By Law360, New York
A Louisiana judge Friday threw out a putative class action alleging the U.S. Securities and Exchange Commission facilitated Robert Allen Stanford’s $7 billion Ponzi scheme, finding the agency was shielded by a law barring suits over federal officials’ discretionary choices.
U.S. District Shelly D. Dick said the discretionary function exception of the Federal Tort Claims Act applied to the case brought by victims of Stanford in part because the alleged refusal of former official Spencer Barasch in the SEC’s Fort Worth, Texas, office to investigate the Ponzi scheme was a matter of choice.
“While the Court sympathizes with the losses suffered by the plaintiffs in this matter, plaintiffs have failed to identify any mandatory obligations violated by SEC employees in the performance of their discretionary duties,” Judge Dick concluded in granting the government’s motion to dismiss.
“Plaintiff[s] have also failed to allege facts demonstrating that the challenged actions are not grounded in public policy considerations,” she said.
The plaintiffs argued that Barasch’s alleged conduct did not fall under the discretionary function exception because the SEC has a policy of making enforcement referrals to the National Association of Securities Dealers and the Texas State Securities Board. Therefore, if a decision was made to refer Stanford, and then not followed, that decision falls outside the discretionary function exception.
But Judge Dick rejected that argument, saying that while “the alleged conduct of Barasch is disturbing… the FTCA clearly states that the discretionary function exception applies ‘whether or not the discretion involved be abused.'”
The suit, which was filed in July under the FTCA, alleged that SEC employees in Fort Worth knew as early as 1997 – only two years after Stanford Group Co. registered with the agency – that the company was likely operating a Ponzi scheme and did nothing about it.
Former SEC regional enforcement director Barasch, now an attorney with Andrews Kurth LLP, was singled out in the complaint for failing in his duties.
“In 1998 [to NASD] and again in 2002 [to TSSB] the SEC – through enforcement director Barasch and others – reached the conclusion that referrals should be made. Barasch himself was designated to perform these tasks,” the complaint said. “But, in fact, these referrals were not made, with the effect that Stanford escaped scrutiny by other agencies for years, thus facilitating Stanford’s scheme to defraud.”
In dismissing the case, Judge Dick cited a similar decision by a Texas federal judge in another case brought against the SEC over Stanford’s scheme. The plaintiffs in Dartez v. U.S. had argued that Barasch’s decisions and the negligent supervision of his superiors were not protected policy considerations.
“While the [Dartez] decision is not binding on this Court, the Court can find no flaw in [its] reasoning,” Judge Dick said.
The plaintiffs are represented by C. Frank Holthaus, Scott H. Fruge, Michael C. Palmintier and John W. DeGravelles of DeGravelles Palmintier Holthaus & Fruge and Edward J. Gonzales III.
The case is Anderson et al. v. United States of America, number 3:12-cv-00398, in the U.S. District Court for the Middle District of Louisiana.