United States Court of Appeals, Fourth Circuit

441 F.
3d 306
Fred SUTER; Terry D. Suter; Green Meadows, LLC; Paula

Totherow; Donna L. Helms; Stephen Miller; Hilda A.
Totherow; Ginny Blankenship; Arthur Helms, III; William E.
Fowler; Carolyn Fowler; Sidney A. Livingston; Eugene Royals;
Dennis Grubaugh; Deborah Grubaugh; James Koenig;
Michelle Koenig; Dan E. Holman; Frankie Edmundson;
Frank Goodman; Angelo Antonucci; Marshall S. Redding, Dr.;
G. Douglas Hayden, Jr.; Claude G. Crisp; Stephen M.
Schwartz; Dale C. Peters; Alma B. Schwartz, PlaintiffsAppellants,
v.
UNITED STATES of America, Defendant-Appellee.
No. 05-1521.
United States Court of Appeals, Fourth Circuit.

Argued February 2, 2006.
Decided March 28, 2006.
ARGUED: Emerson R. Marks, Jr., Charlottesville, Virginia, for

Appellants. Joshua Paul Waldman, United States Department of Justice,
Civil Division, Appellate Section, Washington, D.C., for Appellee. ON
BRIEF: Peter D. Keisler, Assistant Attorney General, Gretchen C.F.
Shappert, United States Attorney, Mark B. Stern, United States
Department of Justice, Civil Division, Appellate Section, Washington,
D.C., for Appellee.
Before WILKINS, Chief Judge, and NIEMEYER and WILLIAMS,
Circuit Judges.
Affirmed by published opinion. Chief Judge WILKINS wrote the opinion,
in which Judge NIEMEYER and Judge WILLIAMS joined.
OPINION
WILKINS, Chief Judge.
Appellants, victims of a fraudulent investment scheme, appeal a district court

order dismissing, for lack of subject matter jurisdiction, their action against the
United States alleging that an undercover federal agent improperly participated
in the scheme. We affirm, albeit on a basis different from that relied on by the
district court.
I.
2
Appellants are victims of a large-scale Ponzi and money laundering scheme that
was perpetrated between 1998 and 2001. As the result of an undercover
investigation by an FBI agent using the fictitious name "John Vega," a number
of the participants in the scheme were successfully prosecuted.1
Appellants brought this action against the United States under the Federal Tort
Claims Act (FTCA), see 28 U.S.C.A. 1346(b), 2671-2680 (West 1994 &
Supp. 2005), alleging that the FBI, in connection with its investigation of the
fraudulent scheme, "participated in the very frauds which it was investigating."
J.A. 15. In particular, Appellants claim that Vega with the full knowledge of
the FBI"assisted the criminals by helping them to conceal and perpetuate
their frauds, which actions drastically extended the scope of the injury inflicted
and the number of victims injured." Id. According to Appellants, during the
course of Vega's undercover investigation, he assisted in the formation and
operation of business entities used in furtherance of the scheme. Appellants
further claim that Vega and the FBI "profited financially from [Vega's]
participation in the crimes which he was investigating," including by acquiring
an ownership interest in one of the entities used in the scheme. Id.
Count One of Appellants' complaint asserts claims for fraud based on

