As a Yankee fan, I do not generally follow the day-to-day minutiae involving their cross-town rivals. However, as a subject matter expert on money laundering and financial investigations, I have been following the Bernie Madoff scandal with great interest. Irving Picard, the court appointed attorney charged with recovering assets for Madoff’s fraud victims, recently filed a $1 billion lawsuit against Fred Wilpon and Saul Katz, which may end up having serious consequences for the Mets and their fans.

The New York media, Mike Lupica of the Daily News in particular, have portrayed the suit as nothing more than an attempt to publicly slander the Wilpon family. Lupica refers to a recent NY Times prison interview where Madoff states unequivocally that the Wilpons had no knowledge of his scheme. Lupica argues that Madoff has already been sentenced for his crimes and thus has no incentive to lie in order to protect the Wilpons. In theory that is correct, but the lawsuit cannot be dismissed so cavalierly.

Picard does not allege that the Wilpons knew the details of Madoff’s scheme; rather he is accusing them of “willful blindness” to the scheme. In both criminal and civil trials, courts have defined willful blindness as the “deliberate avoidance of knowledge of the facts” and consider it the direct equivalent of “actual knowledge.” That definition poses a big problem for the Wilpons. The Wilpons run their own hedge funds and are much more knowledgeable about the ways of the market than your average investor. The compliant filed by Picard claims that the Wilpons should have known from the circumstances around them that their earnings from investments they made with Madoff were too good to be true.

Further complications arise from the documented closeness of the Wilpons and the Madoffs. Madoff was a long time season ticket holder of the Mets and his wife, Ruth, holds a substantial interest in real estate funds managed by Sterling Equities of which Fred Wilpon is a partner. The Wilpons have also been documented as having recruited investors for Madoff for many years. Picard allegedly has lined up several witnesses, including financial auditors, who will testify at trial that they had warned Katz and the Wilpons about Madoff.

If this suit goes to trial, it will be a civil case, which has a drastically lower burden of proof than a criminal one. It will not be necessary to prove that the Wilpons and Katz had intimate knowledge of the fraud, only that they should have been suspicious with the early profits they had made. The fact that they later lost money to the fraud may not be enough to absolve them of guilt. Any jury pool will most likely be more sympathetic to the fraud victims then they are towards rich investors who might have been able to blow the whistle on Madoff but chose not to.

How does this affect the Mets and their fans? The fact that the Wilpons immediately began looking for a minority partner should be a huge red flag. The only explanation for this maneuver is that the Wilpons are looking to stockpile ready cash in order to settle the lawsuit. Whether or not they can find any interested takers remains to be seen. Most recent estimates pin the value of the Mets franchise at right around $850 million. Published reports indicate that the Wilpons are looking to sell a 25% stake in the team for $250-$300 million. That’s a substantial chunk of money to pony up considering the fact that you would have no say in how the organization is run. Plus you then run the risk of watching your investment value plummet if a judgment is made against the Wilpons and the trustees attack their share of the Mets.

In the short term I think that Met fans are facing an austerity budget in terms of payroll and player development. That’s not good news considering how the Phillies have been spending lavishly the last few seasons. In the long term, things are murkier. If an agreeable settlement can be reached, things should be back to normal within a year or two, especially if a suitable minority partner is found. If the worst case scenario comes to fruition and the Wilpons get hit with a billion dollar judgment, there may be no way for them to avoid selling a majority stake in the team. I’ll leave it to Met fans to debate whether or not that is a good or bad development.

3 comments on “Madoff & the Mets

  • Metropolitans

    Jonathan, I am a Mets fan and have naturally been following the issue closely as well. First off, how can you say the Mets will be facing an “austerity budget” in the short term? That makes no sense unless you’re viewing things in terms of the unlimited budgets of the Yankees? Because then, the Mets and every other team have always operated on austerity budgets compared to the team you root for. Fact is, the Mets will have a payroll of about 150 million this year. They added payroll over the winter. It will be in the top 5 payrolls in MLB. Austerity? Really?

    Going forward after this year, it is impossible to know what will happen. However, there is already strong interest in buying a minority, non-controlling interest in the club, contrary to your opinion. I suggest you look up Steve Greenberg’s comments in the Daily News the last week. He is the investment banker handling inquiries from potential investors.

    As for the Wilpon’s defense, the fact that the SEC looked into Madoff, were warned about him, and did nothing will be a powerful defense if this goes before a jury. If the SEC couldn’t and wouldn’t stop Madoff, how were the Wilpons supposed to do so? And if you think the supposed “red flags” were enough to raise suspicion in the legal sense, I suggest you go look up the appeals court ruling from this past September in the Bayou case. It very clearly sets out what the standard is that would require an investor to be on “inquiry notice” and it doesn’t appear the supposed “warnings” given to the Wilpons would rise to that level. For example, someone merely telling the Wilpons they could not replicate Madoff’s returns is not the same thing as telling the Wilpons they believed Madoff was a fraud and would not be considered a red flag.

    So where do I come out on the Wilpons’ ownership of the Mets? I really don’t care if they are or are not the owners in the future. But they have been unfairly attacked in this lawsuit and it would be a miscarriage of justice if they were forced to sell their “controlling interest” in the club due to Picard’s own “willful blindness” to the facts in the case and his overreaching reckless tactics.

