Picard Down To His Final Out in the Bottom of the Ninth

NOTE: this was written by MetsToday loyal reader and legal consultant Robert Tandy, Esq. It is an overview of what is happening with the Irving Picard case vs. Sterling Equities. Mr. Tandy will keep us posted on developments in the case with periodic updates. -Joe

On February 23, 2012, the ten individual partners of Sterling Equities (the “Sterling Defendants”), their family members, trusts, foundations, and affiliated business entities will move for summary judgment dismissing the Trustee’s remaining causes of action against the Sterling Defendants.

By way of background, the procedural history of the case can be summarized as follows:

• On December 11, 2008, the world learned, Bernie Madoff, the once prominent financial advisor, former NASDAQ chairman and vice-chairman of the NASD, was engaged in a Ponzi scheme for decades. Over that period, Madoff deceived thousands of investors and other financial and/or regulatory institutions, including the Securities and Exchange Commission (“SEC”). Each defendant was an individual customer of Bernard L. Madoff Investment Securities LLC (“Madoff”). The Sterling Defendants assert they, too, were deceived and were nothing more than victims of Madoff’s scheme.

• After Madoff’s arrest, his company was placed into liquidation under the Securities Investor Protection Act (“SIPA”) and Irving H. Picard was appointed Trustee. As part of his duties as Trustee, Picard invoked Bankruptcy Rule 2004 and required the Sterling Defendants to produce documents responsive to the Trustees’ document demands – – an estimated 700,000 pages of documents – – and, in addition, the Sterling Defendants contend the Trustee took unlimited deposition testimony of the Sterling Partners who were principally involved with Madoff. The Sterling Defendants have consistently maintained nothing in the vast discovery record demonstrated that any Defendant was suspicious of and/or had knowledge of Madoff’s Ponzi scheme or other fraud.

• As a result of the discovery produced, Picard initiated a one billion dollar avoidance action against the Sterling Defendants. On March 18, 2011, the Trustee filed an Amended Complaint.

• On September 28, 2011, Judge Jed S. Rakoff dismissed all Counts of the Amended Complaint except Counts 1 and 11. The Trustee may attempt to recover the net profits under Count 1 of the Amended Complaint by proving the Sterling Defendants did not provide value for the monies received. However, the Court ruled that the Trustee may only recover the return of the Sterling Defendants’ principal by proving that the individual defendants willfully blinded themselves to Madoff’s securities fraud. Judge Rakoff also held that the Trustee may subordinate the Sterling Defendants’ own claims against Madoff only if it can establish the same standard needed to recover under Count 1 of the Amended Complaint, i.e., that the individual defendants willfully blinded themselves to Madoff’s securities fraud. Specifically, the Court reasoned, in part, that “[a] securities investor has no inherent duty to inquire about his stockbroker, and SIPA creates no such duty.” Moreover, the Court concluded that the Trustee may be able to avoid transfers of “net profits” during the two years prior to bankruptcy “simply by showing that the [D]efendants failed to provide value for those transfers,” but that, as to “principal,” the Trustee can prevail “only by showing an absence of good faith on [D]efendants’ part based on their willful blindness.”

• The Trustee sought interlocutory appeal of the Dismissal Decision, which was denied on January 17, 2012. In denying the appeal, the Court reaffirmed the initial holding that “the Trustee could not recover on a theory of negligence, and that the [D]efendants could therefore establish that they had received the transfers from Madoff Securities in ‘good faith’ …. by showing that they did not know of, or willfully blind themselves to, Madoff Securities’ fraud.”

The Sterling Defendants moved for summary judgment dismissing the case against them in its entirety. Papers submitted by the Sterling Defendants reveal their Motion for Summary Judgment is based in part on the following grounds:

• None of the Sterling Defendants Subjectively Believed That There Was Any Probability That Madoff Was Running a Ponzi Scheme or Engaged in Fraud

i) The Sterling Partners Never Sought Insurance Because of Concerns About a Madoff Fraud or Ponzi Scheme

ii) Nothing About Sterling Stamos Undercut the Sterling Partners’ Trust in Madoff

iii) The Sterling Partners Understood That Madoff’s Returns Were Intended to Be Consistent and Were Not Concerned When They Were

iv) The Sterling Partners Thought Proprietary Strategies Entirely Appropriate and Were Not Concerned About Madoff’s “Black Box”

v) Madoff Deceived Many with His Highly Organized Fraud

• There Is No Evidence That Any of The Sterling Defendants Took Deliberate Action to Avoid Learning the Truth About Madoff’s Ponzi Scheme

