Madoff-victim trustee Irving Picard makes tragic 'winners' of the Mets ownership group
For a while now, the owners of the Mets have had a massive problem in the problem in the person of Irving Picard, the court-appointed trustee for the victims of Bernie Madoff’s Ponzi scheme.
Picard has filed a complaint against the owners—Sterling Equities, and its principals Fred Wilpon—for $1 billion, including $300 million in fictitious profits. It’s an amount that would almost certainly cost them the team, if not everything else they own, too.
The Mets owners were recently given reason to hope when their lawyers succeeded in getting their case moved to a friendlier jurisdiction. On Friday, August 19, they will go before Second Circuit Court judge Jed S. Rakoff—who they believe to be more skeptical about Picard’s claims than the judge who had previously been in charge of the case—in an effort to get the complaint dismissed.
But a ruling on Tuesday by the Second Circuit Court of Appeals—the court above Rakoff's—affirming Picard's formula for determining what they owe may make their effort moot.
The unanimous verdict (issued by Judge Dennis G. Jacobs, a George H.W. Bush appointee, and joined by Judge Pierre N. Leval, a Clinton appointee, and Judge Reena Raggi, a George W. Bush appointee) held that Picard's method for determining which clients of Bernie Madoff owed money, and which were due money, was the correct one.
As a result, even if Judge Rakoff were to find fully for Sterling Equities and dismiss the case, Picard would have the opportunity to appeal the decision, an appeal that would be heard by the same appeals court that just ruled in his favor.
“The Second Circuit’s decision upholding the Trustee’s definition of net equity as applied to the Madoff Ponzi fraud is an important step forward for customers with allowed claims,” Amanda Remus, spokeswoman for Picard, said in a statement. “We have maintained all along that our definition of net equity—which is supported by longstanding precedents in bankruptcy and securities law—is the fairest approach to the determination of claims, and we hope that the Court’s decision can be the final word on this issue.”
That approach, which has now been affirmed by both bankruptcy court judge Burton R. Lifland and now by a trio of Appeals Court judges, says that the Wilpon group owes $300 million in what Picard calls “fictitious profits”—what he believes to be the difference between the amount of money Sterling gave Madoff over the years, and what they got back from him. Considering the already precarious financial position the Wilpons are in, such a judgment is likely to finally force them to sell.
“The decision of the Second Circuit upheld the Trustee’s approach to determining the amounts that customers can claim against the SIPC fund and the BLMIS estate for recovery of the losses in their brokerage accounts,” Sterling Equities said in an emailed statement. “The decision did not address the validity of lawsuits filed by the BLMIS estate against brokerage customers, including the Trustee’s lawsuit against the Sterling Equities. As we have made clear in our motion to dismiss that lawsuit, which is pending before the Circuit Court, the claims and allegations in the Trustee’s lawsuit against the Sterling Equities are without factual or legal merit.”
In essence, what they are trying to say is the $700 million, the part based on whether they knew or should have known that Madoff was breaking the law, was not addressed by this decision. But the financial position of the Wilpons means that if they are found to owe and can't pay $300 million, game’s over anyway.
Short of the United States Supreme Court granting a writ of certiorari for this case—about 98-99 percent of all appeals for one are denied, and it is far from clear this case offers the requisite larger questions of law that would lead to a successful attempt—this battle will end in the Second
District Circuit Court of Appeals. And Tuesday's decision was filled with reasons to think that's bad news for the Wilpons, and good news for Picard.
At the center of the battle were a pair of theories for how victims of the Madoff scheme should be determined. Picard has maintained that the “net investment method”—the amount each investor gave to Madoff, minus the amount each investor took out—would determine what each investor was entitled to get from his recovery efforts. In the event an investor took out more than he put in, he'd be a net winner, entitled to no compensation, and would owe the difference between investment and withdrawal.
The Wilpons, and others designated as net winners, advocated for the “last statement method”, maintaining, not unreasonably, that they'd provided funds to Bernie Madoff for investing, and were therefore protected under the Securities Investor Protection Act (SIPA). The problem with this argument was that Madoff never invested anything, and made up his statements arbitrarily.
Ultimately, both Lifland and the Appeals Court judges came to the same conclusion: that Irving Picard, the man legally charged with distributing funds, was a more appropriate arbiter to do so than Bernie Madoff the scam artist. To accept Picard's method meant both using actual money invested, and did not provide an arbitrary advantage to those who managed to get credited with more money in Madoff's own mind.
The decision doesn't mean that Picard has a clear path to getting the full $1 billion he’s seeking. To be clear, Jacobs specifically wrote in the decision that: “It is not contended on this appeal that any victim knew or should have known that the investments and customer statements were fictitious. It is unquestioned that the great majority of investors relied on their customer statements for purposes of financial planning and tax reporting, to their terrible detriment.”
So Picard cannot assume that his theories behind seeking that $700 million from the Mets will find a receptive ear in this court. But Jacobs did speak favorably of the need to “grant... a measure of latitude to a SIPA trustee” for “the unraveling of weaved-up sins.” In essence, while Jacobs didn't believe either standard could be read directly from SIPA itself, he felt Picard was well within his duties to make the resulting judgment call.
Jacobs also asserts, in support of Picard's ability to make this call, that “A SIPA liquidation is a hybrid proceeding”, and quoted Judge Lifland saying that “SIPA and the [Bankruptcy] Code intersect to . . . grant a SIPA trustee the power to avoid fraudulent transfers for the benefit of customers.” In short, Jacobs appears to be endorsing more than just Picard's method on this particular question; he appears to be endorsing the case proceeding in bankruptcy court itself. The Sterling argument has been that the irregular nature of the proceedings mean federal district court is the correct venue for the suit, not bankruptcy court.
That runs counter to the hopes of Wilpon's group, who want Judge Rakoff on Friday, if he doesn't dismiss the case outright, to keep it in his court. After all, a return to bankruptcy court both returns the burden of proof onto the Wilpons, rather than Picard, and returns Judge Lifland to the helm of the case. Lifland is the one who selected Picard as trustee, so he’s likely to have confidence in Picard's subsequent activities.
The problem for the Sterling group now is that even if Rakoff rules for them Friday, the likely final court seems to see things the way bankruptcy court does. For the Wilpons, who pretty much need everything to go right in order to have a chance of holding onto the Mets, Tuesday's decision went very badly wrong.