11:53 am Jul. 7, 2011
The decision by United States district court judge Jed S. Rakoff to take over the case brought by court-appointed trustee of the Bernie Madoff victims, Irving Picard, against the owners of the NewYork Mets is good news for the owners. But it doesn't mean they’re in the clear.
Instead, think of the decision like a game-tying hit in the ninth inning. There will be extra innings; Fred Wilpon and his company, Sterling Partners, may well lose the case, and the Mets. But the game isn't over.
The situation seemed to be reflected in the muted tone of the statement put out by the Sterling Partners about the decision. The combative tone that has followed each legal setback disappeared. Instead, they simply said: “The motion filed by the Sterling Partners to withdraw the reference was granted Friday by Judge Rakoff. Judge Rakoff has set a briefing schedule and there will be a hearing with respect to the legal issues presented in Sterling’s motion to dismiss the lawsuit.”
Had Rakoff left the $1 billion suit brought by Picard against the Sterling Partners in bankruptcy court, Sterling would almost certainly have been on the hook for at least $300 million in “fictitious profits”—the money Picard says they made over the course of their investing with Madoff, and which he was seeking to reclaim in order to disburse among the victims of the Madoff scam. The bankruptcy court judge, Burton R. Lifland, had already ruled in favor of Picard's formula.
And it is not at all clear that Sterling Partners would be able to come up with the money to pay that fictitious profit back, considering that they already needed to sell a conditions-laden minority stake in the Mets (for $200 million to Greenlight Capital's David Einhorn) just to pay some immediate debts.
So Rakoff's decision, at least temporarily, fends off the specter of bankruptcy. His stated reason for taking charge of the case was to provide a ruling on the responsibility of Sterling Partners to act on warnings they received about Madoff, after which he could return the case to bankruptcy court. Since responsibility is the fundamental question Picard raises in the $700 million portion of his complaint against the Sterling Partners, but not the $300 million, a favorable ruling on that issue alone probably wouldn't provide Fred Wilpon and his partners with salvation.
But Rakoff has options here. He can also now choose to allow the case to move forward in his own court, where Lifland's endorsement of Picard's “cash in minus cash out” formula could be revised. If he harbors serious doubts about the Sterling Partners' complicity, he could decide that such a formula is unduly punitive, and reduce some of that $300 million as well—as a starting point. (That formula is also under appeal, in a case currently before the Second Circuit Court of Appeals). So it means the Wilpons wouldn’t necessarily be on the hook for any set amount, Madoff-wise.
Ultimately, if it is determined that the case will be decided in a venue that is less friendly to him, it could suddenly be in Picard's best interest to settle for far less than the $1 billion he is currently seeking. In bankruptcy court, $300 million was the floor. If Rakoff rules that it wasn’t the responsibility of Sterling Partners to act on on the warnings they received, it wipes away the rationale for Picard seeking $700 million, $300 million becomes the ceiling.
There is also the possibility now that the case will be thrown out. The motion to dismiss the case will be heard in August, in Rakoff's, not Lifland's court. Obviously, a dismissal wouldn't clear away the hundreds of millions in debt Sterling Partners have against both the Mets and SNY—but it would take an impossible task and make it possible, if difficult.
The primary business focus of the Wilpons and their would then shift to making enough money to return the $200 million to Einhorn, who would otherwise be poised to take control of the Mets in a few years.
Whether the Wilpons, in this best-case scenario for them, would be able to afford to run the Mets as a big-payroll team, as they have in the past, is unclear. For now, Mets general manager Sandy Alderson sounds like he’s in no rush to start breaking up the current, expensive roster, despite the fact that Fred Wilpon has hinted that the Mets payroll may be drastically smaller by next year.
What Rakoff has done here is to express doubt about the capability of bankruptcy law of making an informed judgment on “duty of inquiry”—the legal term for the responsibility the Sterling Partners had for the evidence presented to them about what Madoff was doing. He has yet to come to a decision on that matter himself, though. He may impose a higher standard of proof on Picard, and he may even end up sending the case back to bankruptcy court.
What happens in extra innings is anyone’s guess.