misrepresentations Vega allegedly made to Appellants during his involvement
in the scheme and on Vega's assistance in forming and operating entities used in
the scheme. Count Two of the complaint alleges that Vega negligently failed to
avoid unnecessary harm to Appellants and that the FBI negligently hired and
supervised Vega.
The United States moved to dismiss Appellants' complaint for lack of subject
matter jurisdiction. See Fed.R.Civ.P. 12(b)(1). The United States argued that
Appellants' claims were barred by the discretionary function and
misrepresentation exceptions to the general waiver of sovereign immunity
under the FTCA, see 28 U.S.C.A. 2680(a), (h), and that Appellants had failed
to allege conduct by the United States that would create liability under state law
if committed by a private person, see 28 U.S.C.A. 1346(b)(1). In support of
its dismissal motion, the United States submitted the Declaration of John A.
Johnson, a Supervisory Special Agent of the FBI and Unit Chief of the
Undercover and Sensitive Operations Unit at FBI Headquarters in Washington,
D.C. Attached to that declaration was a copy of the Attorney General's
Guidelines on FBI Undercover Operations ("Undercover Guidelines"), which
were in effect at the time of Vega's investigation.2
6
The district court granted the United States' motion to dismiss. First, focusing
on the misrepresentations that Vega allegedly made to Appellants, the district
court held that Appellants' fraud claims were barred by the misrepresentation
exception under the FTCA. Second, the district court held that Appellants'
negligence claims failed because "under North Carolina law, a private person
could not be liable for negligently conducting or supervising an undercover
criminal investigation." J.A. 52. The district court did not address the United
States' argument that all of Appellants' claims were barred by the discretionary
function exception.
II.
7
We review the dismissal of an action for lack of subject matter jurisdiction de

novo. See Welch v. United States, 409 F.3d 646, 650 (4th Cir.2005), cert.
denied, ___ U.S. ___, 126 S.Ct. 1431, ___ L.Ed.2d ___, 2006 WL 452483
(U.S. Feb. 27, 2006) (No. 05-529). In so doing, "[w]e are not limited to
evaluation of the grounds offered by the district court to support its decision,
but may affirm on any grounds apparent from the record." United States v.
Smith, 395 F.3d 516, 519 (4th Cir.2005). Here, we decline to consider whether
the grounds for dismissal relied on by the district court were proper because the
record presents a more straightforward basis for affirmance, namely, that
Appellants' claims are barred by the discretionary function exception.3
The FTCA creates a limited waiver of the United States' sovereign immunity by
authorizing damages actions for injuries caused by the tortious conduct of
federal employees acting within the scope of their employment, when a private
person would be liable for such conduct under state law. See 28 U.S.C.A.
1346(b)(1). This waiver of sovereign immunity, however, is subject to several
exceptions. "The most important of these . . . is the discretionary function
exception," McMellon v. United States, 387 F.3d 329, 335 (4th Cir. 2004) (en
banc), cert. denied, ___ U.S. ___, 125 S.Ct. 1828, 161 L.Ed.2d 724 (2005),
which provides that the United States is not liable for "[a]ny claim . . . based
upon the exercise or performance or the failure to exercise or perform a
discretionary function or duty on the part of a federal agency or an employee of
the Government, whether or not the discretion involved be abused," 28
U.S.C.A. 2680(a). The discretionary function exception "marks the boundary
between Congress' willingness to impose tort liability upon the United States
and its desire to protect certain governmental activities from exposure to suit by
private individuals." United States v. S.A. Empresa de Viacao Aerea Rio
Grandense (Varig Airlines), 467 U.S. 797, 808, 104 S.Ct. 2755, 81 L.Ed.2d 660
(1984). Congress enacted this exception "to prevent judicial second-guessing of
legislative and administrative decisions grounded in social, economic, and
political policy through the medium of an action in tort . . . [and] to protect the
Government from liability that would seriously handicap efficient government
operations." Id. at 814, 104 S.Ct. 2755 (internal quotation marks omitted).
9
To determine whether conduct by a federal agency or employee fits within the

