New York Mets Madoff Update
Mets Owner Fred Wilpon and his companies obtained a partial victory last week, after Judge Jed Rakoff dismissed a portion of Madoff Bankruptcy Trustee Irving Picard's "claw back" lawsuit against Wilpon/Katz/Sterling (collectively, "Sterling"). While the decision does significantly reduce Sterling's exposure, Judge Rakoff left some questions unanswered, and the Court's ruling is not as overly favorable as is being reported.
Judge Rakoff did dismiss all claims against Sterling that do not allege actual fraud or equitable subordination (a claim essentially seeking to subordinate any of Sterling's claims of lost profits to that of other victims based upon Sterling's alleged conduct). Picard alleges that Sterling knew or should have known that its withdrawals were the product of Madoff’s Ponzi scheme. Judge Rakoff held as a matter of law that the "safe harbor" provision of the Bankruptcy Code protected customers like Sterling - meaning that payments made by Madoff to its customers are considered "settlement payments" that a Bankruptcy Trustee such as Picard cannot "claw back" from the customer, unless there is evidence of actual fraud. This wiped away a substantial part of Picard's Complaint.
However, since the "safe harbor" provision does not protect against fraud, Judge Rakoff declined to dismiss the remainder of Picard's Complaint. For example, since Madoff transferred money to some customers to avoid paying other customers (the intent of a Ponzi scheme), those customers that benefited are subject to "claw back." Judge Rakoff determined that the Trustee can recover any of Sterling's profits, but can only seek principal that Sterling paid to Madoff by showing that Sterling "willfully blinded" itself to Madoff's fraud. It has been reported that the net result is that Sterling's exposure is now either $83 million or $295 million - the former being Sterling's alleged profits over a two year period prior to the bankruptcy filing, and the latter being Sterling's alleged profits over the course of the investment. In contrast to multiple articles and statements claiming that the Trustee's recovery is limited to a two year period preceding the bankruptcy filing, Judge Rakoff expressly declined to determine whether the Trustee is limited to that period, or whether profits earned over the course of Sterling's investment are recoverable. Moreover, Judge Rakoff permitted the Trustee to proceed with its claim that Sterling was "willfully blind" to Madoff's fraud, thereby subjecting principal paid by Sterling (not just profits) to recoupment by the Trustee. Thus, Sterling is still substantially exposed, and the Trustee will nevertheless appeal Judge Rakoff's decision to the Second Circuit Court of Appeals.
In sum, the decision is a win for Sterling as it narrows the Trustee's claims and reduces Sterling's financial exposure. On the other hand, a significant amount of money remains at stake, and Wilpon will have to continue his search for a minority partner to sell part of his share in the Mets.
Judge Rakoff's decision can be seen here.
My name is Christopher Fusco. I am the managing partner of Callahan & Fusco, LLC with offices in New York, New Jersey, and Pennsylvania.