• Willful Blindness Must Be Proven As To Each Individual Sterling Defendant

The Trustee’s opposition papers argue the Sterling Defendants were aware of facts that suggest a high probability of fraud and that they, in fact, intentionally blinded themselves of those facts or consciously avoided confirming the truth. The Trustee cites to the testimony of Chief Investment Officer of Sterling Stamos, Noreen Harrington, to establish the Sterling Defendants were warned that Madoff was either “engaged in illegal front-running or a fiction.” However, the Sterling Defendants claim that when examined by Counsel for the Sterling Defendants as to what proof she had, Ms. Harrington testified she did not “have the hard tangible facts to be able to say that [she] was right or wrong” about Madoff; and, she also advised “I have been wrong before, I could be wrong now.”

The Court will now have to decide whether there is enough evidence in the record such that a reasonable juror could differ as to whether the Sterling Defendants subjectively believed there was a high probability that facts exist demonstrating a fraud; and that the Sterling Defendants took deliberate actions to avoid learning of that fact. Time will tell whether the Trustee has submitted enough evidence to go forward against the Sterling Defendants.

Stay tuned for future updates.

Robert Tandy, Esq. is a NY- and NJ-licensed attorney based in Bergen County, NJ specializing in business, contract, and employment law. Prior to joining the dark side, he was a standout NCAA D1 performer at St. Peter's College and an All-County / All-League selection for Bergen Catholic High School, where he started at shortstop in front of future MLBer Mark DeRosa. You can learn more about Robert's firm and legal expertise by visiting TandyLaw.com.
  1. Patrick February 15, 2012 at 8:33 am
    What evidence is there in this situation that it is the bottom of the ninth other than the need for a baseball pun?

    Admittedly, I have tilted like a pinball table way to the side of sayonara Wilpon, Katz families, but I don’t think we’ve seen much total convincing from either side yet. Still while the defendants are innocent until proven guilty, there circumstances don’t look favorably on these fellows.

    • Robert Tandy February 15, 2012 at 12:43 pm
      The title of the article is more than just a baseball pun, Picard is almost to the apple’s rotten core, having spent millions of estate dollars fumbling through hundreds of thousands of documents, dozens of depositions, loss after loss in the Courtroom, and has produced nothing more than a statement by a witness who could not produce any tangible evidence of a fraud – – it was a hunch. Beit a hunch that was true and a fraud that was ultimately uncovered leaving egg on the face of dozens upon dozens of financial and regulatory institutions over decades – – it was still a hunch back when Ms. Harrington advised Katz.

      Court papers reveal, in 1990, Travelers Insurance Company conducted a due diligence of Madoff in connection with a financing effort being undertaken by the Mets. The facts in the record reveal that Madoff’s strategy had an ability to weather bumpy markets.

      Other documents reveal, in 1993, J.P. Morgan analyzed one of Saul Katz’s Madoff accounts in an effort to gain additional business from Mr. Katz. The record establishes J.P. Morgan conducted an“in depth analysis” for one account in 1990 and another analysis for 1991. The submission to court provide JP Morgan recommended that Katz diversify his portfolio and work with J.P. Morgan.

      The Sterling Defendants submitted documents providing in 2000, a Fitch rating was obtained, relying in part on the prior Travelers’ report. The submissions in Court provide: “Fitch IBCA’s rating reflects the performance of the Madoff account and takes into consideration the inherent strengths and weaknesses of the Madoff investment strategy. At any given time, Madoff will invest in stocks of the S&P 100, purchase S&P 100 index puts (options to sell at a fixed price) and sell S&P 100 calls (purchaser will have the right to buy at a fixed price). The puts are designed to reduce downside risk and the sale of calls, while limiting upside potential, generates additional cash for the account to be reinvested. The options limit price volatility of the underlying stocks, and allow for the account to capture the dividends being paid by these blue chip companies. The partners of Sterling Equities . . . have been investing with Madoff since October 1985 and currently have approximately 250 different accounts managed by Madoff. Sterling’s returns on any given year have never been lower than 16.5% and have averaged in excess of 19%. This time frame has included significant bear markets of the late-1980’s and early-1990’s.” Fitch then reaffirmed its rating early in 2003.

