Lawyers: Sterling Defendants Don't Owe Madoff Trustee Money

Lawyers representing Sterling Equities, whose principals Fred Wilpon and Saul Katz also own the New York Mets, said Wednesday that the lawsuit that is being built against their clients by Madoff bankruptcy trustee Irving Picard is without merit.

New York Mets
New York Mets
New York Mets

The attorneys, David Caplan and Karen Wagner, from the law firm at Davis Polk & Wardwell, told CNBC that Wilpon and Katz knew nothing of Madoff's $65 billion scheme, as it has been alleged. Caplan and Wagner also say that more than 700,000 pages they turned over to Picard failed to show a connection.

Picard has filed hundreds of lawsuits against banks and investors who profited off Madoff's made up numbers. He has so far recovered almost $10 billion in these so-called clawback suits.

But Sterling Equities, Wilpon and Katz, who had many accounts with Madoff and referred others to him, don't owe any money, Caplan and Wagner told CNBC on Wednesday.

"The customer of the broker is not subject to clawbacks, even if the broker has engaged in fraud," Wagner said. "Since customers no longer hold physical securities, they rely on the broker to provide them with accurate account statements. The law is clear, even inside of bankruptcy, that the statement provided to the customer constitutes a legal obligation of the broker to pay that amount."

Wagner says that even if it turns out that the money isn't being really earned, as was the case in the Madoff Ponzi scheme, the customer is still owed the amount that the broker said the customer was due and has the right to withdraw whatever is reflected in the statement. Mets LLP, owned by the defendants, reportedly profited off its Madoff accounts.

"The customer of the broker is not subject to clawbacks, even if the broker has engaged in fraud." -Davis Polk & Wardell, Karen Wagner

The bankruptcy case before the 2nd U.S. Circuit Court of Appeals, which is currently sealed, revolves around the definition of net equity. In other words, in this particular case, is a client owed what he or she has really earned or what Madoff said they had earned? So called net winners argue, like Sterling Equities, that they are owed what Madoff said they made even if those accounts turned out to be ficticious.

Other ponzi schemes have resulted in clawbacks, but Wagner said that they are argue that those ponzi schemes involved being an equity investor in a product. That wasn't the case here, they say, because Madoff was a registered broker and the account statements are legal obligations that the broker promises to the customer.

Due in part to the negotiations with Picard, the Mets ownership held a press conference earlier this week to announce that they would be exploring taking on minority partners and would be willing to sell up to 25 percent of the team. The team hired Allen & Company to reach out to potential investors. Sources close to the situation say that the Mets ownership believes that they can sell a minority piece without giving up the rights to own a majority share of the team in the future. Sources also say that it's not necessarily a fait accompli that the team will take on new partners if another form of financing can be found.

A story by the New York Times that was published on Tuesday suggested that the Mets ownership sometimes put money that was owed to players in future years into Madoff's fund to grow until the deferred payments were due.

That is inaccurate, a source close to the team, said. The person, who spoke on condition of anonymity, said that teams defer money to save money. If the Mets had all the money to put into the account, they would have simply paid the player at the time he signed the contract.

The Times also reported that players, Bobby Bonilla was the only one specifically named, would sometimes agree to put the entire money owed to them into the account so that the Mets could win on Madoff's returns and easily pay off the interest when it came time to pay the player.

If that were the case, Bonilla would have lost the $30 million owed to him as a result of Madoff's downfall. Bonilla was due to be paid $1.2 million a year from 2011 to 2035. Bonila's agent Jeff Borris declined to comment.

Sources close to the situation also said that the entire principal of the deferment was not invested in the Madoff accounts.

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