Three days after a federal appeals court ruling dealt a blow to New York Mets principal owner Fred Wilpon and his family, the Wilpons' attorneys will be in Federal District Court in Manhattan on Friday afternoon, hoping to have at least part of the $1 billion-plus lawsuit against them tossed.
Judge Jed S. Rakoff may rule on the Wilpons' motion for the case to be dismissed, or for a summary judgment in their favor, although experts say a unanimous three-judge ruling Tuesday by the United States Court of Appeals for the Second Circuit will make it difficult for the Mets ownership family to avoid owing a minimum of roughly $300 million when the case is fully resolved.
Trustee Irving Picard is suing Wilpon and brother-in-law Saul Katz -- as well as other relatives and their businesses and charities -- for $1 billion, trying to recoup the money to distribute to net losers in swindler Bernard Madoff's Ponzi scheme.
Of that sum, $300 million is "fictitious profits" -- money the Wilpons are alleged to have withdrawn from certain funds over the amount of their investments.
The other $700 million is principal Picard wants the Wilpons to forfeit because he alleges they were sophisticated investors who had warning signs a fraud might be taking place and yet disregarded those red flags.
The Wilpons responded to the accusation tied to the $700 million, saying they thought Madoff was above-board and legitimate. They add that Madoff was their broker, and that they bore no responsibility to perform due diligence -- just as a person investing in a 401(k) relies on his statement without having the requirement of determining whether they are being swindled.
"You have a trustee that wants to find as much money as possible," said Mark Conrad, an associate professor of law and ethics at Fordham University. "You have one of the biggest frauds, if not the biggest Ponzi scheme fraud, in American history. You've got tons of people who lost everything, or most. And you're looking for whatever you can get to bring back in (to compensate victims). That's really the premise Picard is working with.
"Plus, they're saying these guys are big investors, that a lot of money that the Wilpon-Katz family put in to Madoff, some of that, at least, had to smell -- why they got so much out. And that's a stretch. That's the one area that really is a stretch, because there is no evidence they contributed or knew of the scheme, at least up to now. Basically what the trustee is saying is, 'You should have known.' And 'you should have known' can only go so far. And I don't know how far the court is going to accept that in terms of dollars and cents."
Tuesday's ruling nonetheless was a setback for the Wilpons because a three-judge panel unanimously ruled Picard's method of calculating who was a winner or loser in the Ponzi scheme is valid. The Wilpons had claimed that because statements issued by Madoff to them suggested they had $500 million invested at the time Madoff was arrested, they actually lost that amount of money.
The ruling sided with Picard that the standard is money invested versus money withdrawn. Anyone who withdrew more money than he invested, the court essentially found, has to return that profit so that other victims can be compensated. What a fake investment statement created by Madoff contained about the supposed balance of an account is irrelevant.
By that standard, the Wilpons made $300 million from certain funds, Picard alleges.
"What the court said is that we are applying what's called the 'net equity rule.' And the net equity rule is that what you get in is what you get out," said Fort Lauderdale, Fla., attorney Charles M. Tatelbaum, a partner with Hinshaw & Culbertson. "So at the end of the day, you look at what you put in through the whole time of the relationship. If you've gotten more out than you put in, for whatever reason, we're saying the trustee has the right to get it back. And if you've gotten out less than you've put in, then the only amount you can claim in the bankruptcy case is up to the amount to make you even for your principal."
The Wilpons have additionally argued that even by Picard's standard they ought to only owe $160 million -- since the net of all their funds earned that amount.
But experts say Picard likely is within his right seeking the $300 million figure instead of $160 million. Their reasoning: Because the Wilpons' funds had assorted owners -- various family members, charities, the Mets and other businesses -- Picard is able to pick the specific owners who turned a profit in the Ponzi scheme.
"I think the court is going to look at them investment by investment by investment," Tatelbaum said.
Although Rakoff has the reputation as an independent-thinking judge, experts believe Tuesday's ruling ultimately all but obligates the Wilpons to have to pay back at least the $300 million. If Rakoff were to rule otherwise -- Friday or at some future date -- Picard would merely appeal to the court that already had ruled in his favor on the calculation method.
"Under the principles of law, he is bound by that decision. Even though it's not from his court, he is in the Second Circuit," Tatelbaum said. "So therefore he is obligated to follow Second Circuit opinions."
Still, attorney Michael J. Kline of Fox Rothschild LLP's Princeton office said the Wilpons may be able to reduce the $300 million figure slightly through legal arguments over statutes of limitations on recovering certain funds.
Kline does believe the extra $700 million sought by Picard ultimately will be tossed because claiming the Wilpons ought to have known about Madoff's fraud is a reach. Picard in part cites internal Wilpon employee emails in his complaint to assert the family was on notice about potential fraud.
"I think it's stretching," Kline said.
Regardless, Kline does not expect the $700 million to be tossed Friday.
"There are really factual aspects of that case," Kline said. "So (Rakoff) might want testimony. He might want further review of legal arguments. It's tomorrow afternoon, right? I mean, that's not the time you generally do stuff like that and come out with a result. I would be surprised.
"But, as I said, he's been known to do things that are unexpected. It might be that he doesn't want to delay things. As a result, he's going to make a ruling, and that's going to move things along.
"He would be making a decision whether the trustee has the right to pursue the claim. It's a question of a matter of law, the degree to which a person has the obligation to be thinking about the results of the broker's investments and whether they're too good to be true."
What is unclear is how a potential $300 million verdict -- even if it's not $1 billion -- would affect the Wilpons' ownership of the Mets. Aside from this case, the Wilpons have loans against the team exceeding $500 million, according to some reports. They have needed to borrow money from Major League Baseball to cover operating losses. And they are nearing completion of a deal with hedge fund guru David Einhorn, who will invest $200 million in exchange for a minority share of the organization.
Former New York governor Mario Cuomo has been appointed as mediator in the legal dispute between Picard and the Wilpons, and experts predict a settlement remains the most likely ultimate outcome.
"If it does go to trial, it can go to an appeal and it could be years of litigation," Fordham's Conrad said. "The Wilpons clearly are in financial trouble. ... And the longer this drags on, it can't be good. I suspect if they can get a settlement for somewhat under $300 million, the family will take it."
Adam Rubin covers the Mets for ESPNNewYork.com.