The whistleblower returns: Noreen Harrington, once the star witness in a Spitzer crusade, testifies that the Mets owners knew about Madoff
3:36 am Feb. 10, 20128
For just over a year now, the evidence facing Fred Wilpon, Saul Katz and the other Sterling Equities partners who own the New York Mets has been debated in court filings from Wilpon's attorneys, as well as the filings of the trustee for the Bernie Madoff victims, Irving Picard.
And with the $386 million lawsuit brought by Picard against Wilpon and his partners—who are already under great financial strain and struggling to hold on to the Mets—speeding toward a March 19 trial, the latest court filings include testimony from a woman whose contention about what the partners knew and when they knew it could decide the whole ballgame.
The woman is Noreen Harrington, an accomplished financial executive who was last in the news for blowing the whistle on an unrelated scam, leading to the exposure of the mutual fund scandal of 2003.
Back in 2002, the Sterling Partners made the decision to diversify their holdings, which had been nearly entirely invested with Bernie Madoff, in an alternate investment vehicle called Sterling Stamos (the latter part of the name taken from their partner in the endeavor, Peter Stamos).
Sterling Stamos hired Harrington (who had already quit her previous job, but had not yet turned whistleblower) as chief investment officer for the new company, putting her in charge of things like selecting fund managers to invest with, and performing due diligence on those selections.
In 2003, Harrington met with a man named Ezra Merkin. According to Harrington, Katz had enthusiastically recommended that Sterling Stamos invest with Merkin due to the financier's “Madoff-like” returns. What Harrington found out in the meeting, according to her deposition, was that the reason for these similar returns was that Ezra Merkin was, in fact, simply a feeder fund for Bernie Madoff.
According to Harrington, when she explained the due diligence she would need to undertake before Sterling Stamos could invest with him, Merkin grew belligerent, telling her: “You don't get it, do you? This is a privilege. You don't get to ask questions.”
Between the red flag that Merkin, like Madoff, converted his holdings to cash at the end of each month—a trick to avoid regulatory scrutiny—and numerous other problematic practices, it was Harrington's strong recommendation that Sterling Stamos not invest with Merkin. Additional due diligence revealed that Madoff and Merkin's strategies did not result in the returns they both claimed, while their footprint in the marketplace was not apparent based on the trades they claimed to have made.
Here's where it gets problematic for the Sterling partners. Harrington says she then met with Saul Katz, his son and fellow Sterling partner David Katz, and Peter Stamos. Harrington said she explained her recommendation and the reasons for it, and when Saul Katz asked her what the actual reason for the consistent, positive returns could be, Harrington told him they must be bogus.
“I made an accusation of front-running, which is profitable and non-correlated, but also illegal,” she testified. “And I said, if it wasn't that, I believed it was fiction. And to that he said, what do you mean by fiction? And I said, I don't believe the numbers are worth the paper they're printed on.”
According to Harrington, Katz grew angry in response, and ultimately rejected her arguments. She asked for a meeting with Madoff to address her concerns, but never received one. Once Peter Stamos informed her that Sterling Stamos would make the investment with Merkin, Harrington resigned. She did so, she says, directly in response to this decision: “If we forego the process, then we have lied to our investors and we haven't done the work we were hired to do and I will not do that,” she testified.
Sterling is going to have to try to rebut this testimony, but it won’t be easy, given Harrington’s background. She worked in executive capacities in Goldman Sachs and Merrill Lynch, and more importantly, was the whistleblower at Stern Asset Management, helping uncover the mutual fund scandal of 2003, which resulted in a number of convictions. In that case, Harrington's testimony not only held up but proved to crucial in prosecuting the wrongdoers.
"We said, 'That can't be true,'" said then-attorney general Eliot Spitzer when Harrington first came forward. "But every single fact that she alleged has been proven out."
More recently, Harrington has talked publicly about her experience with Sterling and Madoff, presenting a version of events that is consistent with her testimony, which has her trying to tell the Mets’ owners that Madoff’s operation couldn’t possibly be legitimate, trying and failing to secure a meeting with Madoff, getting told off by Merkin for asking too many question, then walking away, as Sterling continued to pour money into what turned out to be a Ponzi scheme.
Saul Katz, in his own testimony, simply says he doesn't remember meeting with Harrington. This is also his defense for an array of other evidence against the Sterling partners, from Katz signing a fraudulent document concerning a $54 million loan from Madoff disguised as an investment from Madoff's wife, to a letter to the New York State attorney general that excluded Bernie Madoff from a mandatory filing on Katz's investments, and several other meetings and documents presented by the trustee as well.
It is fair to wonder how many times the jury is going to accept I don’t remember from Katz, particularly if Harrington, a celebrated whistleblower, is credible when she takes the stand.
And while Peter Stamos says he remembers the meeting, he says he doesn't remember any concerns about Madoff raised by Harrington in that meeting, according to the Sterling attorneys' brief asking for summary judgment filed last month.
It would be very convenient for Stamos if he couldn’t in fact recall this—otherwise, it would mean he disregarded his own C.I.O.'s recommendations about what turned out to be a massive fraud. (Incidentally, Stamos' own brother, Basil, testified that about a year later, Peter cleared out all of his family's personal investments with Madoff, and emails from both Basil and other Sterling Stamos employees just after the incident tout Peter's ability to see Madoff as a fraud years ahead of time.)
All of which means that if the Sterling partners can't impugn Harrington on the witness stand, Irving Picard has an eyewitness telling a jury that after being hired by Saul Katz to perform due diligence, she presented Saul Katz directly with evidence that Bernie Madoff was a fraud—and Katz chose to turn away. In a willful blindness case, that's the kind of thing a verdict turns on.