that animate the discretionary

sidered apart from the totality of the function exception. As summarized suc-

prosecution.’’ Id. (quoting Gray v. Bell, cinctly in Gray v. Bell, 712 F.2d 490

712 F.2d 490, 516 (D.C.Cir.1983)) (inter- (D.C.Cir.1983), cert. denied, 465 U.S. 1100,

nal quotation marks omitted). The court 104 S.Ct. 1593, 80 L.Ed.2d 125 (1984):

noted that ‘‘[t]he complaint does not al- The modern policy basis justifying sov-

lege any damages arising from the inves- ereign immunity from suit has three

tigation itself, but only harm caused by principal themes. First, and most im-

the suspension to which it assertedly portant, under traditional principles of

led.’’ Id. at 762. separation of powers, courts should re-

In Fisher Bros. Sales, Inc. v. United frain from reviewing or judging the pro-

States, 46 F.3d 279 (3d Cir.1995) (en banc), priety of the policymaking acts of coor-

Chilean fruit growers sued the Food and dinate branches. Second, consistent

Drug Administration under the FTCA for with the related doctrine of official im-

12. The summaries of these cases are drawn Drug Admin., 402 F.3d 1249, 1254–55

from Jerome Stevens Pharma., Inc. v. Food & (D.C.Cir.2005).

1034 707 FEDERAL SUPPLEMENT, 2d SERIES

munity, courts should not subject the IV. ANALYSIS AND DISCUSSION

sovereign to liability where doing so A. RELEVANT LEGISLATIVE

would inhibit vigorous decisionmaking HISTORY

by government policymakers. Third,

It is often remarked that Congressional

in the interest of preserving public rev-

intent is particularly relevant to the Fed-

enues and property, courts should be

eral Tort Claims Act because ‘‘no action

wary of creating huge and unpredictable

lies against the United States unless the

governmental liabilities by exposing the

legislature has authorized it.’’ E.g., Dale-

sovereign to damage claims for broad

hite v. United States, 346 U.S. 15, 30, 73

policy decisions that necessarily impact

S.Ct. 956, 97 L.Ed. 1427 (1953) (collecting

large numbers of people. Framed in

cases). As a result, ‘‘the basic inquiry

different fashions, each of these themes

concerning the application of the discre-

appears again and again, alone or in

tionary function exception is whether the

combination, as a modern justification

challenged acts of a Government employ-

for retaining a form of immunity, under

ee—whatever his or her rank—are of the

the general rationale that courts should

nature and quality that Congress intend-

not ‘‘interfere’’ with government opera-

ed to shield from tort liability.’’ United

tions and policymaking.

States v. S.A. Empresa de Viacao Aerea

Id. at 511 (emphasis added, internal foot- Rio Grandense (Varig Airlines), 467 U.S.

notes omitted). 797, 813–814, 104 S.Ct. 2755, 81 L.Ed.2d

Notably absent from this rationale is 660 (1984) (emphasis added).

any mention of ‘‘fairness.’’ As explained in It is notable, then, that Congress, when

National Un. Fire Ins. v. United States, drafting and debating the Federal Tort

115 F.3d 1415 (9th Cir.1997): Claims Act, repeatedly and explicitly sug-

Private actors generally must pay for gested that the discretionary function ex-

the harm they do by carelessness. The ception was intended to apply to the SEC.

government’s power to tax enables it, See Dalehite v. United States, 346 U.S. 15,

better than any private actor, to perform 29 & n. 21, 73 S.Ct. 956, 97 L.Ed. 1427

its conduct with reasonable care for the (1953) (noting that this particular ‘‘para-

safety of persons and property, and to graph [ ] appears time and again’’ in the

spread the cost over all the beneficiaries legislative history). Congress explained

if its conduct negligently causes harm. that the discretionary function exception

Fairness might seem to suggest that the was:

government should be liable more designed to preclude application of the

broadly than private actors. But at its bill to a claim against a regulatory agen-

root, the discretionary function excep- cy, such as the Federal Trade Commis-

tion is about power, not fairness. sion or the Securities and Exchange

Commission, based upon an alleged

Id. at 1422. abuse of discretionary authority by an

As a result of these underlying policies officer or employee, whether or not neg-

and principles, Plaintiffs are misguided ligence is alleged to have been involved.

when they argue that ‘‘there is no over- To take another example, claims based

sight at all available to the taxpaying citi- upon an allegedly negligent exercise by

zens, as well as the nation, to insure that the Treasury Department of the black-

the SEC does its job.’’ (Opp. at 15.) This listing or freezing powers are also in-

broad policy argument is unavailing. tended to be excepted. The bill is not

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1035

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

intended to authorize a suit for damages 1. SEC’s Investigative Powers

to test the validity of or provide a reme- Section 21 of the Securities and Ex-

dy on account of such discretionary acts change Act of 1934, codified at 15 U.S.C.

even though negligently performed and § 78u, establishes the SEC’s investigatory

involving an abuse of discretion. powers. The statute explicitly provides

Dalehite, 346 U.S. at 29 n. 21, 73 S.Ct. 956 discretion to the SEC:

(quoting H.R.Rep. No. 2245, 77th Cong., The Commission may, in its discretion,

2d Sess., p. 10; S.Rep.No. 1196, 77th make such investigations as it deems

Cong., 2d Sess., p. 7; H.R.Rep. No. 1287, necessary to determine whether any

79th Cong., 1st Sess., pp. 5–6; Hearings

person has violated, is violating, or is

before H.Com. on Judiciary on H.R. 5373

about to violate any provision of this

and H.R. 6463, 77th Cong., 2d Sess., p. 33);

chapter, [or] the rules or regulations

see also Defs.’ Mot. at 10 & n. 29 (quoting

thereunder, TTT and may require or

House Rep. 79–1287, at 5–6).

permit any person to file with it a state-

B. THE GOVERNMENT HAS SAT- ment in writing, under oath or otherwise

ISFIED ITS THRESHOLD BUR- as the Commission shall determine, as to

DEN BY IDENTIFYING STAT- all the facts and circumstances concern-

UTES, REGULATIONS, AND ing the matter to be investigated. The

CASES DISCUSSING THE SEC’S Commission is authorized in its discre-

GENERAL POWERS AND tion, TTT to investigate any facts, condi-

DUTIES tions, practices, or matters which it may

[7] In its Motion, the Government sets deem necessary or proper to aid in the

forth a number of general, broad princi- enforcement of such provisionsTTTT

ples governing the SEC’s duties and func- 15 U.S.C. § 78u(a)(1) (emphasis added).

tions. These legal assertions establish

Little discussion is necessary. The stat-

that the alleged wrongs were done in the

ute repeatedly uses permissive language

course of the SEC’s exercise of its discre-

tion, both in terms of conducting its inves- rather than mandatory language. The

tigations and deciding whether or not to SEC has discretion to decide both the

bring enforcement proceedings. These timing of when it ‘‘make[s] such investiga-

basic conclusions are supported by stat- tions,’’ and the manner and scope of how

utes, regulations, and caselaw. Defendant to ‘‘investigate any facts, conditions, prac-

has therefore satisfied its threshold bur- tices, or matters,’’ whether through ‘‘a

den under Gaubert of establishing that the statement in writing, under oath or other-

relevant statutes and regulations ‘‘allow[ ] wise.’’ Id. (emphasis added). All of these

the employee[s] discretion.’’ Gaubert, 499 decisions are framed in permissive lan-