discretionary function exception, we must first decide whether the challenged
conduct "involves an element of judgment or choice." Berkovitz v. United
States, 486 U.S. 531, 536, 108 S.Ct. 1954, 100 L.Ed.2d 531 (1988); see id.
(explaining that "the discretionary function exception will not apply when a
federal statute, regulation, or policy specifically prescribes a course of action
for an employee to follow" because "the employee has no rightful option but to
adhere to the directive"). If the conduct does involve such discretionary
judgment, then we must determine "whether that judgment is of the kind that
the discretionary function exception was designed to shield," i.e., whether the
challenged action is "based on considerations of public policy." Id. at 536-37,
108 S.Ct. 1954. This inquiry focuses "not on the agent's subjective intent in
exercising the discretion . . ., but on the nature of the actions taken and on
whether they are susceptible to policy analysis." United States v. Gaubert, 499
U.S. 315, 325, 111 S.Ct. 1267, 113 L.Ed.2d 335 (1991). Thus, "a reviewing
court in the usual case is to look to the nature of the challenged decision in an
objective, or general sense, and ask whether that decision is one which we
would expect inherently to be grounded in considerations of policy." Baum v.
United States, 986 F.2d 716, 720-21 (4th Cir.1993). Moreover, when a statute,
regulation, or agency guideline permits a government agent to exercise
discretion, "it must be presumed that the agent's acts are grounded in policy
when exercising that discretion." Gaubert, 499 U.S. at 324, 111 S.Ct. 1267.
10
Applying these principles here, we first conclude that Vega's participation in,
and the FBI's approval of, criminal activity during the undercover investigation
involved an element of judgment or choice. Agent Johnson's declaration notes
that "[t]here is no statute, regulation, or policy directive that mandates that the
FBI choose to employ[] any particular investigative technique in carrying out
[fraud and money laundering] investigations"; rather, "the FBI is vested with
broad discretionary power to determine whether a particular investigative
technique, such [as] an undercover operation, is an appropriate means by which
to conduct these types of investigations." J.A. 23. Indeed, Appellants concede
that, in general, "undercover operations are necessarily discretionary in nature

and hence immune from civil liability." Br. of Appellants at 6; see id. at 13
(recognizing that "the nature of undercover operations demands the exercise of
discretion"). They contend, however, that the FBI exceeded its discretionary
authority by participating in the crimes it was investigating. We disagree.
11
The Undercover Guidelines grant the FBI broad discretion in conducting

undercover operations. They generally authorize the FBI to conduct undercover
operations "that are appropriate to carry out its law enforcement
responsibilities." J.A. 30. More specifically, the guidelines permit FBI officials
to authorize, and agents to engage in, a wide range of activities in connection
with undercover investigationsincluding "[a]ctivity that is proscribed by
Federal, state, or local law as a felony or that is otherwise a serious crime," or
that presents "a significant risk of financial loss." Id. at 34-35. It is therefore
clear that the conduct alleged by Appellants falls within the scope of the
discretionary authority conferred on the FBI by the Undercover Guidelines.4
12
We further conclude that the challenged conduct was "based on considerations

of public policy." Berkovitz, 486 U.S. at 537, 108 S.Ct. 1954. The FBI's
decision whether, as part of its investigation, to participate in criminal activity
likely to result in financial loss to third parties "is one which we would expect
inherently to be grounded in considerations of policy." Baum, 986 F.2d at 721.
Indeed, the Undercover Guidelines expressly confirm this understanding,
requiring FBI officials to "weigh the risks and benefits" of a proposed
undercover operation, "giving careful consideration" to several policy-based
factors, including "[t]he risk of . . . financial loss to persons or businesses" and
"[t]he risk that individuals engaged in undercover operations may become
involved in illegal conduct." J.A. 30. As Agent Johnson explains, FBI officials
consider these factors in "mak[ing] discretionary judgments and authoriz[ing]
the operations that advance an investigation while minimizing the risks."5 Id. at
25.
13
We thus conclude that the conduct alleged by Appellants falls within the
discretionary function exception, thereby barring their suit against the United
States.6 We note that our holding is consistent with the decisions of two other
circuits that have applied the discretionary function exception in similar cases.
See Ga. Cas. & Sur. Co. v. United States, 823 F.2d 260, 263 (8th Cir.1987)
(holding that a claim for financial losses arising from the FBI's undercover
investigation of an automobile theft ring was barred because "[t]he FBI's
decision to maintain secrecy. . . involved the balancing of policy considerations
protected by the discretionary function exception"); see also Frigard v. United
States, 862 F.2d 201, 203 (9th Cir. 1988) (per curiam) (holding that a suit
alleging financial fraud by an investment company used by the CIA as a cover

