These various informational sources are relevant to several issues I would like to discuss in a two-installment post. The issues are important because they already are involved in major suits or are likely to be involved in suits that will be filed in future. One could write huge amounts about the involvements, about the relationships. I shall, however, try to confine myself by and large to only the most crucial points, which tend to get buried in the clouds of words appearing in the formal documents written by lawyers and judges.
Let us begin with the issue of the government's liability arising from the unbelievable negligence of the SEC. This is an issue on which, as is common in the legal profession, many lawyers waxed definitive when the Madoff case broke. Lawyers were quick to confidently say, on the basis of very little if any knowledge, that the government cannot be sued. The accuracy of this highly confident but knowledge-free reaction is open to serious doubt.
The problem arises because there is a medieval doctrine called sovereign immunity, under which the government cannot be sued. Though the doctrine is a relic of the days of kings and is wholly inconsistent with the rule of law, it is still followed in many instances. And, at bottom, it is this doctrine that accounts for the lawyerish knee-jerk reactions against the possibility of suit based on the SEC's horrendous conduct.
However, the doctrine of sovereign immunity has been waived by Congress in the Federal Tort Claims Act for matters that fall within that Act. Governmental negligence is one such matter, so under the waiver the government can be sued on account of the fantastic negligence of the SEC.
The waiver does not apply, however, if the matter involved is based on the policy of a given statute or statutes (like the various federal securities acts) and/or is a matter in which a government agency had discretion. The two ideas are often run together; there is no waiver, for example, if a governmental action, though it ultimately proved unsuccessful or even negligent, was within an agency's discretion in seeking to carry out the policy of a statute (such as the securities acts). So the question here is going to come down to whether, in conducting itself with horrible negligence, the SEC was acting within the policy of the securities laws and/or was exercising legitimate, permissible discretion in its enforcement of those laws.
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