Monthly Archives: February 2011

THE CARMELO TRADE AND GAME 1 OF THE KNICKS “NEW ERA.”

                                                                                       Kallas Remarks by Steve Kallas

THE CARMELO TRADE

Of course the Knicks had to pull the trigger on a Carmelo Anthony trade.  But questions surrounding the trade remain; mainly, did the Knicks have to give up so much?  There certainly is a feeling that, if left to his own devices (that is, without the interference of James Dolan and (maybe?) Isiah Thomas), star general manager (see the cap the last few years) Donnie Walsh could have obtained Anthony for less than the Knicks eventually had to give up.  An unanswerable question, of course, because we will never know the truth (a hard thing to find nowadays).  But the biggest Knick problem falls around giving up seven-footer Timofey Mozgov.

Nobody with even half a basketball brain thinks that the Knicks should have said no to the Anthony deal because of Mozgov.  If you do, you’re watching the wrong sport.  But that, of course, misses the point.  The point is that the Knicks, to make a real run at a championship, are going to need a presence in the middle; a big man who can defend and rebound, a seven-footer who will only have to score once-in-a-while, if at all.  The hardest thing to obtain to make a run at an NBA title is a superstar.  Or two.  While the Knicks now have two, looking at three (Chris Paul? Deron Williams?) after 2012 (or, if all stands the same in the NBA, this time next year at the trade deadline), it says here that if they can’t defend or rebound (and, right now, they can’t defend or rebound), there won’t be a title.  Then, non-New Yorkers (and anti-New Yorkers, you know there are lots of them) will start chanting “1973” like they used to chant “1940” for the Rangers.     

Would the Knicks have been better off now with a superstar point guard like Deron (pronounced Darin, by the way, according to Williams) Williams rather than a super scorer like Carmelo?  Hard to answer, but the Knicks don’t project as a championship team with Amare/Carmelo or Amare/Williams alone.  A third guy, at a minimum, will be needed.

Back to Mozgov.  Aside from the denied intrusion of Isiah Thomas and the “we’re all on the same page” statement from the Knick organization, it’s no secret that Donnie Walsh wanted to keep Mozgov.  Why?  Well, that’s easy.  Nobody knows what Mozgov’s upside really is; will he become that defensive, rebounding, shot-blocking, seven-foot center that the Knicks really need?  Well, he’s got the seven-foot part down.  But Walsh’s point is well-taken.  If Mozgov became that guy (and he would have had the rest of this season and all of next season to develop), the Knicks really would have hit the jackpot.  But even if he didn’t, he could have been that 15-18 minute back-up that really would have helped the Knicks.  Now Walsh, if he sticks around (he absolutely should be back), knows that he has to fill another hole.

Finally, all of this assumes that Mike D’Antoni’s “style” of play can win an NBA Championship.  While it says here that it can’t (see Kallas Remarks, 3/24/09), the fact is that remains to be seen.  Are the Knicks now on a par (talent-wise and depth-wise) with the successful Suns teams that D’Antoni coached before he came to New York? Well, no (two-time MVP (and future Hall of Famer) Steve Nash, a young Amare, an excellent Shawn Marion, Raja Bell, Q Richardson, Leandro Barbosa, Boris Diaw, Joe Johnson for a year, etc.).  Would the Suns have won an NBA title back in 2007 if not for the fight against the eventual- champion Spurs?  Of course, we will never know.  So the Knicks, right now, are diving in head first to follow the “D’Antoni way” to try and win an NBA title.  And the Knicks are still two seasons away (2012-2013, with the addition of a superstar point guard – Chauncey Billups, still an excellent player, will be 36 by then) from a chance to win a championship.

GAME ONE FOR THE NEW KNICKS

Well, the Knicks are very fortunate that the first game they had was against injury-riddled Milwaukee at the Garden, a 114-108 victory.  Any analysis of the actual game that doesn’t include this statement — Toney Douglas was far and away the MVP of the game – shouldn’t even be read.  The fact that some national highlight packages didn’t even include a shot of Douglas hitting a three (or getting the biggest rebound of the game) just shows how skewed the coverage can be.  This was Carmelo’s night (27 points, 10 rebounds, one assist, 10-25 shooting) and Toney Douglas wasn’t going to change that.

