Losers, again: The Wilpons' struggle to hold on to the Mets will be bad for the team
Two things we now know about a lawsuit by a trustee of Bernie Madoff's firm against the Wilpons and the Mets: It's going to be bad for the Mets, the only question being how bad; the longer the proceedings drag on, the worst things will get.
The suit brought by the trustee for victims of Madoff's Ponzi scheme against Fred Wilpon, his business partners in Sterling Equities and the New York Mets was unsealed Friday, revealing in detail the financial jeopardy Wilpon faces. Trustee Irving Picard's 373-page complaint is essentially a two-tiered clawback: Picard is seeking approximately $300 million in profits taken by Wilpon and the 48 accounts the Sterling partners held with Madoff, plus damages, for a total of more than a billion dollars.
By naming the Mets in his suit, Picard could saddle the team with significant new debt, even if the team is sold. Picard alleges that $94 million “of other people’s money went to fund the day-to-day operations” of the Mets.
In the meantime, the length of time a possible trial could take is likely to hamper the team's ability to do business. And if the total sought by Picard in a settlement is significantly more than the Wilpon and the other partners can pay without having to sell the team, they may try to drag the proceedings out for as long as they can. (One might normally expect public-relations considerations to mitigate toward a quick settlement; here, the Wilpons' calculation might reasonably be that the damage is already done.)
In addition, Picard is seeking additional damages based on the idea that Wilpon and his brother-in-law Saul Katz ignored repeated warnings from fellow investors and others within their business circle. The New York Times reports that total at around $1 billion.
“The Trustee's lawsuit is an outrageous 'strong arm' effort to try to force a settlement by threatening to ruin our reputations and businesses which we have built for over 50 years,” Wilpon and Katz said in a statement. “This is a flagrant abuse of the Trustee's authority and we will not succumb to his pressure. The conclusions in the complaint are not supported by the facts. While they may make for good headlines, they are abusive, unfair and untrue. We categorically reject them. We should not be made victims twice over—the first time by Madoff, and again by the Trustee's actions.”
The problem Wilpon and his partners have is that the standard by which they'd have to forfeit the $300 million has been well established by now.
As one attorney familiar with the trustee's theories and methods of recovery put to me, “It's been a fact that is essentially undisputed. For instance, Jeffry Picower's settlement came to $7.2 billion—that was based upon how much money he'd extracted from Madoff. His phantom or fictitious balance was irrelevant. And it's likely no different with the Wilpons. You got X dollars out, others didn't, you need to equalize the pain.”
As for the damages beyond that $300 million, Picard has cited a number of warnings Wilpon and Katz received concerning Madoff. Perhaps most damaging, and certainly the earliest cited in the complaint, came from Arthur Friedman, a senior vice president with Sterling Equities and member of the New York Mets' board of directors. Friedman, “in or around the late 1980s,” attempted in vain to replicate the returns from Madoff and told the Sterling partners he was puzzled by Madoff's methods, but no action was taken. Friedman attempted the same thing again in 2005, this time with the help of his executive assistant, and once again failed.
Numerous other warnings are cited in the complaint, including one from Saul Katz's son. The complaint alleges David Katz's concern over the amount of Sterling holdings with Madoff alone, along with Madoff's lack of transparency, led to the creation of an alternate hedge fund, Sterling Stamos, funded in large part by withdrawals from Sterling's Madoff account.
As Fred Wilpon said in a statement Friday, “The plain truth is that not one of the Sterling partners ever knew or suspected that Madoff ran a Ponzi scheme.”
But the established legal standard in this case isn't whether the Sterling partners knew or even suspected.
Picard will not have to prove that the Wilpons were active participants in the Madoff scheme, or even necessarily that they had knowledge of it. The Picard side is out to show that, in the face of repeated warnings from paid advisers, the Mets owners ought to have known. And the mere fact that the Wilpons had more than $500 million in Madoff accounts at the time he went bust, they will argue, still doesn't make them “net losers."
Picard's argument is going to be simply that any reasonably sophisticated investor would have suspected impropriety on Madoff's part, making irrelevant the question (if the judge buys it) of whether the Madoffs had direct knowledge of the scheme. So while no evidence of Fred Wilpon acknowledging suspicions about Bernie Madoff's behavior are found in the complaint, both the warnings from Friedman and Katz could satisfy that “reasonable man” standard, regardless of Wilpon's words or actions.
That is the potential liability faced by Wilpon. It remains unclear where he'd get the money to pay even the false-profit portion of the suit, let alone the damages above and beyond that $300 million amount.
The declaration by Wilpon a week ago that he'd sell 20 to 25 percent of the Mets to guard against the uncertainty of the Madoff lawsuit simply doesn't add up. Forbes valued the Mets at $845 million as of April 2010, with that number likely lower at this point. With significant debt attached to both the Mets and Citi Field, it's not a sure thing that the Mets' current book value is even a positive number. And that was the estimated price before the Mets added the liability of being specifically named in Picard's suit.
And while the Wilpons' SNY is clearly both profitable and valuable, it is also leveraged. The New York Post reported this week that the proceeds from an SNY sale would need to be distributed to lenders Sterling borrowed from, using SNY equity.
It's hard to imagine, under those circumstances, a buyer who would be willing to provide the Wilpons with the infusion of capital they're looking for in exchange for anything less than control of the team. And for now, the Wilpons are trying to hang on.
That leaves an unsettling possibility: That the Wilpons will fight this for as long as possible, to forestall the possibility of selling the team or even declaring bankruptcy.
“The primary reasons people settle in cases like this is to avoid the bad publicity, and avoid the possibility of a massive judgment against them,” the attorney said. “Well, the cat's already out of the bag on the publicity end. So if Wilpon isn't in a position to pay, his best shot is to go on, and hope some judge along the way says, 'Sure, he's a bright guy, but he got snookered here.'”
It wouldn't be unusual for a case like this to take a year. While the Wilpons may decide that the long route is in their interests, it will certainly not be in their team's. It is hard to imagine an owner to be aggressive about payroll decisions when he's fighting for his financial life, and when his team's already-disgusted fanbase begins to choke off that much more revenue from tickets and merchandise. Just as it's hard to imagine an agent to a talented player, if all else is equal, advising someone to go play for an embattled, financially threatened organization whose leadership may be on the verge of collapse.
The best interests of the team would be served by a sale, the sooner the better, to a capitalized owner who isn't fighting a lawsuit. But the Wilpons, apparently, have bigger things to worry about than the Mets.