Madoff-related lawsuits could hit Mets owner Fred Wilpon hard
The Mets chairman and chief executive officer is a defendant in two lawsuits
The suits center on Wilpon's investments with Ponzi scheme artist Bernard Madoff
Wilpon and other defendants may have to pay hundreds of millions in damages
New York Mets chairman and chief executive officer Fred Wilpon is a defendant in two lawsuits that threaten his considerable wealth and pose profound implications for his ball club.
The lawsuits center on Wilpon and his companies' investments with imprisoned Ponzi scheme artist Bernard Madoff and whether Wilpon and his associates knew, or should have known, of Madoff's fraudulent actions. If successful, the lawsuits could require Wilpon and other defendants to pay hundreds of millions in damages. Payment of those damages could threaten Wilpon's ability to own the Mets or at least to sustain a high team payroll. (The Mets had the fifth-highest payroll in 2010 at $133 million.)
Compounding Wilpon's problems is a recent New York Times article which reveals that Wilpon and his brother-in-law Saul Katz, the co-founder and president of Sterling Equities, were investors in a different Ponzi scheme called "Bayou", a creation of now imprisoned hedge fund manager Samuel Israel III. In paying close to $13 million, Wilpon and Katz settled claims brought by other Bayou investors, who alleged that Wilpon and his associates allegedly knew, or should have known, about Bayou's fraudulent activities before divesting their stake in Bayou. The story implies that Wilpon may not have learned much from dealing with a Ponzi scheme artist, as he continued to invest with Madoff in a way that some characterize as unusually trusting.
Goldweber v. Sterling Equities is a class action lawsuit filed last July in the U.S. District Court for the Southern District of New York. The named plaintiff, Elyse Goldweber, is the widow of a former employee of Sterling Securities, a real estate investment firm that owns the New York Mets, among other businesses. Sterling Securities maintained a 401(k) retirement plan worth about $17 million, 92 percent of which was invested with Madoff, whose fraudulent actions wiped out most of the plan.
Wilpon is a trustee of the plan, meaning that he exercises authority and control over it. His status as a trustee also dictates that he owes fiduciary duties to participants in the plan, including an obligation to periodically review the plan's performance.
Wilpon is also co-founder and chairman of the board of Sterling Securities, which through its financial arm, Mets LP, invested separately with Madoff. Mets LP was one of approximately 30 Madoff investors that generated more money with Madoff than they had invested with him. Specifically, Mets LP withdrew $571 million from two accounts with Madoff after investing $523 million with him, for a healthy gain of $48 million.
According to Goldweber, Wilpon and other Sterling executives violated the Employee Retirement Income Security Act (ERISA), a federal law that protects people who place their money in retirement funds.
Goldweber's primary claim boils down to a "hear no evil, see no evil" charge: Wilpon and his associates should have questioned Madoff's investment strategy, especially given the numerous commentaries that had raised questions about Madoff's almost unbelievable returns. Had Wilpon inquired seriously into Madoff's remarkable track record, he would have developed suspicions that Madoff was not investing, but rather ripping off investors. Such suspicions could have motivated the plan's trustees to drop Madoff, thereby minimizing damage to the plan. Wilpon's failure to act, according to Goldweber, constitutes a failure to prudently and loyally manage the plan's assets.
To accentuate criticism of Wilpon in her complaint, Goldweber repeatedly mentions Wilpon's comments to The New York Times in August 2009 that he and his family were doing "fine," even though his companies had laid off staff while others had lost their savings to Madoff.
Goldweber also charges that Wilpon possessed a glaring conflict of interest in his role as trustee. Various published reports, including comments by former Mets GM Steve Phillips, portray Wilpon and Madoff as good friends and Madoff as someone with whom Wilpon had invested considerably. Wilpon, it is argued, should have resolved a conflict that pitted the financial interests of the plan's participants against his own interests. Wilpon, for instance, could have resigned as a trustee. Had he resolved the conflict, Goldweber contends that the losses suffered by the plan would have been minimized, since fewer resources would have been invested with Madoff.
In his defense, Wilpon could raise several points.
First, many of Madoff's clients behaved in the same way he did: They trusted Madoff and they enjoyed the returns that he delivered on their investments. While it is true that experts had questioned, and in some cases repudiated, the unusually positive returns generated by Madoff, many investors stuck by him to the end.
Second, while Wilpon possessed fiduciary duties as a trustee of the retirement plan, most of the commentaries questioning Madoff's results were publicly available. Participants in the retirement plan therefore could have reviewed those commentaries and acted with them in mind, instead of relying exclusively on Wilpon and his associates.
Third, while the Mets technically gained from investing with Madoff, there are at least two reasons to separate those gains from Goldweber's losses. One, Mets LP had two separate accounts with Madoff, with different investors impacted by the returns and with a different format for administering the account. Put another way, Sterling's retirement plan with Madoff and the Mets' accounts with Madoff arguably should not be intermingled for purposes of the law.
In addition, the Mets contend that they really did not "make" money with Madoff. The test endorsed by U.S. Bankruptcy Judge Burton Lifland for gains/losses experienced by Madoff clients is the difference between money paid into a Madoff account and any amount withdrawn before the fund dissolved in December 2008. Under that test, the Mets indeed made money.
