The liquidator of Bernard Madoff’s bankrupt firm more than doubled his estimate of how much investors may lose if he can’t overturn a judge’s ruling that dismissed much of his $1 billion claim against the owners of the New York Mets.
Trustee Irving Picard said today that the ruling cut his potential recovery from clawback suits by at least $2.7 billion, and placed the recovery of another $3.5 billion “in question,” according to a statement from his spokeswoman, Amanda Remus.
U.S. District Judge Jed Rakoff this week cut to about $386 million the $1 billion demanded by Picard from the Major League Baseball team owners, Fred Wilpon and Saul Katz, saying the trustee could only try to take back two years of withdrawals from the Ponzi scheme, instead of six.
A lawyer for Picard said yesterday that the two-year rule would cost the trustee “about” $3 billion on all clawback suits. Another aspect of Rakoff’s ruling relating to so-called preference payments jeopardized another $3.5 billion of recoveries, according to today’s statement.
Picard will ask Rakoff to approve an appeal of his ruling to the federal appeals court in New York. The appeals court will then decide whether to review the ruling. Picard, who got a favorable ruling from the appeals court on his formula for compensating investors who lost money, may lose this time.
Permission to Appeal
“I’m not sure Judge Rakoff will give Picard permission to appeal,” said Jonathan Landers of Milberg LLP, which represents investors in more than 25 so-called clawback lawsuits brought by Picard, including some awaiting Rakoff’s attention. “If he does, I expect him to be affirmed by the appeals court.”
An appeal could cause the Madoff firm’s liquidation to “grind to a halt for a year or longer,” Landers said.
The trustee said today his first payments to investors totaling $272 million will be delayed because of Rakoff’s ruling. The checks were due to be issued by Sept. 30, almost three years after the Ponzi scheme collapsed. He didn’t say how long the delay would last.
Rakoff set a trial date of March 19 for the trustee’s case against the Mets owners, after quizzing both sides yesterday on their plans to bring in expert witnesses. He said he was “skeptical” about the trustee’s desire to bring in an expert on investors’ fiduciary duties -- Picard based his claims for the $1 billion on allegations the Mets owners failed in their duty to probe Madoff’s fraud despite so-called red flags that warned of irregularities.
Rakoff, who said in his ruling, “A securities investor has no inherent duty to inquire about his stockbroker,” told Sheehan the subject was “a matter of law,” not “a matter for experts.” He was also skeptical of listening to an expert on red flags, whom Sheehan proposed bringing, he said.
“I’m inherently skeptical of all experts,” Rakoff said.
Picard said in July he has raised more than $8.6 billion for Madoff investors who lost money, or almost half of the $17.3 billion in principal lost by Madoff customers who filed claims. That includes more than $5 billion tied up in court challenges.
Rakoff set a high standard of proof for the trustee to take back the $700 million in principal he sought from the Mets owners, even if he wins his appeal. Rakoff ruled that Picard must prove the Wilpon group willfully blinded themselves to evidence of Madoff’s fraud. Rakoff said in his decision that the standard was lower for claiming fictitious profits.
Rakoff’s ruling that the trustee can only take back two years of withdrawals was good news for investors facing so-called clawback suits, from the Mets owners’ group to individuals who took more money out of the Ponzi scheme than they put in.
“For our clients this is very good news, because it knocks the exposure to payments within two years” of the bankruptcy filing by Madoff’s firm in 2008, Jonathan Landers of Milberg LLP said in a phone interview before the hearing yesterday. He is representing investors in more than 25 so-called clawback lawsuits brought by Picard, including some awaiting Rakoff’s attention.
“Five thousand innocent victims of Mr. Picard’s persecution will sleep well tonight for the first time in 2 1/2 years,” Helen Chaitman, a lawyer who represents Madoff investors, said of Rakoff’s ruling in an e-mailed statement.
The trustee’s pending appeal is “a lesson” for those investors, said Nancy Rapoport, a bankruptcy-law professor at the University of Nevada, Las Vegas.
“If something looks too good to be true, investigate further,” she said in an e-mail.
At the hearing, Rakoff directed both sides to file arguments on how Picard should determine how much of the money the Mets owners withdrew was principal and how much profit.
Rakoff also set deadlines for pretrial evidence exchange in the case and fixed a new trial date. The judge said it was fine for Picard to reserve his right to amend his lawsuit against the Mets owners, as Sheehan requested, though it didn’t mean he would consent.
“The whole trial will go differently if the second circuit rules in our favor,” Sheehan told reporters.
The case is: Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).