Irving Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securites (“BLMIS”), has filed an amended complaint (the “Amended Complaint”) that seeks to buttress his allegations against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”). Among other things, the Amended Complaint details an alleged deliberate mischaracterization of a $54 million bridge loan from Madoff to one of the businesses controlled by the Wilpon/Katz Group, and cites the episode as further evidence of supposed wrongful behavior that demonstrates the complicity of the Wilpon/Katz Group in Madoff’s fraudulent activity.
The Wilpon/Katz Group, in the meantime, in its first legal counter-attack, has filed a motion to dismiss the Amended Complaint (the “Dismissal Motion”). Also, an article in today’s New York Times details the jousting taking place with respect to the massive trove of documentary information gathered by Picard prior to the commencement of the lawsuit.
The Amended Complaint and the Dismissal Motion reveal flaws and risks that each side faces.
The Amended Complaint seeks the repayment of over $1 billion. However, over $700 million constitutes the return to the Wilpon/Katz Group of invested principal, and Picard’s many allegations and inferences may simply not add up to the level of malfeasance or knowledge on the part of the Mets’ owners that he needs to demonstrate in order to recover those funds. Although a number of bad or grossly negligent actions are alleged, the Dismissal Motion refutes Picard’s factual allegations regarding many of the so-called “red flags” that Picard believes should have given the Wilpon/Katz Group reason to suspect Madoff. Some of Picard’s efforts to show mendacity, such as the $54 million transfer that helped the Wilpon/Katz Group to avoid a delay in closing an important deal and then was immediately repaid, come off on closer examination as somewhat thin gruel (or “bad stuff”, as one fictitious former Mets player might have put it).
In addition, of the remaining $295 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period. Picard contends that the six year limitation under New York law should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS[,]” an argument that seems to be discordant with his allegations regarding the plethora of “red flags” that the Wilpon/Katz Group ignored.
The Dismissal Motion, on the other hand, while strongly rebutting many of Picard’s allegations, shows the challenge that the Wilpon/Katz Group will have in fending off the demand for the return of $163 million in “fictitious profits” during the six year look-period. The bulk of the legal arguments in the Dismissal Motion raise nearly precisely the same issues that were recently argued before the Second Circuit Court of Appeals on Picard’s method for determining which customers hold claims against BLMIS. The Wilpon/Katz Group forcefully contends again that customers of BLMIS should hold claims based on the fictitious statements furnished to them by BLMIS, rather than being determined by the straight-forward mathematical calculation of invested principal less funds withdrawn. However, Judge Burton Lifland, the U.S. Bankruptcy Court judge overseeing the BLMIS case, has already rejected this argument, and the Second Circuit panel that heard the appeal earlier this month betrayed a fair degree of skepticism.
The incentives for both sides to work with former Governor Cuomo and reach a settlement remain strong.