Kallas: A Win For The Wilpon/Katz Group In Federal District Court

By Steve Kallas
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This past Friday, in federal district court in Manhattan, both sides (Sterling Equities (Wilpon/Katz, etc.) and Bankruptcy Trustee Irving Picard) presented oral arguments before federal judge Jed Rakoff on Sterling’s motion to dismiss the $1 billion dollar complaint against them and others.


While you can get into trying to read the tea leaves based on oral argument during the hearing (and we will get to that below), the Wilpon/Katz group, in this writer’s opinion, won a big victory by the mere fact that Judge Rakoff has decided to keep the whole trial (if there is a trial, which there probably will be) in federal district court and not in bankruptcy court.

Why is this a big win for Wilpon/Katz?  Well, that’s easy.  Generally speaking, the trustee (in this case, Irving Picard) has kind of a home field advantage when the case remains in the bankruptcy court.  As you probably know, the trustee is appointed by the bankruptcy judge, so, obviously, that appointee (again, in this case, Picard) has a leg up in proceedings in the bankruptcy court.  Generally speaking, the trustee gets the benefit of the doubt on close calls and even legal standards can be more favorable to the trustee in bankruptcy court.

But, once the reference is withdrawn from bankruptcy court to federal court (legal speak for the case is moved from bankruptcy court to federal district court) AND Judge Rakoff decides to keep the whole case, well, that advantage, whatever it is, is gone.


The suit is, essentially (and simplistically), made up of two claims.  The first is the $700 million claim for principal which is based on the notion that the Wilpon/Katz group “knew or should have known” about the Madoff Ponzi scheme.  Believed to be a stretch by many, including this writer, there just doesn’t seem to be enough on either the facts or the law to support such a recovery.

Judge Rakoff certainly seems to understand this, casting doubt already on the notion that the Wilpon/Katz group knew or should have known.  In fact, it seems “pie in the sky” to believe that they actually knew.  Would they have invested money (reportedly low seven figures) on the day that Madoff was arrested if they knew?  Would Fred Wilpon have had close friends, family members and others, including the not-very-wealthy Sandy Koufax, invest with Madoff if they knew?

It defies logic.

As for the “should have known,” well, the “willful blindness” or “conscious avoidance” standard is a very difficult thing to prove.  Some of the evidence submitted by the trustee, especially things like the testimony of Peter Stamos supposedly warning the Wilpon/Katz group about Madoff, was clearly cherry-picked and, when viewed in the context of the entire Stamos deposition, does not support a “should have known” theory, in this writer’s opinion.

In addition, the multiple investigations by the SEC, all of which (until after the discovery of the Ponzi scheme) gave Madoff a clean bill of health, bodes well in support of any defense by the Wilpon/Katz group on a “should have known” theory.

After all, how could Wilpon/Katz have been expected to uncover what the powerful Securities and Exchange Commission could not uncover after a number of attempts?

Plus (and this is not to say that it will sway Judge Rakoff’s decision), the parties may actually be able to reach a settlement if this larger claim is no longer in the picture.


Well, that’s more troubling for the Wilpon/Katz group.  While the Wilpon/Katz lawyers (Davis, Polk & Wardwell) maintain that the recent Second Circuit decision approving the trustee’s net equity formula (that is, net winners v. net losers with the Wilpon/Katz group being a $300 million net winner) has nothing to do with Wilpon/Katz, the reality is that the decision may drastically hurt the Wilpon/Katz group on that issue.  While this writer has stated that the general six-year look back period in a bankruptcy may reduce that $300 million claim, the validity of the claim and the amount of the claim still will be litigated in Judge Rakoff’s  (as opposed to a bankruptcy judge’s) courtroom.


Judge Rakoff stated on Friday that he will make a decision on the motion to dismiss the case by late September.  He also set a trial date for March 2012, he said just to have room on his calendar for it if necessary.

Barring a settlement, it says here that there will be a trial on some aspects (mainly the “fictitious profits” aspect) of this case next year.

We will have to wait until late September to find out which aspects (if any).

Weigh in on the ruling in the comments below.


  • Steve Chong

    I think the September date where Rakoff will decide this case will go to a trial is likely the date where Rakoff will likely toss out Picard’s 700 million claim against the WIlpons for looking the other way. Also I think Rakoff decided to have this case tried in his court due to congress looking into Picard’s clawbacks.

  • TheClambelly

    Picard is as big a crook as Madoff. Period. And I KNOW this.

  • Don A.

    As a practicing attorney myself, Steve, I think you should point out that an adverse ruling by Judge Rakoff would likely be appealed to the 2nd Circuit Court of Appeals. As you know, this is the very same court that approved Picard’s net winners formula. Picard could also challenge Rakoff’s decision to move the entire Wilpon/Katz matter from bankruptcy court to Rakoff’s US Federal District Court. My guess is Picard will wait until Rakoff issues his decision in late September prior to making any appeals to the 2nd Circuit. Clearly, Rakoff does not have final say in this matter. The case could very well be returned to Bankruptcy Court by the 2nd Circuit if picard were to appeal Rakoff’s decision.

    • TPMurray

      The Second Circuit will be appealed so its decision is not final as well.

      The more important issue here is that the way the Second Circuit left it is that the trustee who is paid by SIPC without approval of the BK court (check SIPA on this) is free to pay claims as he sees fit.

      So far the public perception is that Madoff investors were all gazillionairs but when the investing public comes to understand that individual investors cannot rely on statements in a liquidation for purposes of SIPC insurance our capital markets will cease to exist as investors rush to gold and other investments that don’t rely of statements of account.

      Prior to 1970 when you bought a share of stock you got the share of stock in the mail. With the enactment of SIPA this was changed to a computer entry in the broker’s computer followed with a statement in the mail showing the stocks you owned. Investors give up the right to hold their stock certificates in exchange for SIPC insurance.

    • ChicoMan

      Calling last Friday a “Big Victory” for Fred and Saul is a bit of a stretch – like saying Pelfrey can be the ace of a staff. Sure, there are some positives for the Wilpons – being out of the bankruptcy court (for the moment). From what I understand, Rakoff said he would rule on the issues in September, while setting a trial for March 5.

      As Don A points out, even with Rakoff being a somewhat independent-minded judge, it is extremely unlikely that he would buck the 2nd Circuit ruling on who were net losers (and, logically, net winners).

      My take is Rakoff deferred really deciding anything definitive, putting both sides at “theoretical” risk – like in, things may go bad for you. This, I think, was done to give Mario a bit more ammunition to try to move mediation along.

  • LongTimeFan

    Make that below to the poster named “Fred Coupon.”

  • LongTimeFan1

    Make that below, not above to the poster named “Fred Coupon.”

  • LongTimeFan

    Another selfish Mets fan above putting baseball ahead of facts, law, truth and fairness.

    • LongTimeFan

      Referring to poster “Fred Coupon.”

  • Fred Coupon

    Judge Rakoff, please throw the book at Fred, Jeff & Saul and liberate us!

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