U.S. at 323, 111 S.Ct. 1267. Accordingly, guage (‘‘[t]he Commission may TTT’’) and

there is ‘‘a strong presumption’’ that the the SEC is permitted to proceed ‘‘as it

alleged acts were ‘‘based on considerations deems necessary.’’ Id. In other words, the

of public policy,’’ and Plaintiffs bear the statute is discretionary—the SEC retains

burden of rebutting this presumption. Id. discretion over when and how to conduct

This section discusses the Government’s its investigations. This leads to a strong

threshold showing that its actions were presumption that the SEC’s actions were

discretionary and are presumed to be sus- discretionary. Gaubert, 499 U.S. at 324,

ceptible to policy analysis. The following 111 S.Ct. 1267; see also Vickers v. United

section discusses Plaintiffs’ attempt to re- States, 228 F.3d 944, 951 (9th Cir.2000)

but this strong presumption. (‘‘[T]he discretionary function exception

1036 707 FEDERAL SUPPLEMENT, 2d SERIES

protects agency decisions concerning the the carrying out of investigations and

scope and manner in which it conducts an the turning over of evidence to the At-

investigation so long as the agency does torney General for presentation to a

not violate a mandatory directive.’’). grand jury come under the authorized

The SEC’s own regulations are similarly duties of the Commission. And likewise,

discretionary. As explained in the SEC’s plaintiff has not met, in these allega-

formal policies regarding Enforcement Ac- tions, the task of showing acts which fall

tivities, as summarized in 17 C.F.R. outside of the [SEC’s] immunity.

§ 202.5: Id. at 43–44 (internal footnote omitted)

Where, from complaints received from (emphasis added) (citing 15 U.S.C.

members of the public, communications §§ 77h(e), 77s(c), 77t(b)).

from Federal or State agencies, exami- Numerous subsequent courts have held

nation of filings made with the Commis- that the SEC is immune from liability for

sion, or otherwise, it appears that there its investigative actions. In Schmidt v.

may be violation of the acts adminis- United States, 198 F.2d 32 (7th Cir.1952),

tered by the Commission or the rules or the court applied the discretionary func-

regulations thereunder, a preliminary tion exception to bar a claim that the SEC

investigation is generally made. In was investigating a corporation and publi-

such preliminary investigation no pro- cizing its investigation for the improper

cess is issued or testimony compelled. purpose of destroying the company. Id. at

The Commission may, in its discretion, 33, 36. The court explained that the

make such formal investigations and au- SEC’s decision to institute an investigation

thorize the use of process as it deems and conduct it in a particular manner ‘‘was

necessary to determine whether any TTT clearly within the scope of its discre-

person has violated, is violating, or is tionary authority’’ under the 1934 Ex-

about to violate any provision of the change Act. Id. at 36. Nothing more was

federal securities laws or the rules of a said, and nothing more needed to be said.

self-regulatory organization of which the The point was—and remains to this day—

person is a member or participantTTTT ‘‘perfectly clear [ ] under the terms of the

17 C.F.R. § 202.5(a) (emphasis added). applicable statutes.’’ Id.

This regulation does not require the SEC

The same point has been stated in sub-

to conduct its investigations in any particu-

sequent cases including Sprecher v. Von

lar manner; rather, the agency retains

Stein, 772 F.2d 16, 18 (2d Cir.1985), and

broad discretion to decide how to conduct

other cases discussed infra, subsection 3.

its investigations.

2. SEC’s Enforcement Powers

In light of this statutory and regulatory

language, the courts have unanimously re- The SEC likewise has discretion regard-

jected challenges to the SEC’s use of its ing the use of its enforcement powers.

investigatory powers. In a pre-FTCA Under 15 U.S.C. § 78u(d)(1), the SEC has

case, Justice Vinson, then a member of the discretion over decisions to seek an injunc-

District of Columbia Court of Appeals, tion against ongoing violations of the Ex-

wrote an opinion that, inter alia, granted change Act:

official immunity to members of the SEC Whenever it shall appear to the Com-

for their investigatory activities. Jones v. mission that any person is engaged or is

Kennedy, 121 F.2d 40, 43–44 (D.C.Cir. about to engage in acts or practices

1941). In a terse discussion, the court constituting a violation of any provision

explained: of this chapter [or] the rules or regula-

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1037

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

tions thereunder, TTT it may in its dis- The same conclusion was reached in

cretion bring an action in the proper S.E.C. v. Better Life Club of America, Inc.,

district court of the United States TTT to 995 F.Supp. 167, 180 (D.D.C.1998), aff’d,

enjoin such acts or practicesTTTT 203 F.3d 54 (D.C.Cir.1999), cert. denied

15 U.S.C. § 78u(d)(1) (emphasis added). sub nom. Taylor v. S.E.C., 528 U.S. 867,

The SEC retains similar discretion re- 120 S.Ct. 165, 145 L.Ed.2d 140 (1999). In

garding whether to seek monetary relief or that case, a defendant in an SEC enforce-

other injunctive relief. See § 78u(d)(3) ment action brought counterclaims for tor-

(‘‘the Commission may bring an action in a tious interference with contract and inten-

United States district court to seek TTT a tional infliction of emotional distress on

civil penalty to be paid by the person who account of its enforcement actions. The

committed such violation.’’) (emphasis add- court dismissed these counterclaims under

ed); § 78u(d)(5) (‘‘the Commission may the discretionary function exception be-

seek TTT any equitable relief that may be cause ‘‘[i]nvestigation and prosecution un-

appropriate or necessary for the benefit der § 21 of the Securities Acts is discre-

of investors.’’) (emphasis added). tionary; therefore the United States is

immune to these claims.’’ Id. at 180 (cit-

The regulations are similarly discretion-

ary. Again under 17 C.F.R. § 202.5: ing Board of Trade of City of Chicago v.

SEC, 883 F.2d 525, 531 (7th Cir.1989)).