Thankfully, Mike Breen and Walt Frazier (not surprisingly) saw it for what it was.  Douglas was 5-6 in each half and scored 23 points in 29 minutes.  Breen was on it right away and at the end, at two different times, Clyde said it was “The Toney Douglas Show.”  Of course, he was 100% right.

Douglas hit a huge three at the end of the third quarter to put the Knicks up seven (the Bucks never got closer than two in the fourth).  He also hit a huge three with about three minutes left to put the Knicks up six.  And then, with about 45 seconds left, he got the biggest rebound of the game on the offensive glass and then dropped it in to Carmelo for the game-clinching basket (up six again).

But even more important, big picture (i.e., potential championship contender down the road), was the amazing contribution of Toney Douglas at the defensive end.  Douglas probably guarded Bucks point guard Brandon Jennings for about 25 possessions and all Jennings could get was one basket.  Douglas also guarded hot-shooting Keyon Dooling for awhile and shut him out.  This is where the Knicks are really going to need help.

The Milwaukee Bucks have a good team but have had a tough year.  Did you know that sweet-shooting Michael Redd is still on the Bucks? He’s missed the whole season.  How about Drew Gooden?  He’s still not back and has missed 32 games.  Carlos Delfino, who hurt the Knicks, has missed 31 games.  Andrew Bogut, still not 100% after that terrible fall last year where he hurt his elbow and wrist and broke his (shooting) hand, has missed nine games.  And Jennings just returned from missing 19 games with a foot injury.

The Bucks are the lowest (as in 30th) scoring team in the NBA, averaging 91.7 points per game.  Yet they put up 108 against the Knicks and were in the game until the final minute.

That’s not necessarily to criticize the Knicks.  It was their first game (with no practice) with Carmelo and Billups (21 points, 8 assists, great floor leadership) and a scaled-back Amare Stoudemire (19 points, only 13 shots, fouled out).  But the problems are clear from the get-go.  The Knicks are under-sized.  Ronny Turiaf as a starter is not the answer.  Shawne Williams as the back-up center is not the answer either. 

But the Knicks have to go with what they have.

And that’s certainly better than what they had a few days ago.

© Copyright 2011 by Steve Kallas.  All rights reserved.

POSSIBLE PARAMETERS OF A PICARD/WILPON-KATZ SETTLEMENT

                                                                                       Kallas Remarks by Steve Kallas

Much has been written and talked about in the last few weeks about whether the Madoff trustee, Irving Picard, and the group of Wilpon/Katz defendants can actually settle the lawsuit filed by the trustee that seeks about $1 billion in damages. Using the six-year look back period involved in bankruptcies in New York, the following will try to lay out the parameters for a possible settlement. While this writer believes that former Governor Marion Cuomo might be the one person who can craft a settlement, it says here that this will be a very difficult case to settle (if, on the one hand, the Wilpon/Katz group feels that they’ve done nothing wrong and that they owe zero and, on the other hand, the trustee really thinks that the Wilpon/Katz group should have known about the fraud and owes a BILLION dollars, well, that’s a tough argument to mediate). Again, if anybody can do it, it’s Mario Cuomo.

WHAT THE COMPLAINT SEEKS, AS BEST AS CAN BE DETERMINED

Paragraph 42 of the Complaint (page 14), sets forth the amounts that the Complaint seeks to avoid and recover from the Wilpon/Katz group (called “Sterling” in the Complaint):

1) “ $295,465,565 in fraudulent transfers of Fictitious Profits”;

2) “additional fraudulent transfers of principal in an amount subject to discovery and proof at trial”;

3) “$14,191,667 in transfers withdrawn during the 90-day Preference period”; and

4) “$12,031,257 in fraudulent transfers of payments made by Madoff, his wife Ruth Madoff and/or Peter Madoff to certain Sterling entities using BLMIS [Bernard L. Madoff Investment Securities] Customer Property, i.e. other people’s money.”

This becomes a $1 billion dollar case because it is estimated that the principal amount in 2) above is about $700 million.

