Sept. 28 (Bloomberg) -- The New York Mets’ owners may still have to pay hundreds of millions of dollars to the trustee liquidating Bernard Madoff’s investment firm after a judge dismissed nine of the 11 counts in his lawsuit.
The trustee, Irving Picard, sought $300 million in profit and $700 million in principal from Sterling Equities Inc. partners Fred Wilpon, Saul Katz and other defendants in the complaint filed in Manhattan federal court.
U.S. District Judge Jed Rakoff said he wouldn’t decide right now if Picard could try to seize almost $300 million in profits received over the course of the Sterling investment with Madoff, or about $83 million, representing the last two years of Sterling’s profits before Madoff’s 2008 arrest.
Sterling Partners said in an e-mail that the opinion limits Picard to an attempt to recover only two years of “payments.” The decision wasn’t specific about what the recovery of principal would be.
It’s “not a big win for Picard but not a total loss,” said Harvey Miller, a bankruptcy lawyer at Weil Gotshal and Manges LLP. “He still has significant viable claims. By the same token Wilpon and Katz have achieved a reduced exposure at least at this stage.”
Picard is reviewing Rakoff’s decision and declined to comment “prior to a thorough evaluation,” said Amanda Remus, a Picard spokeswoman.
Rakoff left open the question of what time period might apply to the recovery of profits.
“The court does not resolve on this motion whether the Trustee can avoid as profits only what defendants received in excess of their investment during the two year look back period specified by section 548 or instead the excess they received over the course of their investment with Madoff,” said a note in Rakoff’s decision.
The judge let stand Picard’s claim that Katz and Wilpon turned a blind eye to Madoff’s Ponzi scheme.
Picard sued the Mets owners in bankruptcy court in December, demanding the return of what he called “fictitious” profit and $700 million in principal taken out of the Madoff firm by Sterling Equities Inc. and its partners. He alleged they had “concerns” that Madoff was conducting a fraud, even shopping for fraud insurance, and failed in their duty to probe the fraud.
Asking Rakoff to dismiss the suit, the Mets owners said they “never suspected Madoff was running a Ponzi scheme or any other fraudulent enterprise, never shopped for fraud insurance, never thought they needed fraud insurance, and never purchased fraud insurance” for their Madoff investments. No federal law forces a brokerage customer to investigate his money manager, they said.
To prove willful blindness, Picard must show Wilpon and Katz were aware of a “high probability” of fraud and “consciously avoided confirming that fact,” Rakoff said. The trustee can’t say it’s a lack of good faith just because a brokerage customer “fails to launch an investigation of his broker’s internal practices -- and how could he do so anyway?”
Duty of Inquiry
Judges have struggled with the duty of inquiry for more than half a century, Rakoff said at a July hearing in Manhattan when he agreed to decide the issue.
Today, he said, “A securities investor has no inherent duty to inquire about his stockbroker. If an investor, nonetheless, intentionally chooses to blind himself to the ‘red flags’ that suggest a high probability of fraud, his ‘willful blindness’ to the truth is tantamount to a lack of good faith,” he said. “But if simply confronted with suspicious circumstances, he fails to launch an investigation of his broker’s internal practices, his lack of due diligence cannot be equated with a lack of good faith.”
Rakoff’s ruling is another challenge to Picard, who with his firm has filed more than 1,000 suits seeking $100 billion for Madoff investors and charged more than $224 million for work since Madoff’s 2008 arrest.
Court documents for the Mets’ owners case show more than 60 related lawsuits awaiting Rakoff’s attention. His decision on whether Picard can recover profit from just the two years before the bankruptcy or a longer period, when it comes, may affect the related lawsuits.
Separately, Rakoff in July threw out almost $9 billion in damages Picard demanded from HSBC Holdings Plc and feeder funds, saying the trustee wasn’t entitled to make common-law claims based on an alleged failure of duty to detect Madoff’s fraud.
U.S. District Judge Colleen McMahon in Manhattan has said she will decide if the trustee can sue JPMorgan Chase & Co. for $19 billion in damages, equal to the trustee’s estimate of all principal lost by all Madoff investors.
Rakoff also is reviewing whether Picard has the right to use U.S. racketeering law against Sonja Kohn and Italy’s UniCredit SpA in a $59 billion suit.
Wilpon and Katz contend Picard was seeking to recover money that Sterling took out from Madoff’s firm as many as 25 years ago, wrongly deeming the withdrawals to be fraudulent. Under federal regulations, brokerages must issue customer statements and trade confirmations that are “legally enforceable evidence” of a broker’s obligation to customers, entitling customers to take out money, they said.
“By definition,” Madoff’s transfers of money to customers can’t be reversed as fraudulent, the Mets owners said.
They said Picard’s position on their so-called duty to investigate the con man was “unprecedented.”
The bankruptcy court case is Picard v. Katz, 1:10-ap-05287, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The district court case is Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).
--With assistance from Scott Soshnick in New York. Editors: Mary Romano, John Pickering
To contact the reporters on this story: Linda Sandler in New York at email@example.com; Patricia Hurtado in Manhattan federal court at firstname.lastname@example.org; Bob Van Voris in Manhattan federal court at email@example.com.
To contact the editor responsible for this story: John Pickering at firstname.lastname@example.org