After investigation or otherwise the

Commission may in its discretion take 3. The Unanimous Precedent is Sup-

one or more of the following actions: ported by the Justifications of the

Institution of administrative proceedings Discretionary Function Exception

looking to the imposition of remedial The Better Life Club court relied on an

sanctions, initiation of injunctive pro- Administrative Procedures Act case decid-

ceedings in the courts, and, in the case ed by the Seventh Circuit, Board of Trade

of a willful violation, reference of the v. SEC, 883 F.2d 525, 531 (7th Cir.1989).

matter to the Department of Justice for In Board of Trade, the court refused to

criminal prosecution. The Commission exercise jurisdiction over two futures ex-

may also, on some occasions, refer the changes’ claims that SEC had abused its

matter to, or grant requests for access discretion by issuing a no-action order and

to its files made by, domestic and for- refraining from prosecuting a competing

eign governmental authorities or foreign non-exchange ‘‘system’’ that acted as a

securities authorities, self-regulatory or- clearing agency for options trades. The

ganizations such as stock exchanges or court explained that the ‘‘[r]efusal to pros-

the National Association of Securities ecute is a classic illustration of a decision

Dealers, Inc., and other persons or enti- committed to agency discretion,’’ and un-

ties. der the Securities Exchange Act, ‘‘[i]nves-

17 C.F.R. § 202.5 (emphasis added). tigation and prosecution under § 21 are

Again, the courts are unanimous in hold- discretionary, not mandatory.’’ 883 F.2d

ing that these statutory powers are discre- at 530–31. Judge Easterbrook explained

tionary. In SEC v. Research Automation at length the reasons why these decisions

Corp., 521 F.2d 585, 590 (2d Cir.1975), the are discretionary and involve policy judg-

court summarily dismissed a defendant’s ment:

FTCA-based counterclaim because the Doing nothing may be the most con-

SEC had discretion ‘‘to institute and main- structive use of the Commission’s re-

tain the present [enforcement] action.’’ sources. Congress gives the SEC a

1038 707 FEDERAL SUPPLEMENT, 2d SERIES

budget, setting a cap on its personnel. location is not a task governed by ‘‘law’’.

With limited numbers of staff-years, the It is governed by budgets and opportu-

Commission must enforce several com- nities. Agencies ‘‘take Care that the

plex statutes. To do this intelligently Laws be faithfully executed’’ (Art. II,

the Commissioners must assign priori- § 3) by doing the best they can with the

ties. Prosecuting the System means resources Congress allows them.

less time for something else—investigat- Judges could make allocative decisions

ing claims of fraud in issuing new stock only by taking over the job of planning

or conducting a takeover contest, resolv- the agency’s entire agenda, something

ing disputes under the Investment Com- neither authorized by statute nor part of

pany Act, and so on. Agencies may find their constitutional role.

it worthwhile to give short shrift to a Id. at 531 (internal citations omitted).

particular claim if the aggrieved party

Thus, even if the plain language of the

can file its own suit (as the [plaintiff]

Securities Exchange Act were insufficient

futures markets may), for turning the

to bar Plaintiffs’ claims, Judge Easter-

subject over to private litigation frees up

brook’s policy analysis explains the various

time without necessarily diminishing the

reasons that the discretionary function ex-

enforcement of the statute. Yet even

ception applies to the SEC’s actions in the

when the aggrieved party cannot vindi-

present case. Little more needs to be

cate its own rights, as with the National

said, except that numerous other court

Labor Relations Act—indeed, even when

decisions support this conclusion.

the person complaining about failure to

prosecute is a defendant whose business A large number of courts have held that

is going down the tubes—decisions SEC decisions are unreviewable under the

about the best use of the staff’s time are FTCA and/or the Administrative Proce-

for the prosecutor’s judgment. dures Act. See, e.g., Block v. SEC, 50 F.3d

Courts cannot intelligently supervise 1078, 1084 (D.C.Cir.1995) (rejecting an Ad-

the Commission’s allocation of its staff’s ministrative Procedures Act action seeking

time, because although judges see clear- to compel SEC action, because ‘‘[s]o far, it

ly the claim the Commission has de- appears, the Commission has found [its

clined to redress, they do not see at all chosen means] sufficient to induce compli-

the tasks the staff may accomplish with ance with the law. That the petitioners

the time released. Agencies must com- prefer a different means of enforcement is

pare the value of pursuing one case irrelevantTTTT [T]he agency alone, and nei-

against the value of pursuing another; ther a private party nor a court, is charged

declining a particular case hardly means with the allocation of enforcement re-

that the SEC’s lawyers and economists sources.’’); Sprecher v. Von Stein, 772

will go twiddle their thumbs; case-ver- F.2d 16, 18 (2d Cir.1985) (claims arising

sus-case is the daily tradeoff. Judges out of agency’s investigative operations are

compare the case at hand against a rule barred by FTCA immunity); Sprecher v.

of law or an abstract standard of dili- Graber, 716 F.2d 968, 975 (2d Cir.1983)

gence and do not see the opportunity (claims arising out of agency’s investiga-

costs of reallocations within the agency. tive operations are barred by common law

That fundamental difference in the per- immunity); Treats Intern. Ents., Inc. v.

spectives of the two bodies is why agen- S.E.C., 828 F.Supp. 16, 18–19 (S.D.N.Y.

cies (and other prosecutors) rather than 1993) (SEC’s investigative decisions are

courts must make the decisions on pur- unreviewable under Administrative Proce-

suing or dropping claims. Resource al- dures Act); Standifer v. SEC, 542

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1039

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

F.Supp.2d 1312, 1318 (N.D.Ga.2008) (dis- function exception protects agency deci-

missing FTCA claims against SEC for nu- sions concerning the scope and manner in

merous reasons, including the fact that which it conducts an investigation so long

‘‘[t]he SEC is granted broad discretion by as the agency does not violate a mandatory

Congress to investigate possible violations directive.’’); Gen. Dynamics Corp. v. Unit-

of the securities laws and to determine ed States, 139 F.3d 1280, 1283–1284 (9th

whether to bring civil or criminal actions Cir.1998) (government was immune under

to remedy those violations.’’); Leytman v. the discretionary function exception where

New York Stock Exchange, No. 95 CV 902, its auditors’ allegedly negligent investiga-

1995 WL 761843, at *3 (E.D.N.Y. Dec. 6, tions provided the factual basis for the

1995) (‘‘Plaintiff [ ] seeks damages from prosecutor’s discretionary decision to pros-

the Commission for its failure to investi- ecute); Sabow v. United States, 93 F.3d

gate his claims about the [New York 1445, 1452 (9th Cir.1996) (government was

Stock] Exchange’s alleged misconductTTTT immune under the discretionary function

The Securities Exchange Act of 1934 pro- exception for its investigators’ allegedly

vides that stock exchange records are sub- tortious investigation where ‘‘the guide-

ject to investigation by the [Securities and lines promulgated by the [agency] in its

Exchange] Commission ‘as the Commis- investigative manual were meant to be fol-

sion TTT deems necessary or appropriate.’ lowed at the discretion of [the agency’s]

15 U.S.C. 78q(b). The decision of whether investigating officers in light of the specific

or not to investigate a stock exchange is circumstances surrounding a particular in-

left in the discretion of the Commission. vestigation.’’); Fisher Bros. Sales, Inc. v.

[Under the FTCA,] [e]ven if the Commis- United States, 46 F.3d 279, 282 (3d Cir.

sion abuses that discretion, the court may 1995) (en banc) (government was immune

not intervene.’’); see also Thomas Lee under the discretionary function exception

Hazen, 6 The Law of Securities Regula- where laboratory technicians’ allegedly

tion, § 16.2, at 213 n. 313 (6th ed. 2010

negligent investigations done pursuant to

supp.) (collecting cases involving SEC and

mandatory guidelines provided the factual

non-governmental regulatory bodies).

basis for the Food and Drug Administra-

In addition, courts have repeatedly held tion to seize allegedly tainted fruit).

in other contexts that the conduct of regu-

The weight and logic of this caselaw

latory investigations are immune from

leads directly to the conclusions proposed

FTCA liability unless there are mandatory

by the Government: the decisions of

directives that limit the investigators’ dis-

whether and how to conduct investiga-

cretion to determine both the scope and

tions and enforcement actions are firmly

the manner of the investigation. See, e.g.,

lodged in the SEC’s discretion.

