Settlement is best option for all sides in Wilpon-Madoff case
The lawsuit against Fred Wilpon and his partners was made public on Friday
The suit portrays Wilpon as a major beneficiary of Bernard Madoff's Ponzi scheme
Wilpon and his companies allegedly gained more than $295 million from Madoff
A clawback lawsuit filed on behalf of victims of Bernard Madoff against Mets owner Fred Wilpon and his business partners paints Wilpon not only as a major beneficiary of Madoff's fraudulent scheme, but also one who clearly "knew or should have known" about Madoff's fraud and who selfishly choose to profit from it.
The lawsuit, filed in the U.S. Bankruptcy Court for Southern District of New York in December and made public on Friday by U.S. Bankruptcy Judge Burton R. Lifland, also characterizes the relationship between Wilpon and Madoff, who have been described as good friends, as mutually beneficial and interdependent, with Madoff investing $12 million of his money in Wilpon's companies and with those companies possessing 483 accounts with Madoff. Of particular interest to commissioner Bud Selig's office and to Wilpon's fellow owners, the complaint also asserts that salaries of Mets players were paid in part by the stealing of money from Madoff's other clients.
All told, Wilpon and his companies -- one of which, Sterling Equities, owns the Mets -- allegedly gained more than $295 million in fictitious profits by investing with Madoff. Irving Picard, the court-appointed trustee of assets seized from Madoff, hopes to reclaim those millions in the litigation and to then distribute the proceeds to Madoff victims.
If the case goes to trial, Wilpon's business relationship with Madoff will be a focal point in determining the Mets owner's level of responsibility. The more Wilpon is viewed as having chosen to ignore corruption that he either knew about or should have known about, the more likely the damages will approach Picard's desired figure. Along those lines, a key piece of evidence for Picard will be warnings made by Merrill Lynch to Wilpon that he should not invest with Madoff. Wilpon, according to Picard's complaint, allegedly choose to disregard those warnings.
Wilpon and his legal team possess an array of potential defenses. Foremost, expect Wilpon to challenge the assertion that he knew or had reason to know about Madoff's illegal activities. While it is true that Wilpon had access to numerous admonishments that cast doubt on Madoff's business model long before Madoff's scheme was uncovered, Wilpon was not alone in his loyalty -- many of Madoff's investors stuck by him to the end, no doubt blinded by the generous profits that Madoff's fund generated. Wilpon could argue that his allegiance to Madoff looks worse in hindsight than it would have appeared at the time, and that he should be judged against what he, and others, knew then and not what everyone knows now.
In addition, expect Wilpon to challenge the idea that he unjustly profited from Madoff's fraud. For starters, the precise method of accounting for what constitutes "profit" will be a source of debate. Wilpon will likely present financial records which portray his companies as having lost money, rather than gained, by investing with Madoff. He may also characterize much of the supposed "profits" as merely outcomes in a normal business cycle, rather than results engineered through corruption. Indeed, considering that Wilpon's companies had 483 accounts with Madoff's fund, the overall amount of transactional activity was likely to be high.
While the potential courtroom arguments are significant -- and despite the fact that talks between the Mets owners and Picard have broken off -- the parties are still likely to reach a settlement in the approaching weeks and avoid a trial. A settlement would likely require Wilpon and others to pay tens of millions of dollars. Settlement payments would likely be staggered over a period of months or years in order to ease the financial burden placed on Wilpon and other defendants, while also ensuring that Madoff's victims are adequately compensated. If the parties fail to reach a settlement, expect there to be pretrial hearings in the spring and a trial scheduled for sometime later this year.
For Wilpon, the incentive to settle is high. The sooner he distances himself from the Madoff scandal and the disastrous publicity that goes with it, the sooner he can return to being owner of the Mets. A settlement would also provide certainty to Wilpon as to how much he must pay and when he needs to pay it. He would therefore know how much capital he needs to raise and whether he needs to sell an equity stake in his franchise.
If Wilpon instead risks a trial, he could end up paying much more than he would in a settlement -- perhaps so much more that he would have to sell his majority interest in the Mets. A trial would also pose certain unpredictable qualities, particularly if heard before a jury that has great sympathy for victims of Madoff and skepticism toward the wealthy owner of a professional baseball team who may have profited from Madoff's scam (for that reason, Wilpon might elect for a bench trial should the case proceed that far).
A settlement might also benefit Wilpon from the standpoint of his coveted position as an owner of a major league franchise. For one, his team would likely be handicapped by a drawn-out litigation. There would be resulting uncertainties as to how much the team could spend, especially on players. For instance, how would the team approach contract discussions with prized shortstop Jose Reyes, who is scheduled to become a free agent after the 2011 season, if the team's owner might be forced to pay hundreds of millions of dollars in the Madoff fallout? Or how would the Mets approach trade offers for ace Johan Santana, who is due a guaranteed $72 million over the next three seasons? And would the team be forced to change its draft strategy to one that involves drafting a larger percentage of amateur players who would be cheaper to sign over more talented, but expensive prospects?
A settlement might also prove beneficial to Wilpon as a big league owner because of Picard's assertion that $90 million from Madoff's fund was used to finance the Mets. If true, such an assertion could cause substantial problems for Wilpon in his relationship with other big league owners and with the commissioner's office. It would mean that Madoff's victims -- many of whom lost their life savings to Madoff's Ponzi scheme -- effectively paid the salaries of million-dollar Mets players.
Empowered with his "best interests of the game" authority, and also with language from the franchise agreement Wilpon signed with Major League Baseball when he purchased the Mets, Selig could potentially discipline Wilpon and encourage him to leave the fraternity of big league owners -- a move that could be facilitated if other big league owners shared the view that Wilpon should not be among them. By instead settling the case, Wilpon could avoid having to publicly admit to the allegations contained in the complaint, as the settlement would be confidential.
Bottom line: In spite of the parties' heated rhetoric -- which is mainly driven by negotiation posturing and public relations -- the most likely outcome is a settlement.
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.