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Zelaya v. United States

United States Court of Appeals, Eleventh Circuit

March 30, 2015

CARLOS ZELAYA, individually, and GEORGE GLANTZ, individually and as trustee of the George Glantz Revocable Trust, for themselves and on behalf of all those persons similarly situated, Plaintiffs-Appellants,
v.
UNITED STATES OF AMERICA, Defendant-Appellee

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[Copyrighted Material Omitted]

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Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 0:11-cv-62644-RNS.

Before TJOFLAT, JULIE CARNES, and GILMAN,[*] Circuit Judges.

OPINION

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JULIE CARNES, Circuit Judge:

The plaintiffs in this case, Carlos Zelaya and George Glantz, are victims of one of the largest Ponzi schemes in American history: the much-publicized Ponzi scheme orchestrated by R. Allen Stanford. All Ponzi operations eventually unravel, and when the scheme that had victimized Plaintiffs was publicly revealed to have been a fraud, Plaintiffs were taken by surprise. Yet, according to Plaintiffs, the federal agency entrusted with the duty of trying to prevent, or at least reveal, Ponzi schemes was not all that surprised. To the contrary, this agency, the United States Securities and Exchange Commission (" SEC" ), had been alerted over a decade before that Stanford was likely running a Ponzi operation. According to Plaintiffs, notwithstanding its knowledge of Stanford's likely nefarious dealings, the SEC dithered for twelve years, content not

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to call out Stanford and protect future investors from his fraud. And even though the SEC eventually roused itself to take action in 2009, by then, of course, the money was long gone, and many people lost most of their investments.

Pursuant to the Federal Tort Claims Act, Plaintiffs sued the United States in federal court, alleging that the SEC had acted negligently. The federal government moved to dismiss, arguing that it enjoyed sovereign immunity from the lawsuit. The district court agreed, and dismissed Plaintiffs' case. Plaintiffs now appeal that dismissal to this Court. In reviewing the district court's dismissal, we reach no conclusions as to the SEC's conduct, or whether the latter's actions deserve Plaintiffs' condemnation. We do, however, conclude that the United States is shielded from liability for the SEC's alleged negligence in this case. We therefore affirm the district court's dismissal of the Plaintiffs' complaint.

I. Factual Background

As noted, this action arises from one of the largest Ponzi schemes in history.[1] In the 1990s and 2000s, financier R. Allen Stanford (" Stanford" or " Allen Stanford" ) engineered investments in his Antiguan-based Stanford International Bank Ltd. (" Stanford Bank" ) through a network of entities: Stanford Bank itself; Stanford Group, with more than twenty-five offices across the United States; Louisiana-based Stanford Trust Company; and Miami, Houston, and San Antonio-based Stanford Fiduciary Investor Services. Through this network, Stanford Bank issued high-interest certificates of deposit (" CDs" ) to tens of thousands of investors across the globe, ultimately accumulating billions of dollars. Unbeknownst to these investors, however, Stanford Bank never invested this money in securities, as it had promised to do. Instead, the Bank funneled new infusions of cash to earlier investors and to Allen Stanford himself.

As early as 1997, the SEC had been alerted that Stanford was conducting a Ponzi scheme through the above companies. One of these companies, Stanford Group, had been registered with the SEC since 1995 as a broker-dealer and investment advisor, which meant that it was subject to SEC reporting requirements. Yet, despite four investigations between 1997 and 2004, the SEC took no action to stop the fraud until 2009.

In its first investigation, begun in 1997, the SEC discovered that Stanford had contributed $19 million in cash to Stanford Group, which caused the SEC " concern[] that the cash contribution may have come from funds invested by customers at [Stanford Bank]." The Branch Chief of the Fort Worth, Texas SEC office conducting the investigation considered the purported returns on Stanford Bank's CDs to be " absolutely ludicrous" and believed that they were not " legitimate CDs." The Assistant District Administrator heading the investigation warned the Branch Chief to " keep your eye on these people [referencing Stanford] because this looks like a Ponzi scheme to me and someday it's going to blow up." The following year, the successor of that Assistant District Administrator stated, " [A]s far as I was concerned at that period of time[,] . . . we all thought it was a Ponzi scheme to start with. Always

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did." The investigating group concluded, " [P]ossible misrepresentations. Possible Ponzi scheme." Still, the SEC took no action against Stanford.

In the SEC's second investigation, begun in 1998, the investigators decided that " Stanford was operating some kind of fraud" through Stanford Group. They noted that Stanford Group was " extremely dependent upon [Stanford Bank's very generous commission] compensation to conduct its day-to-day operations." Despite this, the SEC did nothing.

In 2002, the SEC investigated Stanford a third time, determining that Stanford Group should be assigned the SEC's highest risk rating because of the SEC's " suspicions the international bank [Stanford Bank] was a Ponzi scheme" and because Stanford Bank's " consistent above-market reported returns" were likely illegitimate. Notwithstanding this concern, the SEC, once again, did nothing.