Alfrey v. United States, 276 F.3d 557, 565–

66 (9th Cir.2002) (prison guards had dis- 4. Procedural Effect of SEC’s

cretion to determine how thoroughly to Statutory and Regulatory

search prisoners’ cells); Sloan v. U.S. Discretionary

Dept. of Housing and Urban Devel., 236 As explained in Gaubert, ‘‘[w]hen estab-

F.3d 756, 762 (D.C.Cir.2001) (‘‘[T]he sifting lished governmental policy, as expressed

of evidence, the weighing of its signifi- or implied by statute, regulation, or agency

cance, and the myriad other decisions guidelines, allows a Government agent to

made during investigations plainly involve exercise discretion, it must be presumed

elements of judgment and choice.’’); Vick- that the agent’s acts are grounded in poli-

ers v. United States, 228 F.3d 944, 951 (9th cy when exercising that discretion.’’ 499

Cir.2000) (stating that ‘‘the discretionary U.S. at 324, 111 S.Ct. 1267. Because the

1040 707 FEDERAL SUPPLEMENT, 2d SERIES

Government has satisfied this threshold where does [plaintiff] allege the existence

burden the burden shifts to Plaintiffs to of a policy that is ‘specific and mandato-

identify particular acts and decisions that ry’ on the [defendant]. He does not state

were either (1) mandatorily prescribed by the terms of this alleged policy, or describe

statute, regulation, or policy, or (2) were any documents, promulgations, or orders

not ‘‘susceptible to policy analysis.’’ Id. at embodying it.’’ Id. (quoting Kennewick

323, 325, 111 S.Ct. 1267. Irrig. Dist. v. United States, 880 F.2d

1018, 1026 (9th Cir.1989)). In addition, the

C. PLAINTIFFS’ BROAD ALLEGA- alleged harmful acts were plainly suscepti-

TIONS OF MISCONDUCT ARE ble to policy judgment, and under Circuit

UNAVAILING precedent, were ‘‘the type of discretionary

At various points in their Complaint and judgments that the [discretion function ex-

moving papers, Plaintiffs assert that the ception] was designed to protect.’’ Id. Be-

SEC violated various unidentified ‘‘[p]oli- cause of these glaring inadequacies, the

cies and practices,’’ and ‘‘common-sense.’’ court held that the discretionary function

(E.g., Compl. ¶ 12 (alleging that the SEC exception applied.

staff ‘‘fail[ed] to follow the SEC’s clear Like the plaintiff in Doe v. Holy See,

policies and practices’’)).13 Plaintiffs in this case largely fail to identify

To the extent that Plaintiffs rely on any mandatory ‘‘policies’’ or ‘‘practices’’

conclusory allegations about ‘‘policies,’’ that were violated in this case. (Cf. infra

‘‘practices,’’ and ‘‘common-sense,’’ they Part IV.C.) Plaintiffs’ ‘‘labels and conclu-

have failed to rebut Defendant’s threshold sions’’ are insufficient to satisfy the plead-

showing. Broad allegations regarding un- ing requirements of Fed.R.Civ.P. 8(a)(2).

defined ‘‘policies and practices’’ are insuffi- See Iqbal, 129 S.Ct. at 1949 (quoting

cient under clear Ninth Circuit precedent. Twombly, 550 U.S. 544, 127 S.Ct. 1955).

In the recent decision in Doe v. Holy See, Likewise, Plaintiffs have wholly failed to

557 F.3d at 1084–85, the Ninth Circuit identify any of the SEC’s actions that were

examined the adequacy of a plaintiff’s not ‘‘susceptible to policy analysis.’’ See

pleadings under the discretionary function Gaubert, 499 U.S. at 325, 111 S.Ct. 1267

exception as articulated by the Supreme (emphasis added). Their Complaint and

Court in Gaubert.14 The court held that their moving papers do not contain any

the complaint failed to adequately allege attempt to rebut the Government’s prelim-

the existence of non-discretionary duties inary showing that the SEC retained dis-

imposed on the government’s officials be- cretion to decide when to investigate, how

cause it only ‘‘refer[red] vaguely TTT to the to investigate, and whether or not to take

[defendant’s] ‘policies, practices, and pro- enforcement actions. Plaintiffs attempt to

cedures.’ ’’ Id. at 1084 (quoting com- recharacterize the nature of Defendant’s

plaint). The court explained that ‘‘no- burden, and argue that the Government

13. Plaintiffs explain that ‘‘ ‘policies’ refer[s] to SEC had promulgated any formal or informal

formal or informal policies, rules, standards, policies with respect to that conduct.’’ (Id.)

guidelines, procedures, codes, routines or oth- Under Gaubert, Plaintiffs’ ‘‘practices’’ are

er directives implemented by the SEC to gov- clearly an inadequate basis for showing a

ern the conduct of its agents.’’ (Compl. ¶ 4 n. mandatory SEC duty.

4.) ‘‘ ‘Practices’ refers to common-sense stan- 14. Technically, Doe v. Holy See involves the

dards of conduct required of SEC agents in Foreign Sovereign Immunities Act rather

the course of exercising their duties with rea- than the FTCA, but, as noted supra, the court

sonable due care, regardless of whether the solely examined FTCA caselaw.

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1041

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

bears the burden of showing that the These are: sharing information; obtaining

SEC’s actions were susceptible to policy trading records and other information

analysis. Plaintiffs are misguided. The from third parties; hiring, training, and/or

Government has in fact satisfied its bur- deploying qualified staff members; avoid-

den: it has identified specific and discre- ing improper personal motivations; and

tionary statutes, regulations, and caselaw- engaging in various administrative case-

based policy arguments. See Doe v. Holy management tasks.

See, 557 F.3d at 1084–85 (where defendant As Plaintiffs themselves point out in

identifies statutes, regulations, and case- their sur-reply, ‘‘it is important to specifi-

law conferring policy-based discretion on cally identify the allegations of the Com-

actor, burden shifts to plaintiff to identify plaint relating to the SEC’s violation of

allegations to rebut this showing). Plain- mandatory policies.’’ (Surreply at 5.) Yet

tiffs have failed to rebut Defendant’s show- Plaintiffs’ factual allegations (which pur-

ing. port to incorporate the Report in its en-

In light of the Government’s showing tirety) fail to support these conclusions.

that the SEC retains broad discretion to Plaintiffs almost wholly fail to allege that

regulate securities markets through formal SEC’s agents violated any mandatory

and informal means (see supra Part III.A), duties, and where Plaintiffs’ allegations

the Government has sufficiently satisfied provide an inference that such mandatory

its threshold burden of showing that the duties existed, Plaintiffs’ arguments are

relevant investigative and enforcement de- defeated by the holding in General Dy-

cisions were discretionary and/or suscepti- namics, 139 F.3d at 1284–85. Plaintiffs

ble to policy judgments. Under Gaubert, therefore have failed to overcome the pre-

this threshold showing creates a ‘‘strong sumption that the SEC’s investigative and

presumption’’ that the discretionary func- enforcement decisions were discretionary.

tion exception is satisfied. Gaubert, 499 Accordingly, Plaintiffs’ Complaint must be

U.S. at 324, 111 S.Ct. 1267. Plaintiffs’ dismissed for lack of subject matter juris-

conclusory allegations regarding ‘‘policies diction.

and practices’’ fail to rebut this presump- 1. Duty to Share Information

tion. See Doe v. Holy See, 557 F.3d at Plaintiffs’ Complaint alleges that SEC

1084–85. teams failed to coordinate their investiga-

tions among themselves and with the Na-

D. PLAINTIFFS’ ARGUMENTS tional Association of Securities Dealers

ABOUT MANDATORY POLI- and Chicago Board of Options Exchange.

