Bloomberg News

Mets Used Madoff Money for Deferred Compensation, Picard Says

February 24, 2012

Feb. 11 (Bloomberg) -- The liquidator of Bernard Madoff’s firm said the New York Mets owners were so “hooked” on money from the con man that they used it in place of disability insurance for the baseball team and to fund players’ deferred- compensation plans.

Irving Picard, the Madoff trustee, told a federal judge he is entitled to pursue a $386 million lawsuit against the Mets owners because they chose to be “willfully blind” to the fraud to maintain an income stream that was essential to their business. The Mets’ Madoff accounts funded working capital, as well as insurance and compensation, he said.

“When faced with cash crunches from week to week, the Mets routinely and confidently relied on future Madoff returns to bridge the gap,” and any excess cash went back into Madoff’s firm, Picard said in a Feb. 9 filing in U.S. District Court in Manhattan. “The Mets relied on Madoff’s returns as a predictable source of income for a business -- professional baseball -- with an otherwise unpredictable revenue stream.”

The Mets owners, after losing money in the Ponzi scheme and an income stream from Madoff, have said they are trying to sell stakes in the Major League Baseball team. They have cut the team’s payroll and hired a restructuring firm to advise them on their finances, which remain under threat from Picard’s claims.

Sterling Equities Inc.’s partners declined to comment in an e-mailed statement, saying they will respond to Picard’s filing next week.

Santana’s Deferred Comp

The Mets’ Johan Santana, who signed a $137.5 million, six- year contract in 2008, gets $24 million this year and has $5 million deferred annually at 1.25 percent, according to Cot’s Baseball Contracts, a website.

Sterling partners Fred Wilpon and Saul Katz have said they trusted their broker and never suspected him of any fraud, let alone a Ponzi scheme. Picard’s suit should be thrown out because he cannot prove willful blindness, only make allegations, they have said.

The Mets owners said they should be allowed to keep $83 million in fictitious profits taken from Madoff’s Ponzi scheme as well as their principal, because the money was owed by the registered brokerage to its clients. Picard had asked U.S. District Judge Jed Rakoff to rule now on his right to take the profits, in advance of a trial set for March 19.

Lost $500 Million

Sterling’s partners built a successful business before they invested in Madoff, they said in a Jan. 26 filing. They were drawn to Madoff because of his prominence in the investment community, and entrusted hundreds of millions to him -- losing $500 million in the fraud, they have said.

Rakoff last year threw out most of Picard’s $1 billion in claims against the Mets owners, leaving the trustee to seek about $386 million. The judge said Picard must prove the defendants, including Wilpon and Katz, were willfully blind to Madoff’s crimes if he wants to recoup more than the $83 million withdrawn in the two years before Madoff’s 2008 arrest.

Parts of Picard’s filing are blacked out in accord with confidentiality agreements, including data on what he called the growing size of “Madoff-related loans,” and the agreements governing the debt.

“By the 2000s, there was not a thread of their business operations that was not entangled” with their Madoff accounts, Picard said. “Banking” on the con man, the Mets owners chose to ignore red flags, including articles questioning Madoff’s returns and “personal warnings” from investors, he said.

‘Guaranteed Returns’

Profits from real estate and other businesses went into Madoff accounts, which provided “guaranteed returns” that were used to pay quarterly taxes, living expenses and loan interest, Picard said. The Sterling partners’ assets, including their stake in SportsNet New York, a television network, “are by their very nature illiquid, meaning they could not and cannot provide cash on demand when needed by the many Sterling businesses,” he said.

Money in Madoff accounts was used as collateral for loans from Bank of America Corp., which financed more investments in Madoff, according to Picard. Sterling partners called those loans “double ups,” he said.

According to Picard, Sterling partner Arthur Friedman testified the partners were warned that if Madoff was ever investigated by regulators, their lenders might put them in default.

‘A Problem’

“If there were an investigation and if the money was tied up, then we might run into a problem,” Friedman said in describing the warning, according to Picard. The partners weren’t warned that Madoff was actually doing something wrong, Friedman told Picard.

By 2001, Wilpon and Katz were reading articles that questioned Madoff’s methods and had received “personal warnings” about the money manager, according to Picard.

After Madoff’s arrest, when Sterling restructured a bank loan of more than $500 million, lenders stipulated that a judgment in the Madoff case of more than $100 million, or in some cases $50 million, would constitute “an event of default,” Picard said in his complaint.

Picard, a partner at law firm Baker & Hostetler LLP in New York, originally demanded $300 million in profit and $700 million in principal from Wilpon, Katz and a group of family members and related entities, saying they turned a blind eye to Madoff’s Ponzi scheme.

In September, Rakoff dismissed all or part of nine of 11 claims in Picard’s suit against Wilpon and Katz. He has set a trial for the rest of the claims. Rakoff last month refused to allow Picard to appeal his decision.

Madoff, 73, pleaded guilty in 2009 to orchestrating what prosecutors called the biggest Ponzi scheme in history. He is serving a 150-year sentence in a federal prison in North Carolina.

The case is Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Andrew Dunn, Stephen Farr

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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