for its operations was barred by the discretionary function exception because
"the alleged decisions by the CIA to use [the company] and to keep its use of
the company secret are administrative decisions grounded in social and
economic policy"). We agree with the core principle articulated by the Eighth
and Ninth Circuitsthat discretionary, policy-based decisions concerning
undercover operations are protected from civil liability by the discretionary
function exception, even when those decisions result in harm to innocent third
parties. Imposing liability for such decisions "would seriously handicap" the
FBI and other federal law enforcement agencies in carrying out the important
duties assigned to them by Congress. Varig Airlines, 467 U.S. at 814, 104 S.Ct.
2755 (internal quotation marks omitted). "Were we to permit this suit to
succeed, we would stymie the very purpose of the discretionary function
exception by permitting the second-guessing of policy through a tort action."
Williams v. United States, 50 F.3d 299, 310 (4th Cir.1995). While we are not
unsympathetic to the financial losses suffered by Appellants, we must apply the
discretionary function exception as we believe Congress intended it. See Ga.
Cas. & Sur., 823 F.2d at 263 ("While we acknowledge the harm to innocent
[third parties] in this case, we cannot ignore congressional intent to protect the
Government from suit through the discretionary function exception.").
III.
14
For the reasons set forth above, we affirm the district court order dismissing
Appellants' action for lack of subject matter jurisdiction.
15
AFFIRMED.
Notes:
1
Appellants have brought a separate civil action against the perpetrators of the
scheme. That action, which is currently pending, is not at issue here
We have held that "[i]n ruling on a Rule 12(b)(1) motion, the court may
consider exhibits outside the pleadings."Williams v. United States, 50 F.3d 299,
304 (4th Cir. 1995).
Although Appellants contend that the discretionary function exception does not
apply to the conduct alleged here, they recognize that the applicability of this
exception is "the core issue in this case." Br. of Appellants at 6
Agent Johnson's declaration confirms that the undercover operation at issue

here received all necessary review and approval by FBI officials and that the
conduct alleged by Appellants "fall [s] within the wide range of conduct,
activities, and undercover scenarios which the FBI has discretion to utilize in
furtherance of an undercover operation, pursuant to the authority of the
Guidelines."Id. at 25.
The Undercover Guidelines impose various restrictions on agents' participation

in otherwise illegal activity. For example, involvement in such activity may be
authorized only for limited purposes, such as to obtain critical evidence not
otherwise available or to establish credibility of a cover identity. Agents also
may not participate in acts of violence except in self-defense. Further, FBI
officials contemplating proposed undercover operations involving "sensitive
circumstances" such as participation in otherwise criminal activitymust
"determine whether adequate measures have been taken to minimize the
incidence of sensitive circumstances and reduce the risks of harm and intrusion
that are created by such circumstances."Id. at 35-36.
We also conclude that Appellants' claim that the FBI negligently hired and
supervised Vega is barred by the discretionary function exception. Courts have
repeatedly held that government employers' hiring and supervisory decisions
are discretionary functionsSee, e.g., Nurse v. United States, 226 F.3d 996,
1001-02 (9th Cir.2000); Burkhart v. Washington Metro. Area Transit Auth., 112
F.3d 1207, 1217 (D.C.Cir.1997).

United States Court of Appeals, Fourth Circuit

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

United States Court of Appeals, Fourth Circuit

Uploaded by

Copyright:

Available Formats

441 F.

Fred SUTER; Terry D. Suter; Green Meadows, LLC; Paula

United States Court of Appeals, Fourth Circuit.

ARGUED: Emerson R. Marks, Jr., Charlottesville, Virginia, for

Appellants, victims of a fraudulent investment scheme, appeal a district court

Count One of Appellants' complaint asserts claims for fraud based on

We review the dismissal of an action for lack of subject matter jurisdiction de

To determine whether conduct by a federal agency or employee fits within the

that, in general, "undercover operations are necessarily discretionary in nature

The Undercover Guidelines grant the FBI broad discretion in conducting

We further conclude that the challenged conduct was "based on considerations

alleging financial fraud by an investment company used by the CIA as a cover

Agent Johnson's declaration confirms that the undercover operation at issue

The Undercover Guidelines impose various restrictions on agents' participation

You might also like