CIES ARE UNAVAILING (Surreply at 6, citing Compl. ¶¶ 37, 62, 63,

In an oversized sur-reply,15 Plaintiffs at- 78, 86, 103, 105, 123, 128, 130, 131.) Ac-

tempt to satisfy their burden of rebuttal cording to Plaintiffs, these ‘‘negligent fail-

by identifying five purportedly mandatory ures to communicate TTT were prohibited

duties imposed on the SEC and its staff. by law.’’ (Id.)

15. The Court never granted Plaintiffs leave to Reply. Plaintiffs’ sur-reply is therefore proce-

file a sur-reply. Nor did the Court grant durally improper.

Plaintiffs leave to file an oversized brief. In It is therefore well within the Court’s dis-

addition, the sur-reply goes far beyond the cretion to strike the surreply. However,

scope of the arguments raised in the Govern- while the Court would ordinarily strike such

ment’s Reply. Even if the Court had granted an improper filing, the Court will consider the

Plaintiffs leave to file an oversized sur-reply, merits of Plaintiffs’ arguments in order to

Plaintiffs would only have been allowed to foreclose certain of these claims in future

address Defendant’s specific arguments in the proceedings.

1042 707 FEDERAL SUPPLEMENT, 2d SERIES

Plaintiffs have failed to support their coordinated approach to regulatory over-

assertions. Plaintiffs’ conclusory allega- sight,’’ these decisions are inherently

tions fail to establish that SEC examiners ‘‘grounded in social, economic, and political

were guided by any mandatory duties re- policy.’’ Gaubert, 499 U.S. at 323, 111

quiring them to share information and co- S.Ct. 1267. Accordingly, the discretionary

ordinate their activities. function exception applies to information-

sharing under § 78q(k)(2).

Plaintiffs argue that Section 17 of the

The legislative history supports this con-

Securities Exchange Act of 1934, codified

clusion. This particular subsection (for-

at 15 U.S.C. § 78q, imposes mandatory

merly labeled subsection (i)) was added to

duties requiring SEC staff to share infor-

the statute in 1996 by the National Securi-

mation. The statute reads:

ties Markets Improvement Act of 1996,

The Commission and the examining au- Pub.L. 104–290, § 108. It is instructive to

thorities 16 shall share such information contrast the statute’s final language with

[regarding securities exchanges and the language of the original House bill.

their members, brokers and dealers, rat- The House’s bill included a complex set of

ings organizations, and clearing agen- reporting and coordination requirements

cies], including reports of examinations, for self-regulatory organizations. See

customer complaint information, and H.R. Rep. 104–622, 104th Cong., 2d Sess.,

other nonpublic regulatory information, 1996 U.S.C.C.A.N. 3877, 3877 (1996). The

as appropriate to foster a coordinated original bill required, inter alia: annual

approach to regulatory oversight of bro- meetings between the SEC and self-regu-

kers and dealers that are subject to latory organizations, § 108(a)(i)(2), period-

examination by more than one examin- ic standardized reporting requirements for

ing authority. the SEC and self-regulatory organizations,

§ 108(a)(i)(3), annual evaluations by an

15 U.S.C. § 78q(k)(2) (emphasis added).

SEC-created panel, § 108(a)(i)(7), and an-

The statute clearly provides for SEC nual reports to Congress, § 108(a)(i)(8).

discretion. The mandatory ‘‘shall’’ is mod- Id. These requirements were mandatory,

ified by the discretionary ‘‘as appropriate.’’ not discretionary: the SEC and the self-

See Sabow, 93 F.3d at 1452 (distinguishing regulatory organizations had no flexibility

between ‘‘suggestive (‘should’) [and] man- in implementing these clear congressional

datory (‘must’) terms’’) (collecting cases). directives.

The statute itself describes the nature of However, after some legislative wran-

‘‘appropriate’’ information-sharing: the in- gling, see H.R. Conf. Rep. 104–864, 1996

formation-sharing must be ‘‘appropriate to U.S.C.C.A.N. 3920, 3920 (1996), the

foster a coordinated approach to regula- House–Senate conference committee

tory oversight.’’ 15 U.S.C. § 78q(k)(2) stripped all of the above-mentioned re-

(emphasis added). When the SEC is quirements and left intact only a few gen-

tasked with making decisions to ‘‘foster a eralized requirements.17 The central pur-

16. ‘‘For purposes of this subsection, the term 17. As part of the compromise, the revised law

‘examining authority’ means a self-regulatory required that the SEC coordinate its activities

organization registered with the Commission with the self-regulatory organizations (where-

under this chapter (other than a registered as the old bill merely required the self-regula-

clearing agency) with the authority to exam- tory organizations to coordinate their activi-

ine, inspect, and otherwise oversee the activi- ties). Compare 15 U.S.C. § 78q(k)(2) (‘‘The

ties of a registered broker or dealer.’’ 15 Commission and the examining authorities

U.S.C. § 78q(k)(5). shall share TTT’’) with H.R. 3005,

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1043

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

pose of the final bill, as explained by the (Report at 133, 198, quoting testimony of

conference committee, was to streamline Eric Swanson.) Taking this allegation as

regulation between federal and state au- true, Plaintiffs’ Complaint directly contra-

thorities. id. at 3920–21. The purpose of dicts the conclusory assertions in their sur-

the remaining portions of the bill—appar- reply.

ently including § 108—was ‘‘to eliminate b. Summary re: duty to

duplication, promote efficiency and protect share information

investors.’’ Id. at 3921. This broad lan-

Plaintiffs have therefore failed to meet

guage sets forth three general policy goals,

their burden of identifying either a manda-

the balancing of which requires the SEC

tory duty requiring the SEC to share in-

to make inherently discretionary judg-

formation with other regulators, or plausi-

ments. See also Milton R. Schroeder, The

ble allegations that the SEC’s decisions

Law of Regulation of Financial Institu-

regarding information-sharing were not

tions, ¶ 8.06[1] (2009 update) (‘‘The Act TTT

calls for information sharing between au- susceptible to policy analysis. The SEC

thorities and the elimination of unneces- retained discretion to determine the man-

sary and burdensome duplication in the ner and scope of its investigations. See

examination process.’’); Rutherford B. Vickers, 228 F.3d at 951 (‘‘[T]he discretion-

