Feb. 5 (Bloomberg) -- The owners of the New York Mets baseball team, subject to a demand by the trustee liquidating Bernard Madoff’s firm to pay $1 billion to end a fraud lawsuit, may model any settlement on a deal they struck over their involvement in the Bayou Group LLC’s Ponzi scheme.
In the Bayou settlement, the Mets owners gave up all fake profits they made in that $400 million fraud plus 44 percent of their principal after a judge ruled their initial investment could be pursued because of “red flags” they saw about the possibility of a fraud.
Trustee Irving Picard had said in court papers that he wants to recover about $300 million in alleged phony profits from Madoff’s scheme made by Sterling Equities Inc., which owns the Mets baseball team, Mets Chairman Fred Wilpon, Mets President Saul Katz and Chief Operating Officer Jeff Wilpon, and other related parties. Picard also demanded an unspecified amount of principal back from the Sterling defendants.
Today, Picard lawyer David Sheehan said the trustee is seeking a total of $1 billion from the defendants. To recover the additional $700 million, the trustee must prove, “using the red flags and other evidence,” that the Sterling defendants had enough information that they should have discovered the fraud, Sheehan said in an e-mail.
The Wilpons said they are exploring the possibility of selling as much as 25 percent of the Mets to deal with any “uncertainty” generated by Picard’s suit. Such a sale might produce no more than $215 million, based on estimated valuations of the team. The amount of principal Picard recovers through settlement or trial might require selling more assets.
Picard didn’t specify in the complaint how much principal he wants, saying that would be determined at trial or before. The Wilpons and their lawyers didn’t say how much the owners had invested with Madoff, saying only that there was $500 million in their accounts when the fraud was revealed. Picard said Madoff took in a total of $20 billion in principal from clients who thought they had $68 billion in their accounts.
In the Bayou hedge-fund case, the bankruptcy judge said investors who saw “red flags” indicating a fraud can be forced to give back principal as well as profits.
Picard’s 373-page complaint cites “many red flags” that should have warned the Sterling partners that Madoff was a fraud.
Merrill Lynch & Co., now part of Bank of America Corp., was a 50 percent partner with an entity affiliated with Mets owners. It had “a long-standing prohibition” against investing with Madoff, and told Saul Katz in 2007 that Madoff wouldn’t pass Merrill Lynch’s “due diligence protocols,” according to Picard’s complaint.
Howard Wohl, co-founder of Ivy Asset Management LLC, warned Saul and David Katz and Arthur Friedman about Madoff at a meeting in early 2002 to discuss the formation of the Merrill-owned entity, Sterling Stamos, a hedge fund partnership of Sterling and Peter Stamos, Picard said.
Former New York Attorney General Andrew Cuomo sued Ivy, Wohl and Ivy Chief Executive Officer Lawrence Simon in May.
Cuomo, now New York’s governor, claimed Ivy and the executives hid their doubts about Madoff from their own customers, who lost $227 million while the firm reaped $40 million over 10 years for Madoff-related work.
Ivy has denied any wrongdoing in the case and is fighting the lawsuit.
Saul Katz and Richard Wilpon heard in their positions at the Brooklyn College Foundation that its investment committee chairman believed Madoff’s firm wasn’t “legitimate,” Picard said. Katz is honorary governor of the foundation and Wilpon is a trustee, according to the complaint.
The Mets owners learned about red flags, “similar in kind to Madoff,” from the Bayou Ponzi scheme, which was orchestrated by the hedge fund’s co-founder, Samuel Israel III, Picard said.
Sterling Stamos put money into funds managed by Bayou Superfund LLC in October 2003, redeeming its investments in March 2005 “because of concerns identified during its extensive due diligence process,” Picard said.
The Bayou red flags identified by Sterling Stamos included an operation overly dependent on one man, the use of a “non-traditional” audit firm, a fund manager who wasn’t receptive to Stamos’ questions, stable positive returns, non-standard legal documentation, an incompetent back office, and “a huge jump in the amount of assets under management,” Picard said.
After Bayou collapsed, the bankruptcy trustee sued Sterling Stamos in September 2006, and settled in May 2009 for $12.9 million, including all of Sterling Stamos’s profit and almost half the principal it took out “just months before it was revealed to be a Ponzi scheme,” Picard said.
‘In Too Deep’
With Madoff, the Mets owners “were simply in too deep -- having substantially supported their businesses with Madoff money -- to do anything but ignore the gathering clouds,” according to Picard’s complaint. “Sterling performed no diligence on Madoff in response to any of the various red flags to which it was exposed.”
“The trustee’s lawsuit is an outrageous ‘strong arm’ effort to try to force a settlement by threatening to ruin our reputations and businesses which we have built for over 50 years,” Fred Wilpon and Saul Katz said yesterday in a statement.
They called the allegations in the complaint “abusive, unfair and untrue.”
The Sterling partners had more than $500 million in their Madoff accounts at the time of his failure, their lawyers said in a statement yesterday. Wilpon and Katz said that none of the Sterling partners ever suspected Madoff was running a fraud.
According to the complaint, the Mets used $90 million in Madoff profits to help fund the team’s day-to-day operations.
Sterling also used Madoff profits to meet capital commitments for its real estate funds, Picard said in the filing. Madoff profits also provided cash flow for Sterling’s internal bank, “a clearing house” for funds and obligations among Sterling partners, their families and trusts, he said.
The Mets were the third-highest-valued team in Major League Baseball at $858 million, behind the New York Yankees, at $1.6 billion, and the Boston Red Sox, at $870 million, Forbes magazine said in April 2010.
A sale of 20 percent to 25 percent, as outlined by the Wilpons, would be worth $171.6 million to $214.5 million, based on the Forbes figures.
The Wilpons said any sale wouldn’t involve Citi Field, their home stadium, or SportsNet New York, their regional sports network. That unit was created by Sterling Entertainment Enterprises, Time Warner Inc. and Comcast Corp. in 2006, according to the network’s website.
Fred Wilpon and Nelson Doubleday purchased the Mets for $80.8 million in 1986, after Doubleday & Co. was purchased by Bertelsmann AG. The co-owners’ relationship deteriorated and Wilpon bought Doubleday’s share of the team for $131 million in August 2002, according to the New York Times.
The case is Picard v. Katz, 10-05287, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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