A federal judge on Tuesday narrowed a lawsuit against the owners of the Mets but ruled the trustee recovering money for victims of Bernard Madoff’s fraud could still seek to seize $1 billion of phony profits and principal allegedly withdrawn before the Ponzi scheme collapsed.
US District Judge Jed S. Rakoff in Manhattan threw out nine of 11 counts, but said Irving Picard, the Madoff trustee, could continue to pursue alleged false profits and the principal investments of Mets owners Fred Wilpon and Saul Katz and their business partners.
Picard is seeking the return of nearly $300 million in fictitious profits, as well as up to $700 million in principal withdrawn by the Mets owners.
In an order Tuesday, Judge Rakoff ruled Picard would have to meet a high standard of proof to seize any of the Mets owners’ principal. He would have to prove the owners were “willfully blind” to signs of the fraud and ignored red flags that would have uncovered it had they investigated.
But the judge rejected Picard’s efforts to recover their principal under a lower legal standard known as “inquiry notice.”
Under that approach, Picard could have recovered principal simply by showing the Mets owners failed to investigate activity a reasonable person would have considered suspicious, even if doing so would not have uncovered the Ponzi scheme.
“The trustee may recover defendants’ net profits simply by proving that the defendants did not provide value for the monies received, but the trustee may recover the return of the defendants’ principal only by proving that the defendants willfully blinded themselves to Madoff Securities’ fraud,” the judge said.
However, the question of how much Picard could ultimately recover in terms of false profits remains an open question, the judge said.
The judge has yet to rule on whether Picard can recover phony profits beyond a two-year statute of limitations under federal bankruptcy law.
The Mets owners allegedly withdrew $83.3 million in the two years prior to Madoff’s fraud coming to light. The nearly $300 million Picard is seeking goes back the length of their investment with Madoff.
The judge also said Picard cannot disallow claims by the Mets owners and their associates for an estimated $160 million in principal they lost in the Ponzi scheme. But Judge Rakoff ruled the trustee could give those claims a lower priority than those of other investors if he could show they were “willfully blind” to the fraud.
Picard has alleged the Mets owners and their business partners failed to investigate direct warnings and evidence that Madoff was conducting a Ponzi scheme.
Madoff admitted in March 2009 to running a decades-long fraud and is serving a 150-year prison term.
“The trustee and his counsel are aware of the District Court opinion and order and are in the process of reviewing the decision,” said Amanda Remus, a spokeswoman for the trustee. She declined further comment.
A spokesman for the Mets owners did not have an immediate comment.
Read more at The Wall Street Journal