LET’S LOOK AT EACH PART (ROUNDING OFF), LOOKING AT 2) LAST

1) The $295,000,000 is apparently all of the Fictitious Profits taken out by the Wilpon/Katz group dating back to the 1980s. A very difficult thing to recover. But, the numbers for the six-year bankruptcy look back window are about $163,000,000 (that is, from about December 11, 2002 until December 11, 2008 (the filing date of the bankruptcy), the Wilpon/Katz group withdrew $163,000,000 in fictitious profits). Prior to the six-year period, the Wilpon/Katz group withdrew about $132,000,000 in fictitious profits (for the total of $295,000,000). While there are numerous factual and legal issues here (net winners v. net losers, are the numbers correct, are these really “fictitious profits,” etc., etc., etc.), it says here that a fair way to mediate this dispute would be to suggest that the Katz/Wilpon group would owe the $163,000,000 (i.e., the six-year number) back to the estate.

2) The $14,000,000 in preferential transfers is an item that the Wilpon/Katz group will have a hard time defending against. Virtually everybody who receives money within 90 days of a bankruptcy can (and usually will) be sued for that amount. While they then can come in and raise certain defenses, it’s much harder to win (from the Wilpon/Katz perspective) when, as here, there was a Ponzi scheme going on (whether any defendant knew about it or not). It says here that a fair way to mediate this dispute would be to give the entire $14,000,000 back to the estate.

3) The $12,000,000 that the Madoff family apparently invested with Sterling investments is probably the easiest to deal with. Defenses, if any, that the Wilpon/Katz defendants may have to this claim would be better off left unsaid (imagine the negative publicity if, rightly or wrongly, the Wilpon/Katz defendants try to keep the monies they received from the Madoff family – a nightmare for sure). Plus, on the overall scheme of things (i.e., a billion dollars), the $12 million is a relatively small amount.

4) The biggest hurdle, of course, will be the approximately $700,000,000 in principal that the trustee is looking for from the Wilpon/Katz group (also a very difficult thing to recover). Considered by many (including this writer) to be a reach (nobody really thinks that Fred Wilpon or Saul Katz actually knew about this fraud), the theory goes that the defendants “should have known” about the fraud. A fascinating question (what each side thinks the answer is could be the biggest stumbling block to a settlement). The “should have known” standard can and (if no settlement is reached) will be litigated to the moon both factually and legally. Were the “red flags” enough? Should Fred Wilpon and Saul Katz, two sophisticated investors, have known? If so, what should they have known? That Madoff was running a Ponzi scheme? That seems like a stretch, doesn’t it? Did the Wilpon/Katz group act in good faith? Did they stick their collective heads in the sand? Can’t smart people be duped, especially by the greatest scam artist in the history of the world? And here’s an interesting question: While Wilpon/Katz are essentially being penalized because they were long-time friends of Madoff, wouldn’t you be LESS likely to listen to the warnings of others when you’ve been friends for 35 years with the guy being bad-mouthed? Realistically, wouldn’t you be more likely to listen to warnings about someone who you don’t know well as opposed to someone you have been friendly with for 35 years? And, finally, if the SEC had no clue, indeed had cleared Madoff of any fraudulent activity, how exactly are Wilpon/Katz supposed to have known? Aren’t they allowed, legally, to rely on the monthly statements that they received from a firm run by a (perceived) pillar of the community who had been chairman of the NASDAQ exchange for three terms?

Obviously, there’s a lot here.

SO, HOW DOES ONE COME UP WITH A FINAL NUMBER?

Well, 163 +14+12=$189 million dollars. But it says here that there has to be an additional number for the $700,000,000 claim. On the one hand, the Wilpon/Katz group will say that number should be zero. On the other hand, the trustee will say that number should be around $700,000,000. Still, obviously, very far apart. When (if?) Fred Wilpon is told that there is a decent chance that he might owe the $189,000,000 (or something close to it) discussed above (no matter what he knew or didn’t know), will he dig in his heels, say we owe nothing and fight to the bitter end? Does the trustee want to fight this case to the bitter end, knowing that this litigation would go on for a very long time with the possibility that he will only be able to recover somewhere up to the $189,000,000 (maybe less), something he might be able to get now in a settlement?