In 2004, the SEC conducted a fourth investigation of Stanford, again reaching the conclusion that Stanford Bank " may in fact be a very large Ponzi scheme." Sitting on this information for five more years, the SEC finally took enforcement action against Stanford and his various business entities in 2009.[2] By then though, most of the investors' money was gone, and the SEC has been able to recover only $100 million of the $7 billion invested in Stanford Bank.

Plaintiffs Zelaya and Glantz were two of the many investors who thought they were purchasing legitimate securities. Zelaya invested $1 million and Glantz invested approximately $650,000. Both plaintiffs have lost almost their entire investments.

II. Procedural Background

Pursuant to the Federal Tort Claims Act (" FTCA" ), and alleging one count of negligence based on the SEC's failure to act upon its knowledge of Stanford Group's participation in the Stanford Bank Ponzi scheme, Plaintiffs filed suit in 2011 against the United States (" the Government" ) in the United States District Court for the Southern District of Florida. In their initial complaint, Plaintiffs identified two separate statutory duties that the SEC had allegedly breached through its inaction. First, Plaintiffs asserted a " notification claim" pursuant to the Securities Investor Protection Act of 1970, 15 U.S.C. § § 78aaa- lll. Specifically, Plaintiffs relied on § 78eee(a)(1), which provides that " [i]f the [SEC] is aware of facts which lead it to believe that any broker or dealer subject to its regulation is in or is approaching financial difficulty, it shall immediately notify SIPC." SIPC is an acronym for the Securities Investor Protection Corporation, which is a non-profit corporation with which Stanford Group, as a registered broker-dealer, was required to maintain membership. Plaintiffs note that although Stanford Group was subject to regulation by the SEC and the SEC had allegedly concluded that Stanford Group was involved in a Ponzi scheme, the SEC failed to notify SIPC, as required by § 78eee(a)(1).

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Second, Plaintiffs also raised a " registration claim" pursuant to 15 U.S.C. § 80b-3(c). Plaintiffs contend that § 80b-3(c) required the SEC to revoke the registration of Stanford Group, but the SEC failed to do so.

The Government responded with a motion to dismiss. As discussed below, while the FTCA, as a general matter, waives what would otherwise be the federal government's sovereign immunity from legal actions for torts committed by its employees, there are exceptions to that general waiver. In its motion to dismiss, the Government argued that one of those exceptions, the " discretionary function exception," barred Plaintiffs' claims based on the alleged breach of both of the above statutory duties. Given the application of this exception, the Government contended that the district court lacked subject matter jurisdiction.

The district court granted the Government's motion to dismiss with regard to the registration claim, holding that the discretionary function exception applied and therefore preserved the Government's sovereign immunity on that claim. The district court, however, denied the Government's motion to dismiss with regard to Plaintiffs' notification claim.

Plaintiffs then filed an amended complaint, re-alleging the surviving notification claim as the sole basis for their negligence action. The Government again moved to dismiss, this time raising the " misrepresentation exception" as a bar to its capacity to be sued under the FTCA. Although it had earlier rejected the application of the discretionary function exception to the notification claim, the district court agreed that the misrepresentation exception did apply and that it precluded this claim. As a result, the court concluded that it likewise lacked subject matter jurisdiction on the notification claim and therefore granted the Government's motion to dismiss. With no remaining claims, the court entered a final judgment for the Government. Plaintiffs filed the present appeal, contending that the district court should not have dismissed either the registration claim or the notification claim.

III. Discussion

A. Sovereign Immunity, Subject Matter Jurisdiction, and the Federal Tort Claims Act--Generally

The district court dismissed Plaintiffs' claims based on an absence of subject matter jurisdiction. We review a district court's dismissal of an action for lack of subject matter jurisdiction de novo. Motta ex rel. A.M. v. United States, 717 F.3d 840, 843 (11th Cir. 2013).

It is well settled that the United States, as a sovereign entity, is immune from suit unless it consents to be sued. Christian Coal. of Fla., Inc. v. United States, 662 F.3d 1182, 1188 (11th Cir. 2011) (citing United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1990)); accord Alden v. Maine, 527 U.S. 706, 758, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999) (" To the extent Maine has chosen to consent to certain classes of suits while maintaining its immunity from others, it has done no more than exercise a privilege of sovereignty concomitant to its constitutional immunity from suit." ). Through the enactment of the FTCA, the federal government has, as a general matter, waived its immunity from tort suits based on state law tort claims. Millbrook v. United States, __ U.S. __, 133 S.Ct. 1441, 1443, 185 L.Ed.2d 531 (2013) (citing Levin v. United States, __ U.S. __, 133 S.Ct. 1224, 1228, 185 L.Ed.2d 343 (2013)). But in offering its consent to be sued, the United States has the power to condition a waiver of its immunity as broadly or narrowly

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as it wishes, and according to whatever terms it chooses to impose. United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 85 L.Ed. 1058 (1941) (" [T]he terms of [the government's] consent to be sued in any court define that court's jurisdiction to entertain the suit." ). That being so, a court must strictly observe the " limitations and conditions upon which the Government consents to be sued" and cannot imply exceptions not present within the terms of the waiver. Soriano v. United States, 352 U.S. 270, 276, 77 S.Ct. 269, 1 L.Ed.2d 306 (1957). If there is no specific waiver of sovereign immunity as to a particular claim filed against the Government, the court lacks subject matter jurisdiction over the suit. See F.D.I.C. v. Meyer, 510 U.S. 471, 475--76, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994).

