9:45 pm Jan. 17, 20126
More than three months ago, Irving Picard, the trustee for the Bernie Madoff victims, sought expedited answers to a number of questions in his lawsuit against Mets owner Fred Wilpon and his Sterling Equities group through interlocutory appeal, or an appeal to the Second Circuit Court of Appeals prior to completion of the March 19 trial in Federal District Court.
The appeal was necessary because the presiding judge Jed S. Rakoff's Sept. 27 opinion, which was at odds with both the precedent in other similar cases and a decision by the Second Circuit, raised uncertainty and the possibility of additional litigation in approximately 250 other "net winner" cases involving former Madoff clients, with $6 billion in potential remuneration to Madoff's "net losers" hanging in the balance.
On Tuesday, Judge Jed S. Rakoff, whose permission was needed to allow that appeal to go forward, rejected it. (Read the opinion here.) The primary reason, according to his written opinion, is that such an appeal would “materially delay, rather than materially advance, the ultimate termination of the litigation.”
So after a three-month wait for this decision, the March 19 trial will now apparently have to run its course before anyone even knows what the next step is.
This is a victory for no one. Rakoff's decision delays the inevitable resolution of the case, whatever it may be, creating more work for the trustee, more delay for the net losers, and more legal fees for the net winners to pay out in the meantime.
Think of it this way: the trustee, Picard, had originally sought $1 billion from Wilpon and his partners. $295 million of that was "fictitious profits," or the money they'd received from Bernie Madoff over and above what they'd given to him to invest. The other $700 million was principal paid by Wilpon and his partners to Madoff, which Picard sought to recover on the basis that Wilpon knew or should have known that Madoff was engaging in fraudulent activity.
In his Sept. 27 opinion, Rakoff—who is a proud, habitual contrarian—reduced the total amount of money Picard could seek to $386 million, reduced the period of time for which the Wilpon group could be held accountable (the "look back" period) from six years prior to the discovery of the Ponzi scheme to just two, and elevated the level of proof required of Picard from “inquiry notice” to “willful blindness.”
That meant Picard could seek a maximum of $83 million in fictitious profits, and $303 million in principal. Under inquiry notice, it was necessary for the Sterling partners to have investigated if they saw “potential red flags” suggesting fraud. Under willful blindness, Picard needs to prove that they saw a high probability of fraud and looked away from it.
It is likely that Rakoff's view will fail to hold up on appeal. For instance, his taking issue with Picard's methodology runs counter an Aug. 16 Second Circuit decision endorsing not just Picard's way of determining who owed what to whom among Madoff investors, but broadly endorsing his right to make that determination. In other words, unless the Second Circuit reverses its own unanimous ruling, the amount of fictitious profits Wilpon and his partners will potentially owe would return to nearly $300 million on appeal.
That provides Picard with no incentive to settle now. To do so would have the effect of setting in stone Rakoff's look-back period for other net winners—he's currently in litigation with approximately 250 of them—and deny him the chance to go after another $6 billion that would be distributed to the net losers. That's a whole lot of incentive to move forward to trial, leaving aside the questions over principal.
Now consider that regardless of how the Second Circuit feels about those other questions—willful blindness vs. inquiry notice, etc.—if they'd gotten the chance to weigh in on them now, the trial could have moved forward with both sides aware of what terms would ultimately matter. Instead, the trial will go forward on Rakoff's terms, and a costly appeal will follow.
If the Second Circuit determines that the wrong standard was used, for instance, their likeliest remedy is to remand the case to Rakoff's court for another trial—this time, on the Second Circuit's terms.
Meanwhile, Tuesday's decision allows Rakoff to continue holding forth as if his view of things is determinative. His reason for denying the interlocutory appeal is rooted in a belief that the trial itself would answer some of the questions raised by Picard's appeal. But that, too, presumes the Second Circuit will look upon Rakoff's view of those questions as the final word; there's simply no reason to believe it will.
The net winners, like Wilpon and Sterling Partners, will spend additional months in litigation. And the trustee, who, it must be remembered, would be derelict in his duties not to go after all potential recovery money for the Madoff victims, will have his time taken up by unnecessary litigation to go along with the minor matter of unwinding the largest Ponzi scheme the world has ever seen.
Judge Rakoff dismissed these claims by the trustee, without addressing them in specific, as “a parade of horribles.” If a judicial action satisfies no one, leaves net winners like the Wilpon group (and their creditors, and the baseball team they happen to own) hanging, and prolongs the financial agony of those who were truly victimized by Bernie Madoff, that sarcastic description doesn't actually seem very far from the mark.