However, if the test were instead how much money was lost based on clients' balances on their final account statements, the Mets would have lost money. By this measure, the Mets would have been eligible to receive up to $500,000 from the Securities Investors Protection Corporation, a fund that provides some relief to victims of misappropriation of funds. The alternative test was rejected by Judge Lifland because of his reasoning that if an investor recovered his or her initial investment, then that person (or business) had fully recovered, and any additional money shown on a fraudulent Madoff statement was just imaginary.
Fourth, the context of Wilpon's questionable comments to The New York Times may ameliorate Wilpon's perceived insensitivity. His comments were made in response to published reports that Wilpon and his family may have lost as much as $700 million with Madoff, and that he was going to have to sell the Mets as a result. As owner of the team, Wilpon likely wanted to temper fears of players, staff and fans as to the future of the team, particularly during the middle of the baseball season.
Fifth, Wilpon's friendship and other business dealings with Madoff do not necessarily mean that he could not effectively administer the plan. Madoff knew many people of considerable wealth, and those persons may have included others who administered retirement plans placed in Madoff's hands.
Last December, Irving Picard, the court-appointed trustee of assets seized from Madoff, filed a lawsuit in U.S. Bankruptcy Court for the Southern District of New York. While the complaint remains sealed, Picard reportedly argues that Wilpon and others at Sterling should have detected the fraud in Madoff's investments and thus any profits obtained through Madoff should be redistributed to Madoff's victims. It has been reported that Picard seeks more than $300 million from Wilpon and other defendants.
This is known as a "clawback" lawsuit: If an investor "earned" any profits in a fraudulent enterprise up to six years prior to discovery of the fraud, those profits themselves can be deemed fraudulent. The underlying logic is that those profits were generated from fabricated numbers and from money that was stolen from other investors, many of whom are left with nothing in the Ponzi scheme. If deemed fraudulent, profits are then disgorged from the investor and re-distributed to victims of the fraud. Even an investor's principal investment can be "clawed back" if it was recovered in bad faith, such as recovering the principal within 90 days of a hedge fund filing bankruptcy (in the case of Madoff's fund, the bankruptcy filing date was Dec. 11, 2008, meaning that Katz and Wilpon needed to have recovered their principal no later than Sept. 11, 2008). The potential damages in a successful clawback lawsuit against Wilpon could go into the hundreds of millions.
Attorneys for Wilpon and other defendants in the Goldweber lawsuit are in settlement discussions with the plaintiff. A settlement would entail Wilpon paying Goldweber (and others who join her class) a substantial amount of money in exchange for Goldweber dropping her claim and any other potential claims she may have against Wilpon. The terms of the settlement, including any admissions of fault, would remain private. If the parties fail to reach a settlement, a court hearing would likely take place in March, with a full trial possibly to follow.
Settlement discussions with Picard are also ongoing. Those discussions, however, may prove more complicated and lengthy than those with Goldweber, as the dollar figures in a settlement with Picard would likely be substantial, perhaps in the tens of millions or even higher, depending on the quality of Picard's evidence and his likelihood of winning a trial.
Barring the highly unlikely event of a settlement occurring in the next week, Picard and Wilpon will appear in court on Feb. 9 to hear a motion filed by WNBC-TV and the New York Times Company. Those media companies have requested that the pleadings be unsealed on grounds that both federal bankruptcy law and the First Amendment compel disclosure. Wilpon and his co-defendants oppose the motion, noting that unsealing the pleadings could disturb settlement discussions and that, "although the public interest is a factor for the Court to consider, the asserted interest in a baseball franchise is more akin to 'mere curiosity' than 'legitimate concern.'" Assuming that settlement discussions continue in the weeks ahead, hearing dates will likely be spread out over the spring and summer in order to give the parties time to reach a settlement.
When attorneys' fees, which themselves could go into the millions of dollars, are added into the equation, it is possible that Wilpon will be paying various parties a lot of money. Thus, as these lawsuits work their way through the court system, Wilpon is considering various options to raise capital. With banks less willing to loan money because of the recession, Wilpon may have no choice but to sell a minority stake in the Mets. A group involving cable television executive Larry Meli and human rights advocate Martin Luther King III is said to be among those interested in purchasing such a stake.
While Major League Baseball has not weighed in on Wilpon's woes, it is in the best interest of the league and Wilpon's fellow owners that lawsuits do not become sources of league-wide embarrassment. To the extent that commissioner Bud Selig and the owners can encourage Wilpon to reach private settlements, they will likely do so.
The Major League Baseball Players' Association also has a stake in the matter. Considering that Wilpon pays the Mets' salaries, his financial wherewithal, and that of any other Mets' owners, are matters of great significance for Mets players. While the league could provide the Mets with financial assistance if need be (or go a step further and take over control of the franchise, as occurred with the Texas Rangers last season), a financially-capable Mets ownership would prove the best outcome for all considered.
Michael McCann is a sports law professor and Sports Law Institute director at Vermont Law School and the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law. He also teaches a sports law reading group at Yale Law School.