Campbell, Jr., Blue Sky Laws and the ary function exception protects agency de-

Recent Congressional Preemption Failure, cisions concerning the scope and manner

22 J. Corp. L. 175, 204 n. 156 (1997) (‘‘The in which it conducts an investigation so

Act TTT mandates that federal authorities long as the agency does not violate a man-

attempt to eliminate duplication and en- datory directive.’’).

hance coordination and cooperation with 2. Failing to Request Materials

the states as concerns the regulation of from Third Parties

brokers.’’). Plaintiffs argue that the SEC violated

In short, the law cited by Plaintiffs is ‘‘formal SEC policies’’ and ‘‘basic auditing

purely discretionary. Under the well-es- principles’’ by ‘‘repeatedly fail[ing] to re-

tablished requirements of the discretion- quest materials from third parties to sub-

ary function exception, this Court cannot stantiate Madoff’s claimed trading activi-

second-guess the SEC’s failure to simulta- ty.’’ (Surreply at 8, citing Compl. ¶¶ 34–

neously accomplish all three of these com- 36, 67, 74, 77, 101, 143.) Again, Plaintiffs

peting policy goals set out by Congress. fail to identify any of the ‘‘formal SEC

The goals require policy judgment and re- policies’’ upon which they rely. But Plain-

source allocation, and are therefore subject tiffs insist that ‘‘SEC staffers themselves

to the discretionary function exception. considered it mandatory [to determine if

a. Plaintiffs’ factual allegations Madoff was actually making the trades he

In addition to these clear statutory purported to be making], given one staf-

rules, Plaintiffs’ Complaint expressly alleg- fer’s characterization of the failure to do so

es that formal policies did not exist. The as ‘asinine.’ ’’ (Surreply at 10, quoting

Report (which is incorporated into the Compl. ¶ 77.)

Complaint by reference) quotes one staff Plaintiffs’ arguments are not supported

member as stating that ‘‘there was no rule by their allegations. It is unclear why an

or policy about TTT information-sharing at SEC staff member’s use of the word ‘‘asi-

[the investigative] level between offices.’’ nine’’ provides evidence of an SEC policy.

§ 108(a)(4)(A) in H.R. Rep. 104–622 (‘‘The examining authorities shall share TTT’’).

1044 707 FEDERAL SUPPLEMENT, 2d SERIES

‘‘Asinine’’ means ‘‘unintelligent, stupid, sil- with third parties, it was not required by

ly, [or] obstinate.’’ Webster’s Third New mandatory SEC policies. (See Compl.

International Dictionary 128 (1981). ‘‘As- ¶ 35, citing Ex. A, at 290 n. 202.)

inine’’ does not mean that a person has Plaintiffs have therefore failed to plead

violated a non-discretionary legal duty; facts that overcome the discretionary func-

nor does ‘‘asinine’’ mean that the person tion exception. The statutes, regulations,

has made a decision that is not susceptible and caselaw discussed supra establish be-

to policy judgment. yond peradventure that the SEC retained

Plaintiffs fail to identify any other alle- full discretion to determine the manner

gations that state or even imply the exis- and scope of its investigation. See Vick-

tence of mandatory duties to obtain rec- ers, 228 F.3d at 951 (‘‘[T]he discretionary

ords from third parties. In fact, the function exception protects agency deci-

Complaint is replete with factual allega- sions concerning the scope and manner in

tions suggesting that there were no SEC which it conducts an investigation so long

policies regarding requesting information as the agency does not violate a mandatory

from third parties. The Report quotes a directive.’’). Plaintiffs’ allegations fail to

former SEC staff member as stating that rebut this presumption, by identifying ei-

the SEC ‘‘always’’ obtained Depository ther a formal mandatory duty or a specific

Trust Company statements ‘‘from the decision that was not susceptible to policy

firm’’ being investigated rather than from analysis.

the Depository Trust Company itself. 3. Assigning Unqualified Staff

(Ex. A at 48, quoting testimony of Dem- Members to Investigative

etrios Vasilakis, emphasis added.) The

Teams

Report also quotes a supervisor as stating

that ‘‘most of the time we do not send out Plaintiffs argue that ‘‘several SEC staf-

[requests for trading] confirmations and fers were inexcusably unqualified for their

do asset verification.’’ (Ex. A at 206, positions,’’ and that the SEC ‘‘assigned [ ]

quoting testimony of Robert Sollazzo.) staffers who had no understanding of secu-

As a result of these and other statements, rities transactions, and were otherwise un-

the Report explained it was ‘‘common qualified, to the Madoff investigations.’’

practice’’ to rely on the firm under inves- (Surreply at 8, citing Compl. ¶¶ 32, 37, 46,

tigation, (Ex. A at 48), and that ‘‘it was 61–64, 67, 88–89, 100, 118, 126, 132, 134.)

not unusual for [examiners] to rely exclu- [8] It is well-established that ‘‘employ-

sively on records and data produced by ment, supervision and training’’ decisions

the’’ firm being investigated. (Ex. A at ‘‘fall squarely within the discretionary

98, emphasis added; see also Ex. A at 191 function exception.’’ Nurse v. United

(noting that ‘‘it was not normal practice in States, 226 F.3d 996, 1001 (9th Cir.2000);

the exam program to reach out to enti- see also Doe v. Holy See, 557 F.3d at 1084

ties’’ that centrally cleared and settled (‘‘the decision of whether and how to retain

trades).) and supervise an employee TTT [is] the

Because Plaintiffs’ Complaint attempts type of discretionary judgments that the

to incorporate the Report in its entirety, exclusion was designed to protect. We

Plaintiffs therefore allege that there was have held the hiring, supervision, and

an absence of mandatory duties requiring training of employees to be discretionary

SEC staff to use specific investigative acts.’’); Gager v. United States, 149 F.3d

techniques. Although it may have been 918 (9th Cir.1998) (‘‘The [postal service’s]

good practice for the SEC to follow up decision not to provide universal training

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1045

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

and supervision in mail bomb detection the FTCA clearly states that the discre-

involved judgment or choice grounded in tionary function applies ‘‘whether or not

social, economic, and political policy.’’). the discretion involved be abused.’’ 28

Plaintiffs have failed to identify any alle- U.S.C. § 2680(a). In addition, Supreme

gations that would bring their case outside Court precedent requires this Court to

the purview of the Ninth Circuit’s general examine ‘‘the nature of the actions taken

caselaw on this question. Accordingly, and [ ] whether they are susceptible to

Defendant has satisfied its burden of policy analysis,’’ not ‘‘the agent’s subjec-

showing that the relevant decisions fall tive intent in exercising the discretion

within the discretionary function exception, conferred by statute or regulation.’’ Gau-

and Plaintiffs have not alleged any facts to bert, 499 U.S. at 324, 111 S.Ct. 1267 (em-

the contrary. phasis added). Accordingly, the SEC

4. Staff Members’ Personally staff’s subjective reasons for deciding how

Motivated Acts to investigate Madoff are irrelevant to the

present inquiry.18

Plaintiffs argue that SEC ‘‘staffers [ ]

acted out of personal animus, unfounded Furthermore, the relevant question is

fear of individual liability, and improper not, as Plaintiffs suggest, whether the

deference to Madoff on account of his rep- agents’ activities were actually ‘‘grounded

utation,’’ and that ‘‘one staffer ignored a in any legitimate policy considerations.’’

