Fordham Law


Mets’ Owners Agree to Settle Madoff Suit for $162 Million

Annemarie McAvoy in The New York Times, March 19, 2012

Media Source

The owners of the Mets scored a major legal victory — one that might well preserve their control of the team — when the trustee for the victims of Bernard L. Madoff’s vast fraud agreed to abandon hundreds of millions of dollars in claims against them.

In a settlement reached Friday and announced Monday morning just before their federal trial was to begin, the owners agreed to pay the trustee $162 million, but that figure is likely to be reduced or wiped out altogether as the complex bankruptcy litigation involving Mr. Madoff’s investment operation plays out.

The trustee, Irving H. Picard, had initially sought $1 billion, declaring that the owners had enriched themselves over many years of profitable investing with Mr. Madoff while ignoring repeated warnings that he might have been a fraud.

The owners, Fred Wilpon and Saul Katz, had angrily decried the charges as an attempt to extort them into paying a giant settlement, one that might have forced them to sell the Mets, one of baseball’s most valuable franchises. In an effort to stabilize the team’s finances, the Mets appear to have sold 12 minority stakes in the club for $20 million each.

The settlement — under which the owners may not have to pay the trustee anything out of their pockets — makes clear that it was the trustee who blinked at the 11th hour. A federal trial, one that would have explored whether Mr. Wilpon and Mr. Katz had been “willfully blind” to evidence of Mr. Madoff’s fraud, was set to start Monday morning with jury selection.

“I can’t wait to get back to our businesses, which I love, and the first order of business, the first priority, is getting down to Florida tomorrow, getting to that spring training camp and bringing the Mets back to the prominence our fans deserve,” a clearly relieved Mr. Wilpon said outside federal court in Manhattan.

Mr. Picard was appointed by a bankruptcy judge in 2008 to recover money for Mr. Madoff’s victims. To date, he has secured some $9 billion — or about half his goal — much of it from Madoff investors he has asserted were unjust beneficiaries of “too good to be true” returns.

In his lawsuit against Mr. Wilpon and Mr. Katz, Mr. Picard asserted that the men were sophisticated investors who were among those illegitimate beneficiaries. But Mr. Picard suffered a number of setbacks. The lawsuit was removed from bankruptcy court, and Jed S. Rakoff of the United States District Court, who took over the case, both reduced Mr. Picard’s financial claims and raised the legal bar he would have to clear in order to collect.

Still, if Mr. Picard had prevailed at trial, he could have recouped as much as $303 million, in addition to the $83 million the Mets’ owners were already ordered to pay.

His decision to settle for much less was regarded by a number of experts as a kind of surrender on the explosive assertions that were central to the case. Legal experts said the settlement would most likely embolden other defendants who are fighting accusations brought by the trustee. Mr. Picard has filed several large suits that have accused defendants of misconduct, including actions against some of Mr. Madoff’s relatives and one of his primary banks, JPMorgan Chase. The cases make similar bad-faith claims to the one brought against the Mets’ owners.

“I certainly consider this a capitulation by the trustee,” said Bradley D. Simon, a former federal prosecutor who focuses on white-collar civil litigation for Simon & Partners. “It seems quite one-sided.”

The Mets, as a baseball operation, still face significant financial trouble. The club has lost some $120 million over the past two years, has had to slash its payroll as attendance has fallen at Citi Field, and has had to put a portion of the team up for sale.

But the resolution of the suit, and on such favorable terms, ends an enormous financial threat.

“That decision removed the defendants from the sword of Damocles hanging over their lives,” Mario M. Cuomo, the former New York governor who was appointed as the mediator in the case in early 2011, said outside the courtroom. “And it will enable them to return to their work, their family and normalcy.”

Mr. Cuomo, who has been mediating high-profile disputes for decades, had not appeared to make much progress as the lawsuit, complete with acrimonious filings, ground on.

But with the case headed for trial, Mr. Cuomo evidently finally made headway.

About two weeks ago, he reached out to both sides, inviting Mr. Wilpon and Mr. Katz to his offices at the law firm Willkie Farr & Gallagher. He suggested to Mr. Wilpon and Mr. Katz that a trial could be both embarrassing and damaging to their reputations, and in a separate conversations he lobbied the trustee to come to a settlement.

“What you do in mediation is recite the realities,” Mr. Cuomo said later in the day during an interview, speaking of his role. “You don’t have to be brilliant. It’s called common sense.”

The settlement itself underscores how complicated the Madoff bankruptcy has proved to be.

Mr. Wilpon and Mr. Katz, as well as their business partners and family members, had hundreds of accounts with Mr. Madoff’s firm when he was arrested in December 2008.

The trustee had identified many of those account as “net winners” — asserting that the owners of those accounts had over the years withdrawn more money from them than they had put in. He argued that, in fact, those profits were “other people’s money,” and had to be returned.

Mr. Wilpon and Mr. Katz contended that they also had scores of accounts that were “net losers,” and they had applied to the very same trustee who was suing them to be reimbursed for those losses.

The settlement announced Monday amounts to a swap: Mr. Picard dropped the claims that the men had ignored warnings about Mr. Madoff; Mr. Wilpon and Mr. Katz agreed that they were obligated to pay back $162 million in so-called fictitious profits they had reaped from the net winner accounts from 2002 to ’08. That figure includes the $83 million that Judge Rakoff had earlier ordered them to pay.

How much of that $162 million the men will ultimately have to pay depends, oddly, on how successful Mr. Picard is in his efforts to recover money for Madoff victims. The Mets’ owners had applied to Mr. Picard to be reimbursed $178 million from their net loser accounts. If Mr. Picard’s recoveries do not yield $162 million after three years, Mr. Wilpon and Mr. Katz have guaranteed to pay as much as $29 million.

What was clear was that Mr. Wilpon and Mr. Katz used the settlement as vindication of their character. “We acted in good faith and we’re very pleased that this settlement bears that out,” Mr. Wilpon said.

For the trustee, the settlement appeared to be a business calculation: even if he could win a judgment that Mr. Wilpon and Mr. Katz were willfully blind to Mr. Madoff’s fraud — and have the verdict upheld on appeals that might take two or three years — he might not have received the $303 million he was seeking.

“It isn’t whether we win or lose,” David J. Sheehan, chief counsel to the trustee, said. “It’s whether we enhance the fund and help the victims. That’s what we did today, and that’s why we did it.”

Mr. Sheehan’s remarks Monday conflicted with much tougher ones made 13 months ago, when he said, “What we’re looking for is a billion dollars, and unless we settle for less than that, which we’re not inclined to do, where they get the money is of no moment to us.”

Mr. Picard might also have had second thoughts about the strength of his case. Judge Rakoff had been skeptical that Mr. Picard could successfully rebut Mr. Wilpon and Mr. Katz’s claims that they acted in good faith in their investing with Mr. Madoff.

Still, however strong Sheehan and Picard felt their case was, they could not be certain of victory.

“Any lawyer who walks into court knows that you can win, you can lose, and you can have the strongest case possible but you don’t know how the evidence will come in or how the jury will perceive the credibility of the witnesses,” said Annemarie McAvoy, a former federal prosecutor who is an adjunct professor at Fordham Law School. She said Mr. Picard “did away with the risk of walking away with nothing at the end of the trial.”

As he read aloud the terms of the settlement between two parties who had battled each other bitterly for more than a year, Judge Rakoff said, “All I say is love is wonderful.”