      Picard’s opposition papers may successfully defeat the Sterling Defendants’ Motion for Summary Judgment on February 23 (given the standard for granting a motion for summary judgment), but it is my humble opinion, based on my reading and interpretation of the parties’ respective submissions in Court, that a juror, given the facts submitted in the moving papers, would struggle to find that the Sterling Defendants subjectively believed there was a high probability that Madoff was engaging in a fraud; and that the Sterling Defendants took deliberate actions to avoid learning of that fraud.

      • DaveSchneck February 15, 2012 at 12:55 pm
        Well stated, and thank you. Given that in your opinion a jury would side with the Sterling group, what is your prediction for conclusion, both in terms of monies paid back by Sterling and in timeline for finalizing with appeals, etc?
        • Robert Tandy February 15, 2012 at 1:19 pm
          It’s difficult to say Dave – – Picard has invested too much into the Sterling empire. He would be pressed to exit while saving face, but it may ultimately be decided by the Court. We should know a lot more after the motion for summary judgment on 2/23. Picard need only demonstrate at this point, however, that, given all favorable doubt to Picard’s position, a reasonable person (juror) could differ as to whether the Sterling Defendants believed Madoff was engaged in a fraud and that they looked the other way.
  2. dancapwell February 15, 2012 at 8:46 am
    Thanks for this, easy to follow and allows the reader to draw his/her own conclusions. I feel about the Wilpons the way I feel about Jerry Sandusky–abhorrent, but deserving of their day in court.

    Also interesting to see when the lying began (12/1108). Since then, Fred Wilpon, Jeff Wilpon, Omar Minaya and now Sandy Alderson have lied to the fanbase about the impact of this “development” on the team’s on-field performance.

    I can understand (but not necessarily support) equivicating about legal matters, but to say one thing to the fans while the facts indicate the exact opposite has lead IMHO to the mass alienation and potential boycott of home games this year. All of that goes away if they start winning, which again IMHO is unlikely.

    • DaveSchneck February 15, 2012 at 9:49 am
      Good post, I agree on all points. As much as I would like this to be in the bottom of the ninth, and end one way or another, I suspect that the appeals process will allow for either side to continue to contest this issue for many months. unless they reach a settlement which is possible but highly unlikely.
      • HobieLandrith February 15, 2012 at 9:58 am
        In baseball there is always the possibility of extra innings. This one may go 18.
  3. LongTimeFan February 15, 2012 at 9:39 am
    I think Picard is full of hot air and has levied baseless charges including misrepresenting Stamos’s testimony under oath to that of unfavorable against the Wilpons when his testimony backs what Wilpon/Katz have been stating all along. There are members of Congress on both sides of the aisle who have publicly stated that Picard is abusing his power which I totally agree.

    I don’t hold any animosity toward the Wilpons nor do I think they willfully lied to the public. Madoff/Picard fallout is fluid with wide-ranging impact on Mets coiffeurs, and thus circumstances evolve over time.

    The biggest mistake I see from the Wilpons, especially Fred, is inadequate contact with Mets fans leading to poor public relations.

    • HobieLandrith February 15, 2012 at 10:04 am
      I think you’re either a beneficiary of the Wilpon/Madoff ponzi scheme, a family member, or your head is stuck in the sand.

      Poor PR is hardly Fred Wilpons’ “biggest” mistake. How about putting his idiotic son in charge of the team? How about investing with Madoff? How about using Madoff’s funny money scheme with greedy intent? How about leveraging his relationship with Bud Selig to force Nelson Doubleday out of ownership? How about building a billion-dollar stadium when the economy was on the verge of tanking? Fan contact and public relations are the least of Fred’s mistakes — though I agree, he’s pretty awful at that, too.

