Judge sets Mets-Madoff case up for possible resolution without letting the Wilpon group off the hook
10:39 pm Sep. 27, 2011
In an opinion issued Tuesday, Second District Court Judge Jed S. Rakoff provided good news to both Irving Picard, trustee for the Bernie Madoff victims, as well as Fred Wilpon and the owners of the Mets, whom the trustee is suing for $1 billion. The opinion came in response to a bid by Wilpon to have Picard's case dismissed.
The problem for Fred Wilpon and the other Sterling partners who own the Mets is that while the news is somewhat good, it likely isn't nearly good enough to remove the risk that they’ll ultimately lose the team. The problem for Mets fans is that while the news is bad, it likely isn't nearly bad enough to force an immediate sale of the team, leaving the club in limbo for a while longer.
Let's start with what the opinion means for the case itself. Picard has filed a $1 billion complaint against the Mets ownership group on behalf of the victims of Madoff’s Ponzi scheme. The complaint is divided into two parts—roughly $300 million in “fictitious profits” Wilpon and his partners withdrew from their Madoff accounts over and above what they put in, and another $700 million in principal. Picard is arguing that the Mets owners ought to pay that latter number based on the idea that the Sterling partners “knew or should have known” that Madoff was operating a fraud.
On the $300 million, Rakoff did more than just allow Picard's claim to go forward—he essentially invited the trustee to seek a summary judgment on the matter, suggesting that he'd be ready to find for Picard without the nuisance of a trial. He did leave open the question of whether Picard had a right to profits of the two years immediately preceding Madoff's big reveal, or profits over the duration of the Sterling investment with Madoff. So the judge effectively created a new “floor” of roughly $83 million, down from the full $300 million.
For the $700 million portion of the complaint, Rakoff left Picard's claim intact, but set the standard of proof at the level the Sterling lawyers argued for: they must be shown to have been willfully blind to Madoff’s wrongdoing, rather than simply having known enough about it to inquire. In essence, it is the difference between a lack of due diligence—which is easier to prove—and “intentionally choosing to blind himself to 'red flags' that suggest a high probability of fraud,” as Rakoff wrote in his decision.
So in a case absent the context this one faces, the next steps would be fairly standard ones. Rakoff clearly attempted to make extreme scenarios unlikely—one in which Picard gets all the money he’s looking for, or one in which the Wilpon group gets off with no penalty at all—to induce a settlement.
But consider that this case doesn't exist in a vacuum. The question of Picard's right to seek the full $300 million in fictitious profits has already been litigated separately, with the Sterling partners as participants against the trustee. Both a bankruptcy court judge and, more importantly, a unanimous decision by the Second Circuit Court of Appeals held that Picard's method of determining claims was valid. Since any appeal of this case would ultimately head to that court, Judge Rakoff's $83 million is only really a temporary floor. $300 million could still be the number used by the higher court.
As for the $700 million, that always promised to be the more difficult aspect of the case for Picard to prove. Rakoff described Picard's evidence “less than overwhelming in this regard,” though enough “to survive a motion to dismiss.”
But Picard has several other factors working in his favor, and against the Mets ownership group. It is the Sterling partners, not the trustee, running low on money—and months of litigation isn't free. If the case goes to trial, it is the sordid financial details of Wilpon, his brother-in-law Saul Katz, and the friends and family they did business with that would be made public. Ultimately, the case would be decided by a jury, a group likely to look more favorably upon the trustee seeking to recover money for the Bernie Madoff victims than from a group of men who indisputably profited from Madoff’s actions. And the trustee got the go-ahead from Rakoff to conduct further discovery, meaning that revelations beyond those already in his filings to date could be forthcoming.
It could be ugly.
All of those factors should have led to a settlement long before this complaint was even filed back in 2009. So why hasn't it? It may be a question that has to do with the finances of the Mets owners, and of how much Fred Wilpon and his partners can afford to pay to make this case go away.
Let's say Picard gives up all claims to his $700 million—unlikely, considering that he now has a green light to go to trial on it—and simply tells Wilpon to hand over $300 million and call it a day. The Mets owner would need to come up with not only that money, but the $200 million he planned to get from hedge funder David Einhorn before the would-be minority owner pulled out earlier this month. Einhorn's money wasn't for Picard, but was going to be put toward short-term expenses such as 2011 team losses, a loan due back to Major League Baseball, and next year's expected losses as well.
With debt of approximately $1.5 billion between the Mets, Citi Field and SNY, it is neither clear that Wilpon can raise the kind of money necessary for a settlement, nor that his other lenders will sit back and allow him to pay Picard before he pays them—a hurdle that delayed Wilpon's deal with Einhorn, don't forget.
So if the sale of the Mets or bankruptcy is the ultimate result of any settlement anyway, the Sterling partners have no motivation to settle.
Which, from a baseball perspective, is really too bad. The longer this dispute drags on, the longer the team faces the kind of financial uncertainty that makes real long-term planning impossible. This disappointing 2011 season is over, but absent a resolution to this case, the real losing has only just started.