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Media & Entertainment Law

: Sports Law Blog

New Sports Illustrated Column on Lawsuits filed against New York Mets Owner

By Rick Karcher, Michael McCann, Geoffrey Rapp, Greg Skidmore, and Howard Wasserman

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I have a new SI.com column on two significant lawsuits filed against Mets owner Fred Wilpon and others connected to the team. Here's are some excerpts:

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The lawsuits center on Wilpon and his companies' investments with imprisoned Ponzi scheme artist Bernard Madoff and whether Wilpon and his associates knew, or should have known, of Madoff's fraudulent actions. If successful, the lawsuits could require Wilpon and other defendants to pay hundreds of millions in damages. Payment of those damages could threaten Wilpon's ability to own the Mets or at least to sustain a high team payroll. (The Mets had the fifth-highest payroll in 2010 at $133 million.)

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Goldweber v. Sterling Equities is a class action lawsuit filed last July in the U.S. District Court for the Southern District of New York. The named plaintiff, Elyse Goldweber, is the widow of a former employee of Sterling Securities, a real estate investment firm that owns the New York Mets, among other businesses. Sterling Securities maintained a 401(k) retirement plan worth about $17 million, 92 percent of which was invested with Madoff, whose fraudulent actions wiped out most of the plan.

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Goldweber's primary claim boils down to a "hear no evil, see no evil" charge: Wilpon and his associates should have questioned Madoff's investment strategy, especially given the numerous commentaries that had raised questions about Madoff's almost unbelievable returns. Had Wilpon inquired seriously into Madoff's remarkable track record, he would have developed suspicions that Madoff was not investing, but rather ripping off investors. Such suspicions could have motivated the plan's trustees to drop Madoff, thereby minimizing damage to the plan. Wilpon's failure to act, according to Goldweber, constitutes a failure to prudently and loyally manage the plan's assets.

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[Picard v. Katz & Wilpon} is known as a "clawback" lawsuit: If an investor "earned" any profits in a fraudulent enterprise up to six years prior to discovery of the fraud, those profits themselves can be deemed fraudulent. The underlying logic is that those profits were generated from fabricated numbers and from money that was stolen from other investors, many of whom are left with nothing in the Ponzi scheme. If deemed fraudulent, profits are then disgorged from the investor and re-distributed to victims of the fraud. Even an investor's principal investment can be "clawed back" if it was recovered in bad faith, such as recovering the principal within 90 days of a hedge fund filing bankruptcy (in the case of Madoff's fund, the bankruptcy filing date was Dec. 11, 2008, meaning that Katz and Wilpon needed to have recovered their principal no later than Sept. 11, 2008). The potential damages in a successful clawback lawsuit against Wilpon could go into the hundreds of millions.

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While Major League Baseball has not weighed in on Wilpon's woes, it is in the best interest of the league and Wilpon's fellow owners that lawsuits do not become sources of league-wide embarrassment. To the extent that commissioner Bud Selig and the owners can encourage Wilpon to reach private settlements, they will likely do so.

The Major League Baseball Players' Association also has a stake in the matter. Considering that Wilpon pays the Mets' salaries, his financial wherewithal, and that of any other Mets' owners, are matters of great significance for Mets players. While the league could provide the Mets with financial assistance if need be (or go a step further and take over control of the franchise, as occurred with the Texas Rangers last season), a financially-capable Mets ownership would prove the best outcome for all considered.

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To read the rest, click here.

Full post as published by Sports Law Blog on February 01, 2011 (boomark / email).