Sterling Mets Counter with Motion to Dismiss

Posted on March 25, 2011 by Matthew Stockwell
 
By now, mostly everyone is aware that Irvin Picard has been appointed Trustee to oversee recovery of funds from the Madoff fraud for Madoff’s victims, and that Picard is targeting Fred Wilpon, owner of the Mets, his partner Saul Katz and several Sterling entities (collectively referred to as “Sterling”). Picard has had the benefit of pre-suit discovery, in that he was permitted to obtain extensive documents and deposition testimony before litigating. Picard took discovery from numerous third parties, including Sterling’s banks, Sterling Stamos Partners, Merrill Lynch, Bank of America, and possibly other financial institutions. The Bankruptcy Court rules do not require Picard to disclose the evidence at this stage of the proceeding, leaving Sterling at a major disadvantage. Picard’s strategy apparently was to scare Sterling into settling at mediation with former Governor Cuomo. Settlement has not been reached, and last week, Picard amended his Complaint against Sterling to include additional factual allegations indicating Sterling knew or should have known of Madoff’s fraudulent activities.

Sterling, in turn, filed a motion for summary judgment, seeking dismissal of the Amended Complaint, based primarily upon deposition transcripts that Picard refused to provide to Sterling. The motion begins by arguing that the “crux” of Picard’s Complaint is that Sterling was repeatedly warned by Peter Stamos of Sterling Stamos Partners that Madoff was a fraud. Based upon those warnings, Picard claims Sterling knew or should have known that its withdrawals were the product of Madoff’s Ponzi scheme. Sterling’s attorneys, however, cite to deposition testimony given by Stamos (which Sterling’s attorneys obtained from Stamos’ attorney) that he described Madoff to Saul Katz as “the most honest and honorable man,” and that he is “perhaps one of the best hedge fund managers in modern times.” Although Stamos did recommend that Sterling not invest more than 10% in one manager, he testified that this was simply a recommendation for purposes of diversification and competition with Madoff.

With regard to Picard’s claim that Saul Katz, David Katz and other Sterling partners were experts in the brokerage/investment business, Picard has evidence including marketing literature and a hedge fund questionnaire completed by a Sterling entity, that hold Sterling out as experts and decision-makers on investment strategies, although Stamos testified at his deposition that these items were “market puffery,” and called the questionnaire “inaccurate.” Saul Katz testified that he and his son had absolutely no involvement in investment strategies.
 
Sterling also makes a legal argument (and I’m simplifying it to keep this post as short as possible) that Sterling was entitled to rely on its brokerage statements, and securities laws grant Sterling protection unless Picard can prove that Sterling knew it was investing in a Ponzi scheme.

A summary judgment motion is extremely difficult to win at such an early stage. In order to grant a summary judgment motion, the court must find that there are no important disputed facts, and that the party seeking dismissal is entitled to judgment as a matter of law. In a dispute as complex as this, it is very easy for a Judge to find an issue of fact, especially since discovery has not been completed. However, a review of the 94-page motion reveals that Picard may not have been as forthcoming as to the evidence he obtained, and the factual allegations he asserted. Even if the motion is not immediately successful, it is a brilliant strategic maneuver by Sterling’s attorneys that will force Picard to reveal some of his cards. If Picard has evidence to show that Sterling knew or should have known of Madoff’s scheme, now will be the time to disclose it to the court, to avoid dismissal of his Complaint against Sterling. If there is such evidence, at least Sterling will know about it, and can act accordingly at mediation/settlement discussions. If there is no “smoking gun,” Sterling could obtain an outright dismissal (unlikely), but if not, would certainly strengthen its position and negotiating stance. Also, a motion such as this will delay the case several months, and provide an opportunity for Sterling’s lawyers to further investigate whatever discovery Picard may have.

Interestingly, in just a few days after Sterling’s motion was filed, an attorney for several Madoff victims called for Picard’s resignation as trustee.  Helen Davis Chaitman accused Picard of withholding vital information when he reached a $220 million settlement with Norman Levy, and is attempting to have the settlement set aside.

Picard’s opposition is due in mid-May, and Sterling will then have 30 days to respond, before the motion is even submitted to Judge Lifland.

 

 

 
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