For six months, the competing claims have played out in court papers and public charges.
The trustee for the victims of Bernard L. Madoff’s Ponzi scheme has accused the Mets’ owners of ignoring repeated warnings that Madoff might have been up to no good during their years of investing with him. The owners, the trustee has said, were accomplished businessmen who had made fortunes in various fields, and had to have known the returns from their investments with Madoff were suspect.
For their part, the owners, Fred Wilpon and Saul Katz, have sought to draw a vital distinction: yes, they are successful businessmen, but they are not sophisticated Wall Street investors. They had, indeed, hired Madoff for the investing skills that they lacked. There was no way, they have argued, that they had the expertise and experience to have sniffed out Madoff’s fraud.
The high-stakes arguments – the trustee is seeking $1 billion from Wilpon and Katz – are set to be heard, and perhaps decided, by Judge Jed S. Rakoff in United States District Court in Manhattan on Aug. 17.
In a court filing last week, the trustee, Irving H. Picard, laid out, in more detail than before, his strategy for asking the court to evaluate the conduct of Wilpon and Katz. While not abandoning his theory that the team’s owners are more sophisticated than the average investor, Picard argued they should be tested by a somewhat lesser standard: what would a “reasonable person” of “ordinary intelligence” have done when presented with what he calls a “mountain” of warnings about Madoff’s operation?
“At some level, he is trying to line up his arguments with actionable legal theories,” said Joel Seligman, the president of the University of Rochester and an expert on securities law who has not studied the case.
At a minimum, Picard asserts that Wilpon and Katz should have conducted some kind of inquiry into the details and probity of Madoff’s operations. They never did, but instead continued to invest, and to profit, for years.
Picard’s argument appears to result in part from the successful effort by Wilpon and Katz to transfer the trustee’s lawsuit from bankruptcy court to district court – a procedural victory for them.
Wilpon and Katz wanted the change so their dealings with Madoff might be judged under securities law, not the federal bankruptcy code. Seen merely as individual investors, they argued, they were under no special obligation to check out the trustworthiness of Madoff’s investing.
In a 25-page filing, though, Picard’s lawyers cite what they argue is a body of established New York and securities law that holds that ordinary individual investors – and not necessarily sophisticated ones – have real obligations to meaningfully check out warnings or hints of a possible fraud.
In a 2006 case involving a Ponzi scheme, for example, the Court of Appeals for the Second Circuit in New York ruled that the “exercise of ordinary intelligence” must be used by a prudent investor “or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”
In a 2004 decision on a securities-fraud case, a district court said, in part, that “when circumstances would suggest to an investor of ordinary intelligence the probability that it has been defrauded, a duty of inquiry arises, and knowledge will be imputed to the investor who does not make such an inquiry.”
Picard’s aggressive and pointed reassessment of the standard the Mets’ owners are to be held to is a “game changer,” said Philip M. Aidikoff, a partner in the securities law firm of Aidikoff, Uhl & Bakhtiari in Los Angeles.
” ‘Reasonably prudent’ is a lower threshold,” said Aidikoff, who represents clients who were defrauded by Madoff. “What Picard is doing is creating a new framework in terms of how two people should be measured.” He added, “It has that ‘it-makes-sense’ feeling.”
Still, Picard’s assertions about what Wilpon and Katz knew and should have done ultimately have to convince Rakoff, who has shown a willingness to drastically and surprisingly affect the course of major litigation. At a hearing late last month, he appeared sympathetic to the arguments by the team’s owners that Picard was seeking to, in effect, punish them retroactively for failing to uncover a fraud they were not in any way reasonably obliged to uncover.
Karen Wagner, a lawyer for Wilpon and Katz, argued at the hearing that securities laws did not impose a requirement on her clients to investigate Madoff.
At next month’s hearing, the Mets’ lawyers will almost certainly continue to argue that Picard has fabricated or distorted the evidence that is at the heart of the lawsuit: the supposed red flags and warnings that Wilpon and Katz ignored.
“A red flag is a look back, not living in the moment,” Aidikoff said. “They’re issues after the fact when you ask, ‘What did they know and when should they have known it?’ It’s subject to historical revision.”
Rakoff could dismiss the case entirely or rule on certain critical issues, and return all or parts of the lawsuit to United States Bankruptcy Court.