Tuesday, March 13, 2012

Sportz Court: Madoff's Trustee vs. The Mets

By Conor Flahive

Remarkably, as of February 2012, approximately fifty-two percent of the principal lost by investors of Bernard Madoff’s unprecedented $20 billion Ponzi scheme has been recovered for those that have filed claims.

Of the $9 billion recovered for claimants (the other three billion lost in courts fees, settlements, rendered unrecoverable), just $100 million is from the forfeiture of real estate, bonds, arts, boats, and other properties owned by Madoff himself. So how has the Madoff Recovery Initiative and its trustee, Irving Picard, recovered so much money? And where did it come from? One needs not to look further than America's greatest past time (besides money laundering) to find the answer.

In analyzing the ongoing litigation between Picard and New York Mets’ owner Fred Wilpon, and Wilpon's equity group, Sterling Equities, Inc., who had invested more than $500 million in at least 483 accounts with Bernard L. Madoff Investment Securities, LLC, I've discovered the legal vehicle Picard used to recover that fifty-two percent, as well as how that money will affect the Mets' future.

Under federal bankruptcy law, the trustee of any debtor (Madoff) has the right to “avoid” or undue certain transactions, such as the fraudulent transfers alleged in Picard’s lawsuit, through what is known as a claw-back. If a creditor, or an investor in this case, has intentionally received a fraudulent transfer within two years of the bankruptcy filing, the trustee can sue to recover that transfer, or claw it back. The policy reasoning behind the claw-back is to ensure that people are treated equally in bankruptcy. It prevents debtors from transferring assets to relatives and insiders just before bankruptcy is filed, and provides proportionate distribution to all investors harmed by fraud.

In his lawsuit, Picard alleged that the Mets’ owners received $83.3 million in fictitious profits and $301 in principal in the two years before involuntary bankruptcy proceedings were filed on behalf of Madoff. On March 5, U.S. District Judge Jed S. Rakoff denied both parties’ motions for summary judgment, setting the stage for a March 19 trial in Manhattan that is sure to steal headlines.

The $83.3M in “fictitious profits” was essentially the interest the Mets’ owners “earned” from their principal investment. Bankruptcy law does protect profits earned by fraud, so the $83.3 million figure will not be at issue next Monday (the Mets’ owners must pay the trustee that sum, which will be distributed to other investors).

At the heart of the litigation is whether or not the $301 million of principal the Mets’ owners withdrew some six months before Madoff’s collapse was done in “good faith,” or whether it was the result of a fraudulent conveyance to an insider. To recover the money, Picard will have to prove that Wilpon and company’s failure to recognize the Ponzi scheme approaches the standard of “wilful blindness.”

In his decision, Judge Rakoff said he "remains skeptical that the trustee can ultimately rebut the defendants' showing of good faith." While that wording certainly gives the Mets’ owners reason to be optimistic, their case is far from a home run. There is plenty of case law that says if such withdrawals were based on even a wiff of fraud, they cannot be considered to be in good faith, and after all, when you get back $83.3 million more than you invested, it is a tough to get a jury of your peers behind you. Furthermore, the jury is certain give a lot of weight to the fact that Wilpon and company’s accountant advised them to withdraw their money just before Madoff went down.

Very basically: Six months before Madoff went down, the Mets' owners withdrew $303 million from their Madoff accounts, in a transaction that was either really lucky, or the result of insider information. Under bankruptcy law, the claw-back tool allows Picard to sue investors that received payouts from Madoff's fraud, and disperse it to other injured investors proportionately.

So how does all of this affect Mets franchise?

Last January, Wilpon announced that he may be forced to sell up to twenty-five percent of the ball club as a result of the Madoff litigation. Wilpon has recently renounced this possibility, asserting that the litigation will not affect the Mets’ day-to-day operations and control. But after a lackluster 85-loss season and a fourth-place finish in the National League East last season, the third-highest valued team in the MLB shed $50 million off their payroll this winter.

The Mets will probably fall short of the playoffs once again this year, and time will tell whether eight-figure contracts like that of Jason Bay’s will be worth it (he started spring training 0-8 - a K for each figure I presume). However, if the Mets’ owners have learned one thing from the Madoff case, it is that if you think something is too good to be true, it probably is.

Conor is the president of the Entertainment and Sports Law Club at the California Western School of Law. He can be reached at their website, CWSL.edu.

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