A claim that the SEC negligently
approved an investment adviser's annual amended registration could not proceed,
but a claim that the Commission breached its duty to timely report the alleged Robert
Stanford and Stanford Group Company Ponzi scheme to the SIPC may continue,
according to the U.S. District Court for the Southern District of Florida.
The case arose from Robert
Stanford’s alleged operation of a Ponzi scheme involving the sale of fraudulent
offshore certificates of deposit. Stanford Group Company, allegedly created by
Stanford to promote these investments, was registered with the SEC as a
broker-dealer and investment adviser. The SEC investigated numerous complaints about
Stanford and the company from 1997 to 2004 and each time found that Stanford
was operating a Ponzi scheme.
The plaintiffs sued the Commission
for negligence under the Federal Tort Claims Act (FTCA). Specifically,
plaintiffs alleged the SEC failed to timely report the Stanford Ponzi scheme to
the SIPC under the SIPA once it determined that Stanford’s company was in or
approaching financial difficulty. The plaintiffs also claimed the SEC
negligently approved annual amendments to the company’s Investment Advisers Act registration
after finding Stanford’s company was a Ponzi scheme.
The government moved to
dismiss the case for lack of subject matter jurisdiction. When a motion to
dismiss for lack of subject matter jurisdiction involves a factual attack that
implicates an element of the claim, the court should find jurisdiction exists
and instead treat the motion as a direct attack on the merits of the case, said
the court. Thus, the government’s motion was treated as if it were a motion to
dismiss for failure to state a claim and the plaintiffs’ allegations were
accepted as true.
The U.S. argued that both of
plaintiffs’ claims fell within the discretionary function exception to the
FTCA, thus depriving the court of subject matter jurisdiction. The court used a
two-part test to determine whether this exception to the FTCA’s limited waiver of
sovereign immunity applied. First, the government act must be discretionary in
nature (i.e., it involves judgment or choice). A nondiscretionary law or rule,
however, leaves the government no option but to comply. Second, if the act is
discretionary, the court examines whether it is capable of policy analysis. No
weighing of policy options is required because the court presumes that a
discretionary act is grounded in policy.
The court rejected the
government’s main argument that the SEC’s decision to report a broker-dealer’s financial
troubles to the SIPC is discretionary. The U.S. argued that determining
Stanford’s company was a Ponzi scheme was not the same as concluding that the
company was in or approaching financial difficulty under the SIPA. The court,
however, said that if plaintiffs’ allegation that the Commission had found
Stanford’s company to be a Ponzi scheme was true, then by definition the
company was in or approaching financial difficulty. Although the determination
that a firm is in or approaching financial difficulty itself involves
discretion, the statutory obligation to report to the SIPC upon making this
finding is nondiscretionary. Thus, the plaintiffs’ sufficiently alleged that the
SEC had a non-discretionary duty to report Stanford’s company to the SIPC.
The court declined to consider
the government’s other arguments that the SEC had not determined Stanford’s company
was a Ponzi scheme or that the SEC and the SIPC would have discretion to act even following a
report to the SIPC. These arguments were inappropriate for a motion to dismiss
where all of plaintiffs’ claims are accepted as true. The U.S., however, may revive these
arguments at the summary judgment stage or at another appropriate time.
By contrast, the court held
that plaintiffs may not proceed with their claim that the SEC negligently
approved Stanford’s company's annual amended Advisers Act registration. The plaintiffs
alleged that the Commission had a nondiscretionary duty to review annual
amendments to the company’s registration. The court noted that plaintiffs did not allege SEC negligence in reviewing the company's initial adviser application. The SEC must either grant or investigate whether to deny initial adviser registrations.
The court instead credited the government’s argument that the SEC owed no duty to grant or deny amendments to adviser registrations because the relevant laws and rules do not mandate SEC action. Even if SEC approval of these amendments was required, said the court, the act of granting or
denying amendments to an Adviser Act registration is discretionary. Commission decisions on amended adviser registrations, thus, are within the FTCA's discretionary function exception.
Zelaya, et. al. v. United States of America (No. 11-62644-Civ-SCOLA, September 7, 2012, Scola, Jr., J).