    • Jonathan

      The 2011 Mets payroll was largely set in stone before the Wilpons became targets of this lawsuit. Upwards of $60 million is set to come off that payroll at the end of this season and more than likely little of that will be invested back into the team according to GM Alderson. That means the Mets will be looking to plug some significant roster holes while expending the least amount of money possible. To me that qualifies as an austerity budget.

      Steve Greenberg is a salesman for the Mets at this point. Of course he is going to say that he has offers pouring in to buy a minority share in the team. His job is to drum up interest and drive up the price. Every one that I have seen publicly named as a potential investor has denied being interested.

      The fact that the SEC didn’t act on Madoff does not absolve anyone else, especially since the head of the SEC is now being accused of being complicit with Madoff as well. You have to understand that Picard is on quite a roll right now and he may be suffering from a case of hubris. To date he has recovered billions for his clients and none of the institutions he has challenged has had the stones to fight him in court. In the end I don’t think the Wilpons will have the intestinal fortitude to see this through to a court verdict. In the long run they may decide that it is cheaper and more expedient to settle (while admitting no legal wrong doing) and just be done with the whole affair.

      The Bayou Group appeal only absolved individual investors, the institutions that participated were still held liable to the creditors. Wilpon and Katz will have a hard time convincing anyone that they were naive individual investors. They ran hedge funds and knew what a realistic rate of return was. The burden of proof will be on them to explain how they thought the astronomical returns Madoff was delivering were possible given that the their own funds were making so much less. Aside from this fact you also have to consider that the Wilpons don’t want any negative publicity that might result from a trial. Things get ugly in open court and in a case like this everything will be aired in the media. The Wilpons are in a difficult spot and Picard knows it. Is Picard being overreaching and reckless? Maybe, but I’m sure his clients love him for it.

      • Metropolitans

        Jonathan, I suggest you go back and read Alderson’s comments again. He never said that the money coming off the books at the end of the season won’t be going back. He said not all of it may go back, but he never said or implied most of it won’t be going back. I guess it would be like the Yankees this offseason where the GM wants the flexibility to spend as he sees fit and not be forced to spend (Soriano) just because the money is there. There is just no basis for your opinion that “little of that” will be going back into the payroll the next year. None. Also, this is minor, but it’s likely 60 million won’t be coming off the books because if K-Rod is healthy and pitching well, his option will kick in. The only way I see it not kicking in is if he gets injured. So, it’s more like 40 million coming off the books.

        Your use of the word “austerity” was the wrong word and just not in tune with reality. The Mets this year will have the highest payroll they’ve ever had.

        Yes, Steve Greenberg’s job is to drum up interest for the Mets, but are you accusing him of lying? He told the Daily News he had “dozens” of potential investors willing to buy a minority interest and that he already passed on those names to MLB. You do know that if he is lying, it will come out. All they have to do is figure out if MLB really has those names or not, right? And, at any rate, most of those names who have been named as POTENTIAL investors by the media are not the names Greenberg passed on to MLB. They are not officially potential investors at this point. You do know, for example, that it was Trump who called the Mets, and not the other way around, to tell them of his interest. That doesn’t mean he is on Greenberg’s list.

        “To date he has recovered billions for his clients and none of the institutions he has challenged has had the stones to fight him in court.”

        Jonathan, that is very very inaccurate. In fact, there are many parties who are fighting him now or actually “ignoring” his suit. Chase is actively fighting him now, for example, and hasn’t given Picard one cent back. Not all parties are settling with him. You also have to realize that 60% of the money he got back is from one investor, Picower, who probably benefited from Madoff like no one else. So I suggest you really familiarize yourself with the details of the case before you write about it.

        “The fact that the SEC didn’t act on Madoff does not absolve anyone else, especially since the head of the SEC is now being accused of being complicit with Madoff as well.”

        Many lawyers think the fact that the SEC totally failed to do its job will be a powerful defense here. One of those is Charles Newhouse, a very prominent defense lawyer interviewed by WFAN last week. The interview is linked on the radio station’s website and I suggest you listen to it. I think the fact that one of the lead lawyers for the SEC has also been sued will only work in the Wilpons’ favor.

        As for a court fight, I believe unless Picard lowers his demands and agrees to a settlement that only includes “net profit” you WILL see the Wilpons fight this through the end all the way to the appeals court if necessary. So the ball is really in Picard’s court. If he lowers his demands we may see a settlement. If not, an all out court fight.

        “The Bayou Group appeal only absolved individual investors, the institutions that participated were still held liable to the creditors.”

        Can you cite and quote the particular ruling that differentiated between Sterling and other investors in the Bayou case? I believe you are incorrect. Sterling was treated as an individual investor in Bayou, just as the Wilpons are being treated as individual investors in Madoff. I don’t think the Wilpons will have a hard time convincing anyone they were duped — just like all other Madoff investors were duped as was the SEC. And if the SEC was duped, then it was surely possible to dupe the Wilpons.

        Much harm has already been done to the Wilpons’ reputation through Picard’s unethical leaking and character assassination campaign via the New York Times. At this point, it is to the Wilpons’ benefit to fight him back, litigate this in court on the merits of the law, and vindicate themselves. Or, it may depend on Cuomo to bring Picard back down to earth and knock some sense into him and his legal team. In which case a reasonable settlement can be arrived at.

        Finally, let me reiterate that you should familiarize yourself with the facts before writing on this. Particularly as to statements by Alderson regarding future spending and the status of the other lawsuits filed by Picard.

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