whistleblower out of spite.’’ (Surreply at (Surreply at 9.) Rather, the question is

8, citing Compl. ¶¶ 23, 97–99, 119, 121–22.) whether the agents’ activities were suscep-

All of these assertions strike at the tible to policy analysis. See Gaubert, 499

manner in which the SEC conducted its U.S. at 324, 111 S.Ct. 1267; Terbush, 516

investigations. As noted repeatedly in this F.3d at 1129. Investigative decisions are

Order, the SEC retained discretion to inherently susceptible to policy analysis,

make policy-based decisions about the and Plaintiffs fail to identify any mandato-

manner and scope of its investigations. ry laws, regulations, or policies that pre-

See 15 U.S.C. § 78u(a)(1) (permitting SEC scribe a specific course of action for the

to decide ‘‘as it deems necessary’’ how to staff to follow when conducting investiga-

‘‘investigate any facts, conditions, prac- tions. Accordingly, these decisions are

tices, or matters,’’ whether through ‘‘a subject to the discretionary function excep-

statement in writing, under oath or other- tion.

wise.’’); see also Vickers, 228 F.3d at 951 5. Failing to Follow Case–

(‘‘[T]he discretionary function exception Management Procedures

protects agency decisions concerning the Plaintiffs next argue that the SEC ‘‘vio-

scope and manner in which it conducts an lated its own internal policies’’ regarding

investigation so long as the agency does case-management by doing the following:

not violate a mandatory directive.’’). (1) ‘‘failing to obey rules regarding the

Plaintiffs’ allegations, taken as true, at filing of reports and the use of the SEC’s

most establish that the SEC staff abused STARS [Super Tracking and Reporting

its discretion when conducting investiga- System] computer system,’’ (2) failing to

tions into Madoff’s operations. However, consult the Super Tracking and Reporting

18. To the extent that SEC staff members were the Government while acting within the scope

truly acting for personal purposes, such activ- of his office or employment,’’ and the FTCA

ities would not constitute a ‘‘negligent or would not provide an avenue for recovery.

wrongful act or omission of any employee of 28 U.S.C. § 1346(b)(1) (emphasis added).

1046 707 FEDERAL SUPPLEMENT, 2d SERIES

System database before beginning exami- ing report in the STARS computer system.

nations, (3) ‘‘fail[ing] to submit Matter Un- (Compl. ¶ 80.) There is one allegation

der Inquiry [ ] reports with respect to TTT suggesting that case-opening report is

open investigations,’’ and (4) failing to file mandatory: the Report quotes a supervi-

case-opening and case-closing reports. sor’s statement that the staff members

(Surreply at 7.) were ‘‘supposed to’’ enter their case-open-

Plaintiffs have adequately alleged that ing ‘‘information into the tracking system.’’

the SEC teams failed to conduct each of (Ex. A at 132, quoting McCarthy testimo-

these tasks at one time or another. Plain- ny.) The Washington team also failed to

tiffs have not, however, adequately alleged follow its case-planning memo. (Compl.

that these tasks were mandatory or were ¶ 69.) There are no factual allegations,

not otherwise susceptible to policy judg- however, that there is a mandatory duty to

ment. Because the SEC staff had broad follow a case-planning memorandum.

discretion to determine how to conduct its In April 2004, the Washington team

investigations, see supra Part IV.B, Plain- closed its investigation and failed to file a

tiffs bear the burden of identifying plausi- case-closing memorandum. (Compl. ¶¶ 78,

ble allegations that non-discretionary 80.) There is one allegation that the case-

duties were imposed on the investigators. closing memo may have been mandatory:

See, e.g., Sabow, 93 F.3d at 1452–53 (close- the Report quotes a supervisor’s statement

ly examining Naval Investigative Ser- that ‘‘[t]ypically, staff is supposed to—

vice/Judge Advocate General investigation when they finish an exam[ination] they’re

manuals to determine whether investiga- supposed to close it out and I think there

tors were obligated to conduct investiga- should have been a close-out memo is my

tions in particular manner); Alfrey v.

understanding.’’ (Compl. ¶ 78 & n. 15,

United States, 276 F.3d 557, 563 (9th Cir.

quoting Ex. A at 136 (quoting McCarthy

2002) (holding that prison guard’s failure

testimony).)

to search a computer database was part of

discretionary investigatory decision where At the same time that the Washington

there was no policy requiring such a team closed its investigation (April 2004),

search to be conducted); cf. Franklin Sav. the first New York enforcement team re-

Corp. v. United States, 180 F.3d 1124, ceived a tip, and in December 2004 the

1132–33 (10th Cir.1999) (agency not im- New York team opened its investigation.

mune where its employees failed to pre- (Compl. ¶ 86.) This team failed to draft a

pare mandatory case memoranda; howev- planning memorandum. (Compl. ¶¶ 87,

er, plaintiff’s claims were dismissed on the 108.) Plaintiffs state in a conclusory fash-

merits because no injury flowed from the ion that there was an SEC ‘‘policy or

failure to prepare the memoranda). Plain- practice’’ requiring such a memorandum,

tiffs have not met their burden. but support this assertion by citing to a

a. Factual Allegations factual statement in the Report that

quotes staff members saying that there

In May 2003, the Washington-based Of-

fice of Compliance Inspections and Exami- was not such a policy at the time of the

nations received a tip and referred the investigation. (Compl. ¶ 87, citing Ex. A

matter to a team in the Broker–Dealer at 166.)

section. In December 2003, the Washing- The New York team failed to consult the

ton team received a second tip and opened STARs computer system to see if any

its investigation into Madoff. According to prior case-opening reports had been filed.

Plaintiffs, the team failed to file case-open- (Compl. ¶¶ 103, 108.) There is no specific

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1047

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

allegation that there is a mandatory duty ination.’’ (Ex. A at 142; see also Compl.

to check the computer system; however, ¶ 1 n. 3 (incorporating Report in its entire-

Plaintiffs allege that SEC policy required ty into Complaint).)

that ‘‘there should never be two examina-

tions of the same entity being conducted at In September 2005, the first New York

the same time without both teams being team formally closed its investigation. In

aware of each other’s examination.’’ October 2005, after Harry Markopolos’s

(Compl. ¶ 103, quoting Ex. A at 132.) In third report was referred from the Boston

the Ninth Circuit, the word ‘‘should’’ is office, a different New York team began a

generally viewed as suggestive rather new investigation into Madoff’s operations.

than mandatory, see, e.g., Sabow, 93 F.3d In December 2005, this second New York

at 1452, and a person’s subjective belief team filed its ‘‘Matter Under Inquiry’’ re-

that something ‘‘should’’ be done is inade- port. (Compl. ¶ 124.) The New York of-

quate evidence that there is ‘‘in fact [a] fice received another tip about Madoff be-

mandatory [duty] under some federal reg- tween the October 2005 opening of the

ulation or [internal] policy.’’ Alfrey, 276 investigation and the December 2005 filing

F.3d at 563. However, viewing this quota- of the Matter Under Inquiry report.

