The Wilpon group settles with the Madoff victims, freeing them to deal with more pressing debts
The Mets ownership group may yet lose control of their baseball team—possibly quite soon—but it won't be because of the massive, high-profile lawsuit brought against them by the trustee for the victims of Bernie Madoff's Ponzi scheme.
The lawsuit by the trustee, Irving Picard, was set to go to trial today, with the short-term fate of the Mets effectively in the balance. The owners, led by Mets C.E.O. Fred Wilpon, face a huge amount of debt, and any judgment that forced them to come up with any significant amount of money quickly would likely have forced them into bankruptcy or an outright sale of the team, or both.
Neither of those things will happen, yet, as Picard settled with Wilpon and his partners for $162 million, with no money down. The owners' first payment won't be due until April 2016.
At least temporarily, this is a significant win for the owners, despite the fact that they're settling with a man who they had until today characterized as an out-of-control plaintiff pursuing a baseless vendetta. But it buys them time, and removes the most immediate threat to their ownership of the Mets.
Ultimately, it was the very precariousness of the Wilpon group's financial position that motivated the trustee to settle, since that was what made immediate recovery of funds impossible. What Picard did under the circumstances was take the best possible deal he thought he could make for the Ponzi victims: The total amount is more than the Mets owners would likely have been asked to surrender immediately, even if they could afford it.
It's likely Picard would have fared well in front of a jury. After all, whistleblower Noreen Harrington, who has testified that Wilpon's partner Saul Katz knew that something was amiss with Madoff, didn't disappear, nor did the mountain of evidence and 18 witnesses Picard planned to call.
But even if Picard prevailed, the amount of money he could recover from Wilpon and his partners would have fallen well short of any judgment. The Mets owners would likely have been driven into bankruptcy, which would essentially have put Picard into a different battle, scrambling against banks who hold the $430 million debt against the team due in 2014, a $450 million debt against SNY due in 2015, and roughly $600 million still due the City of New York on Citi Field, along with shorter-term debt like the $40 million bridge loan taken out last November, and the $25 million the Mets still owe Major League Baseball.
That would have been the case even if he won the full $386 million he was eligible to seek in the current trial, or if he managed to increase that number on appeal to the $1 billion he originally sought. And let's assume he managed, after the additional time necessary to fend off the banks, to get it. That still might amount to less than the value, both in terms of total money to recover and the time it would take to do it, he garnered through today's settlement.
That's not just because of the possibility of bankruptcy, and how complicated that would have made everything. As a result of the settlement, Wilpon and his partners agreed to drop their participation in the appeal to the Supreme Court that took issue with Picard's method of determining what each Madoff customer would receive. Picard's method was to determine exactly what each entity had put in, what it had taken out, with the difference serving as what that entity was owed.
Wilpon had been part of a suit that actually predated the matter settled Monday, arguing that the amount of equity each entity had on its last statement was the correct amount of money to claim. The problem with this argument is obvious—instead of reality dictating the money owed, entities would be entitled to whatever Bernie Madoff dreamed up right before his scheme ended. And both Bankruptcy Court and the Second Circuit Court of Appeals had ruled in favor of the trustee.
But while the appeal to the U.S. Supreme Court was a longshot, as long as the issue remained in litigation, the trustee could not distribute more than $6 billion in already-recovered money to the victims. Wilpon dropping the appeal clears the way for the trustee to pay that money out.
In addition, the settlement explicitly states that the amount arrived at represents a six-year standard of recovered money. That is vital for the trustee in approximately 250 other cases involving net winners. The difference between the trustee being able to reach back two years, a standard Rakoff alone came up with in the Wilpon case, and the six years the U.S. Bankruptcy Code prescribes, is worth approximately another $6 billion into the Madoff victim fund.
Compared to a bankruptcy and a messy court fight lasting years, the settlement provides significant value, and even lets the trustee marshal his resources elsewhere. That the $162 million ultimately comes from the pool of Madoff net losers should be vaguely galling to the actual net losers, since it means they are paying for Wilpon's inability to pay. But it is after all the trustee's responsibility to maximize returns for the victims, not settle scores.
In terms of what this means to the Wilpon group's continued ability to hang onto the Mets, who have sent their best players elsewhere as part of a post-Madoff downsizing, they're still in the position of needing to come up with a bunch of money they don't have, fast. They're still short of the ten minority owners and $200 million they were seeking in order to be able to pay off short-term debts and make a down payment on their 2014 debt against the team. They still need to do those things just in order to survive.
As of last week, the Wilpon group had still only manged to find seven committed stakeholders. Two are already partners in the ownership group (and members of Fred Wilpon's family), Saul Katz and Jeff Wilpon. Four were from Mets-affiliated cable network SNY, which has a stake in keeping the network and the Mets in the same hands as one another. And the seventh was Steven A. Cohen, manager of the hedge fund SAC Partners, whose bid had more to do with earning goodwill from M.L.B. Commissioner Bud Selig in pursuit of his real target, the majority stake in the Los Angeles Dodgers.
One relevant question now is whether other potential investors were scared off by the Picard lawsuit, in which case they might hypothetically feel differently about investing in the team, or if the enormous financial burdens facing the current owners still make the proposition a nonstarter. After all, it's still not a great deal, at least in money terms: They're being asked to put up $20 million, with a nominal return of three percent annual interest and no option to cash out until 2018.
The answer to that question should come soon enough, either through a finalizing of those minority ownerships, or a bankruptcy triggered by Wilpon and his partners' failure to pay one upcoming obligation or another. But a trial, which might at least have provided some finality to a saga that has gone on for far too long in the eyes of Mets fans—it was scheduled to end on April 3, just two days before the Mets begin the season by hosting the Braves—has been averted.
Picard is now out of the picture. Apparently pursuing justice on behalf of one brutalized constituency was enough for him.