Mets owners score in the friendly confines of District Court, hope same ground rules apply on the road

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Jeff and Fred Wilpon. ()
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With a single order issued late Wednesday morning, District Court Judge Jed S. Rakoff chopped the maximum amount Irving Picard, trustee for the Bernie Madoff victims, can seek from Fred Wilpon and the owners of the Mets from $1 billion to $386 million.

But what appears to be a clear victory for the Wilpon group could set off a chain reaction of legal maneuvers that could leave Wilpon and company with a more difficult set of trial hurdles and many of the legal underpinnings for appeal cemented against them.

Rakoff's order, when combined with Tuesday's opinion issued by Rakoff, are likely to produce a request by the trustee for an interlocutory appeal. What that means, simply, is this: Normally, a trial has to run its course, with all issues resolved, before the appeals process can begin. Interlocutory appeals are rarely granted.

But a number of mitigating factors help to make this case ripe for such consideration. To begin with, Rakoff's limited definition of potential clawback runs counter to decisions in Madoff cases of Bankruptcy Court Judge Burton R. Lifland, fellow District Court Judge Kimba Wood, and most significantly, a unanimous decision by the Second Circuit Court of Appeals last month on the specific question of how the trustee determines who is to be paid and who is to pay among Bernie Madoff's victims.

It is that final decision that matters most—it is that court which would hear an interlocutory appeal. That court didn't merely endorse Picard's specific method of determining payout in last month's opinion, but in that opinion, the court wrote that a “trustee may, and should, exercise some discretion in determining what method, or combination of methods, will best measure 'net equity.'”

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That discretion goes right to the heart of a pair of issues hugely impacted by the Rakoff opinion Tuesday and the order Wednesday: the number of years back the trustee can reach for profit recovery, and the total amount of money he can seek as a result.

Rakoff's $386 million represents two years of gains for Wilpon and his partners from Madoff: both the amount of principal they invested, in other words, and the amount of profits the withdrew. Rakoff has yet to delineate how much of that total he considers fictitious profit, and how much he considers principal.

At the same time, he wrote this in his opinion: “Specifically, the Court does not resolve on this motion whether the Trustee can avoid as profits only what defendants received in excess of their investment during the two year look back period specified by section 548 or instead the excess they received over the course of their investment with Madoff.”

So Rakoff set a very definite maximum in the case, without even defining the component parts of that number or the years it covers. That leaves him vulnerable to an Appeals court finding the need to step in and define those parameters for him. And his further declaration that “how to determine which profits the Trustee can recover remains an open question” may not conform to the Appeals court's argument last month that a reviewing court “could and should accord a degree of deference” to the trustee's methodology, as long as the method “is not clearly inferior to other methods under consideration.”

Here, too, Rakoff's opinion may be contestable, considering the larger picture of the Madoff victims overall. With all funds won in lawsuits by Picard going into a pool to pay those victims who lost more than they withdrew (“net losers”) from their Madoff accounts, limiting the application of clawback suits to just two years shifts nearly $6 billion from “net losers” to the “net winners”—people or institutions that withdrew more from their Madoff accounts than they put in. (Wilpon and his partners, for instance, are net winners.)

By the Appeals court's own words, to uphold Rakoff, they will need to find that $6 billion ought to be placed in the hands of people who profited from Madoff's fraud. Conversely, by overturning Rakoff on interlocutory appeal, they can expedite the payout to the Madoff victims who did not profit. That payout was set to begin this Friday, but lead counsel to the trustee David Sheehan said at Wednesday's hearing that those payments now need to be delayed due to the uncertainty produced by Rakoff's opinion.

That is, of course, assuming the Appeals court even gets the chance. Before an interlocutory appeal can be accepted by the Appeals court, Rakoff will need to allow the trustee's request to be heard. Rakoff can simply deny this request. The result could be months of litigation: a trial that begins on March 19, followed by an overturn on appeal, and even a remanding of the case back to Rakoff, under adjusted parameters, for another trial. An appeal at trial's end is likely regardless, but an interlocutory appeal would resolve many those issues now.

Just how concerned Rakoff is by the possibility of getting overturned in this case, and by being overturned by higher courts generally, isn't clear. He paid little heed to the Appeals court's opinion during Wednesday's hearing, mentioning a desire to be “sort of consistent with the spirit, although I don't think it's necessarily more than that” with the higher court's ruling.

(Exactly one year ago today, the Second Circuit Court of Appeals overturned a Rakoff ruling through interlocutory appeal, regarding an issue in a civil case stemming from the insider-trading case of Raj Rajaratnam, writing that Rakoff had “clearly exceeded his discretion.”

As Rakoff said at a hearing in August, “Welcome to my ballpark." It is his ballpark, but the ground rules may yet be adjusted by the court above him.