Rakoff turns: A sympathetic judge places a crushing burden on the owners of the Mets

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Judge Jed Rakoff. ()
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As the legal and financial walls close in on Fred Wilpon and his partners, the owners of the New York Mets, their one reliable ally has been Federal District Court Judge Jed S. Rakoff. Debts are coming due and Wilpon is being sued by the trustee for the victims of Bernie Madoff's Ponzi scheme for an amount that he can't afford.

But the Wilpon group has had something going pretty consistently well for them as they've fought to hold on to their downsized team: In Rakoff's court, things have tended to go their way.

From a decision to reduce the potential liability of Wilpon and his partners from $1 billion to $386 million, to the decision to remove the case from bankruptcy court itself, Rakoff's decisions have complicated things for the Madoff trustee, Irving Picard, and provided the rare bits of good news Mets ownership has received since the day in December 2008 when the Madoff fraud was revealed. Rakoff's decisions haven't gotten them out of trouble. They have, however, bought the Mets owners some time.

But Rakoff's opinion Wednesday, that the burden is on the Wilpon group to prove that they didn't ignore warnings about Madoff's fraud, rather than on Picard, is probably the biggest decision the judge has made yet. It comes on the heels of Rakoff's ruling earlier this month that the trial was to proceed, as scheduled, on March 19.

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This is very bad for the Wilpon group.

Here's why: Fred Wilpon and his partners at Sterling Equities must now prove that a preponderance of the evidence shows that either the trustee's case does not show red flags of fraud, or that when red flags of fraud were raised to them, they acted in good faith by either having good reason to ignore them, or having investigated them and found no reason to suspect fraud.

That is a very different task from the one they faced when the burden of proof was on Picard, which would required the trustee to prove that Wilpon and his partners consciously avoided investigating these red flags to avoid learning of fraud. In essence, Picard would have needed to not only prove that the warning signs were there, but to show in particular that those warning signs did not move Wilpon and his partners to take action separating themselves from Madoff.

Let's look at some specific evidence, to see how the game has changed for both sides. Noreen Harrington, for example.

Harrington, you may remember, is the former C.I.O. of Sterling Stamos who blew the whistle. According to her testimony, she determined that Madoff was either front-running or "a fiction" in the course of providing due diligence for Sterling Stamos, an investment vehicle for Sterling Equities, and told this to Saul Katz. In response, Katz grew angry, ignored Harrington's request for a meeting with Madoff to further investigate her concerns, and Sterling Stamos shortly thereafter decided to invest in what was a Madoff feeder fund. Harrington resigned when she learned of this decision.

Now if the burden of proof rested with Picard, he'd need to prove that Katz had ample reason to trust Harrington's appraisal, would need to speak to his state of mind in both getting angry and ignoring her advice, and ultimately prove that both came from a desire on Katz's part to consciously avoid further information he'd have learned about Madoff by investigating Harrington's claims. 

Instead, it is now up to the Wilpon attorneys to show that Katz shouldn't have trusted Harrington's appraisal, even though she had been specifically hired by Sterling Stamos to provide due diligence. They also need to prove that Katz had some other reason for getting angry and ignoring Harrington's advice that wasn't conscious avoidance of further information about Madoff and the possiblity of fraud. That's a very different standard.

Another example comes from the decision by the Sterling partners in 2001 to investigate the possibility of purchasing fraud insurance against their Madoff holdings, after Katz was urged to do so by a business partner, Chuck Klein of American Securities. After pricing out the insurance, the Sterling partners determined that the insurance could only cover a small portion of their Madoff holdings, and they decided not to purchase it.

Had the burden of proof rested with the trustee, Picard would have needed to show that the reason they did this is a high suspicion of fraud. The burden now belongs to the Wilpon lawyers to show they had some other, perfectly innocent reason for exploring fraud insurance against their Madoff holdings that had nothing to do with a high suspicion of... fraud.

Exactly how the Wilpon attorneys will do this, given how many of their witnesses are also key witnesses for the plaintiff first, isn't clear. But in any case, a jury could look at things idiosyncratically, no matter what the evidence shows.

It's already unclear how the ownership group will meet the deadlines that are coming due on their various team-related debts. And now, thanks to Rakoff's opinion, Fred Wilpon's campaign to remain in the owner's box at Citi Field, even as the team falls apart under the weight of his financial problems, just got even harder.