  4. Tony February 15, 2012 at 10:04 am
    This was a very well written post summarizing what has taken place..after reading what has been constant tainted info on the proceedings, this is refreshing. I can only see this being the final out if an appeal is quickly denied, which is also likely given how far the trustee has drawn this out, and the fact that he can be motivated by his hourly earnings and commissions. If he loses now, an appeal will likely be denied or he will finally budge in mediation. What some fail to recognize is that he is hoping to use sterling equities (wilpons) to set a case precedence to allow him to go after the principal, not just the earnings of others, including investment banks that likely did know better.
  5. Mike B February 15, 2012 at 11:06 am
    Let me start by saying I hate the Wilpons, But why are the wilpons the only ones that were stealing and everyone(all the small investors that lost all thier money) were victims. They also bought into “easy money”, I dont feel bad for them that the music stoped and they didnt have a chair.
  6. LB February 15, 2012 at 12:33 pm
    RT is a brilliant attorney and when he was a regular commenter on my own Yankees blog he correctly called the entire progression / conclusion of the Bonds case way in advance.

    IMO Wilpon and his fleet of firms is well connected and well invested in the redevelopment of the Iron Triangle, of which Citi Field is only a part. There is much talk of a convention center being built and at least the area will be razed and redeveloped completely. That said, the matter will be resolved with a pittance at most.

    • LB February 15, 2012 at 1:56 pm
      Did I say convention center? I meant casino. Oh wait…
  7. NormE February 15, 2012 at 12:51 pm
    Mr. Tandy’s article is greatly appreciated.

    I think that most Mets fans don’t really care about the court proceedings as long as the team can return to functioning
    as the big league entity it should be.

    We don’t watch the team to root for the owners. All we ask is that ownership give its baseball people the means to field a competitive team. The Madoff case has impaired that. When this case ends, win or lose, will the present ownership be able to provide the money to reinvigorate the team? That’s what we care about.

    • HobieLandrith February 15, 2012 at 1:18 pm
      Agreed on the article – good stuff.

      As for the court proceedings, I think a lot of Mets fans are like me and DO care about them, and are following them intently.Theres no point in rooting for the Mets to win on the field this year, so instead I’m rooting for Picard to beat the Wilpons in court so we can get new ownership. Sad, but that’s the way I feel this year.

      BTW thanks to the bloggers here for keeping us updated, especially since the Wilponzi’s official online spin factory MetsBlog is ignoring the case (what a surprise).

  8. Galloping Gael February 15, 2012 at 3:05 pm
    If it’s the bottom of the ninth and Picard is down to his final out, is Noreen Harrington the person on third about to score the winning run, or did she just drive one into the right center alley, enabling Picard to trot in with the winning run?
  9. gary s. February 15, 2012 at 4:59 pm
    The Wilponzi’s are despicable in many ways.I will add one more to their resume.The last 2 years i bought a 6 pack for 5 home games plus a met/yankee game at Citicavern.I only plan to purchase tickets for any games via stubhub this year since the prices will be lower than buying from Mets.com.Despite that i checked on line a few days ago after i recd an email from the Mets to purchase six games. At face value the price is $154.They add a 2.50 handling charge to each ticket,Greedy but i can live with that,Than they have the gall to add a $20 “processing” fee to make the total $186.I will not buy because of the later absurd fee.THIRTY FIVE DOLLARS IN FEES FOR $154 WORTH OF TICKETS!This from a team that should be going out of their way to get people to come to the ballpark.I hope Picard wins his case and the greedy Wilponzi’s rot in hell with Madoff where they all belong.
  10. Izzy February 15, 2012 at 5:38 pm
    People defendning the Wilpons!!!!!! Its truly amazin. Fred Wilpon deserves niothing but to rot in hell. He used the Mets and millions of fans as a toy to his disgusting ego and as a play toy for his idiotic and useless son. the only thing Wilpon deserves is to be driven into bankruptcy. By Picard, by fans sick of his horrid ownership and snot faced attitude, who cares. Destroy the guy. He deserves it. And all Met fans deserve better than the Wilpon scum that has ruined this franchise. Defedning Wilpon! You few must be on the rolls.
    • DaveSchneck February 16, 2012 at 9:24 am
      Supporting someone’s right to their day in court is not defending the Wilpons. That said, a change in ownership would be more than welcome, and the notion of Jeffy leading this franchise for years to come is tough to take.
  11. gary s. February 15, 2012 at 8:11 pm
    Izzy, Well said.I think you and i speak for the vast majority of Met fans who actually pay attention and watch the games.