The well known travails of Fred Wilpon, the principal owner of the New York Mets, have all converged this past week. He, his partner Saul Katz and their families and affiliated enterprises (the “Wilpon/Katz Group”) lost several hundred million dollars when Bernard Madoff’s long running Ponzi scheme finally unraveled at the height of the financial crisis in 2008. The Mets’ on-field performance has been dismal, and their cash flow, weighed down by the debt incurred to build their under-attended new stadium, has been even worse. Finally, there have been the efforts by Irving Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securites (“BLMIS”), to recover from the Wilpon/Katz Group over $1 billion that it withdrew from BLMIS over many years. (Kelley Drye & Warren LLP represents other Madoff investors from whom recovery is being sought.) Wilpon further has had to suffer the ignominy of Picard’s public assertions that no good faith defense can apply which would permit an offset of $700 of principal invested during such period, because the Wilpon/Katz Group either knew or was willfully blind to the fraud that lay at the heart of BLMIS.
The past several days have seen, first, Picard file his opposition to the Wilpon/Katz Group’s motion to dismiss the recovery action, and then a magazine article in which Wilpon makes disparaging references to three of the Mets’ best players. Finally, yesterday came the announcement by the Wilpon/Katz Group of a prospective sale of a minority interest in the Mets to hedge fund investor David Einhorn.
The statements made by Wilpon about David Wright, Jose Reyes and Carlos Beltran have been fulsomely discussed by the sports media and are outside the purview of this blog. Bringing in Einhorn as a minority partner, while unquestionably easing the Wilpon/Katz Group’s immediate financial distress, likely will have long term ramifications that Wilpon may prefer not to consider right now. Suffice it to say that Einhorn, who famously denigrated Lehman Brothers before its demise, has never been particularly shy about speaking his opinions about under-performing enterprises.
Strangely enough, the best long term news for Wilpon appears to lie in Picard’s latest pleading. While Picard of course forcefully repeats his assertions that the Wilpon/Katz Group possessed sufficient information to have been on “inquiry notice”, and that the failure to conduct a “diligent inquiry” obviates any claim now of good faith, the legal brief breaks little new ground and mostly rehashes previous arguments made.
Picard particularly focuses on brief efforts by the Wilpon/Katz Group in 2001 to obtain fraud insurance for its BLMIS investments as evidence that it possessed sufficient information to undertake an investigation. However, as with his earlier allegations regarding the mischaracterization of a short term $54 million loan, Picard appears to place far more weight on certain isolated incidents than can reasonably be supported. By his own argument, the standard set forth in similar cases to place a hedge fund investor on inquiry notice requires, for example, credible evidence that a purportedly profitable fund was in fact losing money, or might be insolvent. The incidents to which Picard alludes come off as myriad loose strands that Picard fails to weave into a larger fabric.
Indeed, Picard’s intensive efforts to recover the $700 million in invested principal may well wind up impairing his chances of recovering a substantial portion of the “fictitious profits” that he is seeking. Of the $295 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period that is permitted under New York law. Picard has previously argued that the six year limitation should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS”. However, the more that he contends that there were a plethora of “red flags” that the Wilpon/Katz Group ignored, the more he undercuts his own argument to extend the six year look back period. There were, after all, numerous other Madoff victims equally as sophisticated as the Wilpon/Katz Group. Picard even notes that the Wilpon/Katz Group’s investigation into fraud insurance supposedly arose out of discussions had with another Madoff investor – a fact clearly discordant with any argument that the Madoff fraud “was not reasonably discoverable” by others.
Fred Wilpon has clearly had a highly eventful week. The effect of his intemperate words about his best players, and the long term ramifications of bringing on David Einhorn, can only be guessed at right now. But things do not appear to be measurably worse for him and his partners in the Madoff litigation as a result of Picard’s latest pleading.