Mets Owner Wilpon's Involvement with Madoff's Ponzi Scheme

A few months ago, it was disclosed that New York Mets’ team owners Fred Wilpon and Saul Katz were being sued for $1 billion in connection with Bernard L. Madoff’s Ponzi scheme. With impeccable timing, along comes hedge-fund manager David Einhorn who last week announced that he has entered into exclusive negotiations to spend $200 million for a noncontrolling stake in the Mets. How ironic it is that the Met's "white knight," Greenlight Capital Inc. President David Einhorn, is a hedge-fund manager given that Madoff's hedge fund, Ascot Partners, was a giant scam that had to intensify redemptions from scores of other hedge funds to meet its obligations. Wilpon pleaded innocent to charges he knew about the Madoff scam.

Wilpon needs all the friends he can get right now but recent comments about specific Mets players' on-field performance run counter to that goal. He may be justified in criticizing a team that is winning only 45 percent of its games following a season that was marginally better -- a 49 percent success rate. What's worse, the Mets have the 5th-highest payroll in Major League Baseball ($133 million or $$5.1 million per player).

In a May 30 story by Jeffrey Toobin in New Yorker magazine that was released on-line last week, it was reported that

                                  Fred Wilpon

Wilpon had previously made critical comments about a few key Mets players. Midway through the article, Tobin recounts an exchange he had with Wilpon during the Mets' 4-3 loss to the lowly Houston Astros. Here is a sampling of comments:

                 "He thinks he's going to get Carl Crawford money," referring to Jose Reyes                                     who had singled and stole second, leading off for the Mets. "He's had                                               everything wrong with him"

                On Carlos Beltran: "We had some schmuck (referring to himself) who paid                                     paid him based on that one series (the 2004 postseason)...He's sixty-five                                     to seventy percent of what he was."

                As for Ike Davis, "Good hitter,...Shitty team."

                When David Wright got up to bat, Wilpon said, "He's pressing. A really good                                 player. Not a superstar."

I'm not sure what Wilpon considers superstar statistics to be but Wright has to be given serious consideration with a career batting average of .305, and .383 on-base-percentage. He has averaged 23 steals the last five years. He has hit 26 home runs or more for 5 of the past 6 years. Wright also was the winner of the gold-glove award for his play at third base in 2007 and 2008. Wright is a five time All-Star and won the Silver Slugger Award in 2007 and 2008 that goes to the best offensive player at each position, as determined by the coaches and managers of Major League Baseball.  

Should we have sympathy for Fred Wilpon? After all, he was snookered into investing in Bernie Madoff's Ponzi scheme along with thousands of other investors. On December 11, 2008, the day that Madoff’s money-management business was revealed to be the largest Ponzi scheme in American history, Wilpon and his partners’ stake was listed at $550 million. On that one day, it all vanished. Adding insult to injury, last December, Irving Picard, who is the bankruptcy trustee charged with salvaging assets to compensate Madoff’s victims, filed a lawsuit against Wilpon and his partners.

Picard charged Mets co-owners Wilpon and Saul Katz were enablers, virtually Madoff’s accomplices in the vast crime, who “willfully turned a blind eye to every objective indicia of fraud before them.” For the Madoff investors, Picard had adopted a formula whereby the “net winners”—that is, those who cashed out more than they put into their Madoff accounts—would pay back their winnings to compensate those who were net losers. I previously blogged about this so-called "clawback" standard under which the Wilpon people would have had to repay approximately$160 million in profits that they had taken out of their Madoff accounts over the years. (The precise amount is in dispute.) However, Picard was treating Wilpon the way he treated those he believed to be complicit in Madoff’s fraud. From this group, Picard was seeking a refund of their Madoff principal, not just their profits. In other words, they would have to make good even on the money they had lost in the scam. Specifically, he was demanding that the Wilpon group pay damages of $1 billion.

The real question here is did (or should have) Fred Wilpon seen the red flags that trouble was brewing with Madoff and his funds? Wilpon's defense is that if the SEC wasn't aware of the fraud, how could he reasonably be expected to have known? Indeed, the SEC was informed about the scheme by independent financial fraud investigator, Harry Makopolis, who has received public acclaim for uncovering evidence over a period of nine years that Madoff's wealth management business was actually a massive Ponzi scheme.  Madoff was ultimately sentenced to 150 years in prison after admitting to operating the biggest Ponzi scheme in history. 

Picard's complaint alleges that Wilpon and Katz knew that Madoff was dishonest in his investment advisory business, and that his investment returns were "too good to be true." According to Picard, Wilpon and Katz had a "deep dependency" on the continuation of the Madoff fraud. In one example of the close relationship between Sterling Equities and Madoff, the complaint says Wilpon and Katz accepted an interest- and cost-free $54 million loan from Madoff to pay Cablevision for the broadcast rights for the New York Mets. According to Picard, the loan was documented by a fraudulent letter that described it as an "investment" by Madoff's wife, Ruth.

The complaint says Wilpon and Katz received fraudulent transfers from Madoff during a six-year period before the Trustee began liquidating Madoff's investment firm in December 2008. It also charges that Wilpon and Katz received "preferential transfers" in a three-month period after the liquidation proceedings started. If the latter is true, there can be no doubt that clawbacks are justified and the payments after the liquidation began would seem to indicate that Wilpon may have been one of many investors who chose to look the other way as Madoff's funds returned about 10-12 percent every year.

  Blog by Steven Mintz, aka Ethics Sage, May 30, 2011