8:27 am Mar. 23, 2011
Lost amid news of the long-expected releases Luis Castillo and Oliver Perez, Sterling Equities—a group that includes Fred Wilpon, CEO and owner of the New York Mets—formally responded to a complaint against them by Irving Picard, the appointed trustee for the victims of Bernie Madoff's Ponzi scheme.
As expected, the 107-page response offers a sympathetic take on a number of key pieces of evidence against the principals of Sterling. It attempts to explain and excuse the fact that the Wilpons (Fred and his son Jeff, who is COO of the Mets and executive vice president of Sterling) were beneficiaries of Madoff's criminal activity by establishing their ignorance of what was being done on their behalf.
This will all be relevant in determining just how much the Wilpons and Sterling will eventually owe of the more than $1 billion Picard seeks from them.
The question is how much that actually matters.The fact is that much of the public interest in the case has to do with whether the Wilpons can possibly emerge from all of this as owners of the New York Mets. On that question, the arguments about what they knew and when they knew it are already academic. Things are too far gone.
Ever since the Madoff affair became public in December 2008, the financial soundness of the Wilpon ownership group has been the subject of speculation. In 2009 came of the first of the reports that the Mets would eventually have to sell part or all of the team. The Mets vigorously pushed back against the claim. Only in January 2011 did the Wilpons acknowledge their position by publicly, humblingly, announcing that they were looking for a partner to pour capital into the organization, stating that they were doing so “to address the air of uncertainty created by this lawsuit.”
Subsequent revelations made it clear that the lawsuit was beside the point. The collapse of the Madoff scheme, which funded nearly every aspect of the team's operations, is what crippled the team's finances. The Wilpon group needs money just to operate the team right now, even if Picard goes away tomorrow (which he won't). The lawsuit may simply serve to accelerate the inevitable.
The suit, weirdly, has made it possible to overlook just how much financial trouble the Wilpon ownership group appears to be in. By timing the announcement of a partial sale of the time to coincide with Picard's announcement that he would be seeking a billion dollars from them, the Wilpons implied that the infusion of money they were seeking was to be a sort of buffer against an unfavorable legal decision. But Mets general counsel David Cohen subsequently acknowledged to the Times that any proceeds from a sale would go toward operating the team, not toward settling the lawsuit. (Where the Wilpons would get the money to pay off the suit is even less clear.)
The numbers here have never really made sense, in terms of how they can simultaneously be in need of the money they'd bring in by selling part of the team, but in possession of enough money to continue to own it.
For the minority, non-controlling stake in the Mets that Fred Wilpon has suggested would be in the range of 20-25 percent to some lucky buyer, the Mets are reportedly seeking $200 million. If the team were worth $845 million, as Forbes appraises the Mets, that might be rational. But the Mets also own more than $500 million in debt, making the effective value of the team much lower.
The idea of the Wilpons packaging a share of the Mets with a stake in SNY, the network that owns the rights to televise Mets games, is a non-starter for several reasons: the minority owners have a right to block any sale, and it has been reported that the Wilpons need to turn over proceeds of a sale to settle debts they incurred last summer, using SNY as collateral.
And the threat of Picard's suit, which names not only the Sterling partners but the New York Mets franchise itself, further reduces the real value of the team and the Wilpons' options in using it to leverage new cash.
As for the substance of the Wilpons' response to the suit, the credibility of each side's testimony will determine whether their version of events, in which they had no idea what Madoff was doing, or Picard's (in which they did, and in which the accounts of individual witnesses seem to conflict with what the Wilpons have them saying) prevails.
For instance, one of the red flags Picard cites as evidence the Wilpons willfully ignored the possibility of Madoff's wrongdoing is internal warnings from Sterling Equities' own hedge fund, Sterling Stamos, specifically from the firm's chief investment officer, Ashok Chachra. Picard cited a December 13, 2008 email from Chachra, two days after the Madoff scam was revealed, in which he stated that Sterling Stamos “turned down the Madoff Funds more then [sic] 6 years ago and told many of our investors including the Wilpon and Katz families about our concerns.” In the Sterling partners' response, they quote Chachra from a deposition saying there was “no reason to think there was anything wrong” with Madoff's operation.
Similar contentions are raised over Arthur Friedman, a partner who managed the 183 Sterling accounts with Madoff. Picard cites Friedman's multiple efforts to replicate Madoff's profits using Madoff's methods, his failure to do so, and his communication of this failure to the other Sterling partners as another example of willfully ignoring evidence of Madoff's malfeasance. In the Sterling response, Friedman is said to have failed to replicate Madoff's success, but to have used Madoff's methods to turn a smaller profit, and therefore, according to the response, “viewed the exercise as an unequivocal success.”
But that entire argument is over the approximately $700 million that Picard is seeking on top of the $300 million he wants Sterling to pay for “fictitious profits” (his calculation of the difference between what they put into Madoff's operation and what they took out before the scheme collapsed). The response to Picard's complaint attempts to dispute this, but the matter of those profits has already been argued before Federal Bankruptcy Judge Burton L. Lifland (the judge in this case) and adjudicated.
In short, any eventual settlement or judgment probably has a floor of $300 million. That's a number that far exceeds even the fanciful amount the Wilpons are seeking for a minority stake in the team.
With all the challenges the Wilpons face in the meantime—payroll costs (even Castillo and Perez get paid, though they've been released), a $22 million construction bond payment due at the end of June, and a controversial credit line from Major League Baseball now completely tapped out—it seems like the only way they could hang on would be to make hundreds of millions of dollars materialize out of thin air.
And we all know what happened the last time they did that.