tion in the light most favorable to Plain- (Compl. ¶ 125.) Plaintiffs allege that, had

tiffs, there may be a plausible inference the Matter Under Inquiry been filed in

that there was a mandatory policy to check October, this new tip would have been part

the STARs computer system or that the of the second New York team’s investiga-

decision to check the STARs computer was

tion. (Compl. ¶ 125.) However, there are

not susceptible to policy analysis. (See

no factual allegations that SEC policy re-

surreply at 12, 25.) Plaintiffs therefore

quires that a Matter Under Inquiry form

allege that the Washington and first New

be filed immediately, other than Plaintiffs’

York teams violated internal policies

conclusory allegations that this a ‘‘required

and/or made decisions that were not sus-

step at the beginning of any Enforcement

ceptible to policy judgment. These acts

and omissions will be examined in greater investigation.’’ (Compl. ¶ 124.) Contra-

detail infra. dicting this conclusory assertion, Plaintiffs’

Complaint contains specific factual asser-

Plaintiffs further allege that the first

tions that, although the Matter Under In-

New York team learned about the previous

quiry ‘‘should’’ have been opened sooner,

Washington examination while the New

the SEC’s enforcement manual states that

York team was interviewing Madoff in

staff members ‘‘may’’ file a Matter Under

mid-to-late May 2005. (Ex. A at 195.) In

Inquiry if and when they determine that a

early June 2005, the Washington team sent

its files to the New York team, and the complaint is ‘‘serious and substantial.’’

New York team performed a ‘‘cursory re- (Compl. ¶ 125, citing Ex. A at 263 (quoting

view’’ of the Washington team’s findings SEC Enforcement Manual) (emphasis add-

because the information ‘‘seemed so simi- ed).) Plaintiffs further allege that ‘‘it is

lar to what we [the New York team] were unclear whether the tip would have made

receiving in real time.’’ (Compl. ¶ 105, any difference in the conduct or the result

quoting Ex. A at 200.) Plaintiffs allege of the [second New York team’s] investiga-

that the two teams’ failures to fully com- tion because TTT of [the investigating at-

municate ‘‘resulted in embarrassment and torney’s] view that anonymous tips, ‘on

a waste of Commission resources as two their face’ were not credible.’’ (Ex. A at

examination teams from two different of- 265; see also Compl. ¶ 1 n. 3 (incorporat-

fices essentially conducted the same exam- ing Report in its entirety into Complaint).)

1048 707 FEDERAL SUPPLEMENT, 2d SERIES

In June 2006, after completing its exam- York team’s ongoing investigations.

ination, the second New York team filed (Compl. ¶ 105, citing Ex. A at 200.)

its case-closing report despite the fact that Ultimately, then, Plaintiffs are alleging

it had failed to resolve all of the red flags that two SEC offices violated mandatory

it identified. (Compl. ¶ 147.) However, policies and thereby failed to adequately

there are no allegations that the SEC staff coordinate their investigations and other-

is required to resolve red flags before de- wise conduct their investigations in a thor-

ciding to close a case and file a case- ough and adequate manner.

closing report. (See Compl. ¶ 147.)

As has been shown repeatedly through-

b. Discussion and Analysis out this Order, the SEC retained discre-

In short, viewing the plausible infer- tion to decide how to conduct its investiga-

ences of the Complaint’s factual averments tions—which includes decisions about how

in favor of Plaintiffs, the Complaint alleges to coordinate investigations between of-

three acts that violated mandatory duties fices. (See supra Parts. IV.B.1, IV.B.3.)

and/or were not susceptible to policy judg- At the risk of being repetitive, it is useful

ment: to refer back to 15 U.S.C. § 78u(a)(1),

(1) the Washington team failed to file a which permits the SEC to decide ‘‘as it

case-opening report; deems necessary’’ how to ‘‘investigate any

(2) the first New York team failed to facts, conditions, practices, or matters,’’

consult the STARs computer database whether through ‘‘a statement in writing,

to find prior case-opening reports re- under oath or otherwise.’’ In addition, 15

garding Madoff; and U.S.C. § 78u(d)(1) permits the SEC ‘‘in its

(3) the Washington team failed to file a discretion’’ to bring an enforcement action

case-closing memorandum. when it detects a securities violation dur-

Plaintiffs’ other assertions are either un- ing its investigations. There are, in short,

supported by any factual allegations what- no mandatory obligations requiring the

soever 19 or are supported by factual alle- SEC to conduct its investigations in a par-

gations that plainly contradict Plaintiffs’ ticular manner or to bring an enforcement

conclusory assertions that there was a action in particular situations. These deci-

mandatory duty and/or decision not sus- sions are fundamentally discretionary and

ceptible to policy analysis.20 Plaintiffs fur- require staff to make policy-based judg-

ther allege that the three specific SEC ments. See, e.g., Sloan, 236 F.3d at 762

omissions had an extremely limited impact. (‘‘[T]he sifting of evidence, the weighing of

Plaintiffs assert that the New York team, its significance, and the myriad other deci-

prior to closing its investigation, received sions made during investigations plainly

and reviewed the Washington files—albeit involve elements of judgment and

in a ‘‘cursory’’ manner because the infor- choice.’’); Vickers, 228 F.3d at 951 (‘‘[T]he

mation appeared duplicative of the New discretionary function exception protects

19. There are no specific allegations stating their specific allegations in the Report that

that there was a requirement to follow a case- there was no policy requiring staff to prepare

planning memorandum. Nor are there spe- a case-planning memorandum and there was

cific allegations stating that there was a re- a discretionary policy (which used the sugges-

quirement to resolve red flags prior to closing tive ‘‘should’’ and the permissive ‘‘may,’’ see

a case and preparing a case-closing memo- Sabow, 93 F.3d at 1452) regarding staff mem-

randum. bers’ decisions to file a Matter Under Inquiry

20. Plaintiffs’ conclusory assertions that there report.

were mandatory duties are contradicted by

DICHTER–MAD FAMILY PARTNERS, LLP v. U.S. 1049

Cite as 707 F.Supp.2d 1016 (C.D.Cal. 2010)

agency decisions concerning the scope and the supervisor’s limited exercise of discre-

manner in which it conducts an investiga- tion did not immunize the hydrographers’

tion.’’). negligent preparation of the charts in vio-

In light of this broad investigatory dis- lation of mandatory guidelines. As the

cretion, General Dynamics is therefore di- court later explained in General Dynam-

rectly on point regarding the small handful ics, ‘‘little intervened between the hydrog-

of mandatory procedural obligations im- raphers’ wrongdoing and the injury to the

posed on SEC staff. In General Dynam- plaintiff.’’ General Dynamics, 139 F.3d at

ics, the Ninth Circuit explained that an 1285. Instead, there was a ‘‘tight coupling

otherwise actionable agency decision is im- between hydrographers, reviewers, charts,

mune from suit if ‘‘a totally separate exer- and results,’’ such that the plaintiff was

cise’’ of ‘‘independent’’ and ‘‘broad based injured by the hydrographers’ violation of

discretion’’ ‘‘intervenes between an alleged the mandatory guidelines in preparing the

government wro

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