But that which the Sovereign gives, it may also take away, and the Government has done so through statutory exceptions in 28 U.S.C. § 2680, including the § 2680(a) discretionary function exception and the § 2680(h) misrepresentation exception, which serve to block the waiver of sovereign immunity that would otherwise occur under the FTCA. See 28 U.S.C. § 2680. These exceptions " must be strictly construed in favor of the United States," and when an exception applies to neutralize what would otherwise be a waiver of immunity, a court will lack subject matter jurisdiction over the action. JBP Acquisitions, LP v. United States ex rel. FDIC, 224 F.3d 1260, 1263--64 (11th Cir. 2000) (internal quotation marks omitted).

B. Interplay Between 28 U.S.C. § § 1346(b)(1), 2674(b)(1), and 2680

Any plaintiff seeking to sue the United States under the FTCA must satisfy two initial statutory burdens to establish jurisdiction. Clark v. United States, 326 F.3d 911, 912 (7th Cir. 2003). First, as with all suitors in federal courts, the plaintiff must identify an explicit statutory grant of subject matter jurisdiction, which in the case of the FTCA is 28 U.S.C. § 1346(b)(1). Id. This statute provides:

Subject to the provisions of chapter 171 of this title [i.e., 28 U.S.C. § § 2671--2680], the district courts . . . shall have exclusive jurisdiction of civil actions on claims against the United States, for money damages, accruing on and after January 1, 1945, for injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.

28 U.S.C. § 1346(b)(1) (emphasis added). Translated, any time the federal government is sued based on the act of an employee performed within the scope of his employment duties, federal district courts will have exclusive jurisdiction of such claims. In addition, § 1346(b)(1) sets, as a predicate, a requirement that the circumstances be such that a private person would be liable under the law of the state where the federal employee's act or omission occurred, had a private person so acted.

Because the United States is a sovereign entity, the second jurisdictional requirement is a statute that waives its sovereign immunity. Clark, 326 F.3d at 912; see also Meyer, 510 U.S. at 475 (" Sovereign immunity is jurisdictional in nature." ). This waiver of sovereign immunity is provided in chapter 171 of Title 28, which chapter includes § § 2671--2680. The waiver is most directly referenced in § 2674.

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As the texts of the two statutes indicate, jurisdiction depends on both statutes being satisfied. Indeed, § 1346(b)(1) explicitly makes its grant of jurisdiction subject to the conditions of chapter 171, with its introductory phrase declaring that the sub-section is " [s]ubject to the provisions of chapter 171 of this title." Two provisions found in chapter 171 are pertinent in this case. Section 2674 affirmatively establishes the Government's liability for tort claims, but reiterates § 1346(b)(1)'s requirement conditioning liability by the Government on a showing that a private individual would be liable under like circumstances.[3] Finally, § 2680, the final section of chapter 171, lists exceptions to the United States' waiver of sovereign immunity, under which " [t]he provisions of this chapter and section 1346(b)(1) of this title shall not apply." See 28 U.S.C. § 2680.

Thus, between § 1346(b)(1) and chapter 171, there are numerous prerequisites to, and limitations on, the grant of jurisdiction over tort suits against the United States. In the present case, two obstacles potentially block Plaintiffs' efforts to use the FTCA to sue the Government based on the SEC's alleged negligence in this case. First, as noted, there are exceptions, found within the FTCA itself, that preclude use of that statute by a plaintiff to sue the Government for tort claims. And it is the applicability of those exceptions on which the district court and parties focused below, with the court ultimately determining that two statutory exceptions blocked Plaintiffs' efforts to use the FTCA to pierce the Government's sovereign immunity.

But there is another obstacle that was largely ignored by the district court and the parties. Specifically, even when no applicable exception exists, the FTCA does not provide an open field for a litigant to sue the federal government for the alleged torts of its agents. Instead, the particular statute granting subject matter jurisdiction over such claims--28 U.S.C. § 1346(b)(1)--constrains a litigant as to the type of claims that can properly be brought pursuant to the statute. That is, both § § 1346(b)(1) and 2674 preclude liability of the federal government absent a showing by the plaintiff that a private individual who had acted as did the federal employee, in like circumstances, would be liable for the particular tort under governing state law where the tort occurred.

We address first the impact of the above requirement on this litigation, after which we discuss the applicability of statutory exceptions in this case.

C. The Federal Tort Claims Act's Requirement of a State Law Analogue

1. The Need for a State Tort Analogue

The FTCA was enacted to provide redress to injured individuals for ordinary torts recognized by state law but committed by federal employees. Ochran v. United States, 273 F.3d 1315, 1317 (11th Cir. 2001) (" Ochran II " ); Sellfors v. United States, 697 F.2d 1362, 1365 (11th Cir. 1983) (Congress " was concerned primarily with providing redress for the garden variety common law torts recognized by state law." ). Indeed, the reference in ยง 1346(b)(1) to " the law of the place where the act or omission occurred" means the law ...


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