Inside the Mets’ Madoff Payout
Sometimes, even in federal court, it is not whether you win or lose—it’s how you play the game.
So when reporters challenged David Sheehan, the lead counsel for the Madoff bankruptcy trustee, about why he agreed Monday to a $162 million settlement on terms seemingly favorable to the owners of the New York Mets, he said: “This is a settlement for all the investors. It’s not whether we win or lose; it is about enhancing the recovery for investors.”
Ending uncertainty about the Mets co-owners’ settlement and adding $162 million as recovered money on the books, Sheehan said, will enable bankruptcy trustee Irving Picard to announce as early as this week that there will be more immediate payouts to hundreds of Madoff investment victims. While the trustee has collected more than $9 billion, only $325 million of that fund has been distributed to Madoff investors who proved their losses.
Perhaps more important in the long run, the settlement by Mets majority co-owners Fred Wilpon and Saul Katz will lead to faster negotiations by Picard’s legal team in many of the nearly 1,000 pending cases they have filed seeking more than $100 billion in recoveries. Sheehan called the settlement “a positive example” for defendants in other cases.
“It will set a ceiling of sorts for exposure for other defendants,” bankruptcy expert Michael Parker of the law firm Fulbright & Jaworski told The Daily Beast. “It’s not necessarily a cap, but now the trustee has communicated to everyone out there: ‘What I am willing to do, and under what terms I am willing to do it.’”
After several years of rulings by chief bankruptcy Judge Burton Lifland in favor of Picard’s aggressive team, more than 250 of the major corporate defendants originally sued in U.S. Bankruptcy Court sought relief by asking the U.S. District Court to assert jurisdiction over the cases. The defendants argued successfully that many claims by Picard’s team went beyond simple bankruptcy proceedings and deserved to be litigated in District Court. Indeed, District Judge Jed Rakoff and other judges did dismiss some of Picard’s more novel and far-reaching assertions that some defendants suspected Madoff was a crook but did business with him anyway.
By short-circuiting the first case that was actually going to be tried in district court, rather than the more sympathetic bankruptcy court, the trustee avoided years of appeals, trial costs, and potentially adverse Supreme Court decisions. The move also removed an incentive for defendants in other cases to stall, rather than settle, as they waited for the final outcome in the Mets case.
Shortly before the Mets owners’ trial was to begin Monday with jury selection, the judge had ruled that so far the bankruptcy trustee had proved entitlement to only $83 million. That number represented the “fictitious profits” the Wilpon/Katz group had withdrawn during the last two years their Madoff accounts were active. The settlement expands that to 100 percent of the last six years of fictitious profits, an enlarged time frame that could figure prominently in settlement negotiations in other cases.
For Wilpon and Katz, the settlement removes the immediate trial risk that a huge jury award of $383 million sought by Picard could have forced them into bankruptcy and cost them the baseball team. Former New York governor Mario Cuomo, who served as an arbitrator helping craft the settlement, more colorfully said that the settlement removed “the sword of Damocles” that had been hovering over Wilpon, Katz, and the Mets. And by keeping the Mets alive, Picard lessened his risk that the Madoff’s victims fund would get stuck with nothing if the baseball team owners went bust. Sheehan said: “In a sense, we’re partners now.”
Now all the bankers, ballplayers, and fans worried about the Mets finances know the statistics: the 56 entities controlled by Wilpon and his brother-in-law, Katz, have five years to pay with no cash money down for at least three years.
Even better, the Wilpon-Katz group and their Sterling companies are not writing any checks to the bankruptcy trustee until after the team’s scheduled debt restructuring in 2014. Nor will Mets fans have to worry about a trial scenario with hostile witnesses, such as former financial adviser Noreen Harrington, sullying the team’s owners as dumb and greedy.
As part of the settlement, the bankruptcy trustee dropped his claim that Wilpon and Katz were “willfully blind” as they ignored suggestions by their own financial experts that their old friend Bernie Madoff was possibly a fraud rather than a financial genius.
Outside the court, Wilpon said that the dropped claim proved that he and Katz had never been “willfully blind” to Madoff’s crimes, an assertion that had remained part of the case even after Judge Rakoff pared down the original Picard claim that Wilpon and Katz’s group should have to pay $1 billion.
The trustee now takes over claims by Wilpon and Katz’s entities that, as Madoff victims, they are entitled to recover $178 million they lost during the last six years the Ponzi scheme was running before Madoff was caught in December 2008.
How much cash the Mets group will have to put out depends on the rate of success by Picard’s team. If the trustee recovers all of the more than $17 billion in actual money people gave to Bernie Madoff, he could pay off Madoff investors at 100 cents on the dollar. At 91 cents on the dollar, the $162 million settlement would be fully covered.
So far, not counting this settlement, the trustee has recovered about $9 billion, or 52 percent of the actual capital investors lost to Madoff. That means of the $178 million that the Wilpon accounts lost, about $93 million has already been recovered by the trustee and is in bank accounts he controls. So the balance of the total settlement the Wilpon/Katz group still has to produce is actually $69 million. That bill could diminish significantly before it is totaled again in three years as the trustee recovers more money from other cases. Even then, the settlement does not obligate the Wilpon/Katz crowd until year four to make payment of half of what is still owed. Plus, the settlement only obligates Wilpon and Katz personally to pay $29 million if there is a shortfall at the end of five years.
The one clause in the settlement that drew laughter in court was the agreement that “all parties agree not to make disparaging remarks.” Judge Rakoff, who must sign off on the final settlement April 13, quipped: “All I can say is, ‘Love is wonderful.’”