This is the problematic number. For purposes of this proposed settlement, let’s add another $50,000,000 to the number for a total of $239,000,000. When push comes to shove, this might be fair for all of the parties concerned. While, at first blush, Fred Wilpon/Saul Katz will be outraged at the size of the number, maybe it can be explained to them that they will probably owe a big number (in the $189,000,000 range) if they go the distance but, if they settle, they won’t risk a near $1 billion dollar judgment. The trustee, who has already recovered about $10 billion dollars (i.e., much more than a normal trustee in bankruptcy, percentage-wise and dollar-wise), might be willing to avoid a long and contentious litigation for a $50,000,000 bump on top of everything else the estate might be owed.

Of course, the trustee might want an additional $100,000,000 or $200,000,000 on top of everything else (rather than $50,000,000) to settle the case. But it seems that, if the Wilpon/Katz group is willing to sell 25% or so of the New York Mets for somewhere in the neighborhood of $200-$225 million (assuming they can get such a buyer), maybe that’s the area of a possibility of a settlement.

If Fred Wilpon and Saul Katz really think that they owe zero and are willing to fight to prove it, it’s unlikely that they will settle. If the trustee really believes that the Wilpon/Katz group should have known about the fraud and, thus, owes the estate $700 million to a $1 billion dollars, it’s unlikely that they will settle. The $239,000,000 number is just that – a number.

But it says here that the neighborhood of this number is one where an actual settlement could (possibly) take place.

We’ll see what happens.

© Copyright 2011 by Steve Kallas.  All rights reserved.

STATEMENTS MADE BY MADOFF IN NEW YORK TIMES INTERVIEW ABOUT HIS SCAM AND WILPON/KATZ, WHILE GENERALLY GOOD (AND MAYBE GREAT), MIGHT CUT BOTH WAYS

                                                                                       Kallas Remarks by Steve Kallas

 A blockbuster interview of Bernard Madoff conducted by Diana Henriques of The New York Times contains some fascinating information about the massive Madoff fraud and whether or not others knew about it. There’s even a specific reference to New York Mets owners Fred Wilpon and Saul Katz. However, some of Madoff’s comments might cut both ways with respect to the Wilpon/Katz group of defendants in the Irving Picard bankruptcy lawsuit against them.

DID THEY KNOW?

It says here that, generally speaking, despite taking a pounding in the media, most intelligent, right-minded people do not think that Wilpon/Katz and their partners actually knew about the massive Madoff scheme. When Bernard Madoff was asked specifically, during this two-hour prison interview in Butner, North Carolina, about whether Fred Wilpon and Saul Katz knew about the Madoff fraud, Bernard Madoff stated, “They knew nothing. They knew nothing.”

This is good, but not surprising, news for Wilpon/Katz and their partners. In the 373-page complaint against them, there does not seem to be any evidence of actual knowledge of either Fred Wilpon or Saul Katz (warnings, yes, that something was wrong or “was too good to be true’ or things of that nature, but that goes to other areas, not actual knowledge).

BUT WHAT ABOUT “WILLFUL BLINDNESS?”

Interestingly, this is part of the conscious avoidance claim in the complaint. Should they have known? Did they stick their heads in the sand? Well, according to the Times article, discussing his relationship with various banks and hedge funds, Madoff pointed to their “willful blindness.” Indeed, Madoff goes on to say, “They had to know. But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’” Presumably, the “they” in that quote refers to banks and hedge funds (although Madoff named no specific bank or hedge fund during the interview).

So, where does this statement leave Wilpon/Katz? According to the complaint, Sterling Equities (“Sterling”) “is a closely-held family run business that over the last several decades has evolved into a multi-billion dollar real estate, professional baseball, private equity and hedge fund empire with the New York Mets Major League baseball franchise standing at the helm.” Sterling Equities is also described, later in the complaint, as “a general partnership formed under the laws of the state of New York.”

So was Bernard Madoff referring to Sterling Equities when he made his “willful blindness” statement? It says here that he wasn’t but maybe, at some point in the future, he will be put under oath (we’ll get to that later) and asked questions about hundreds of entities by name.

WERE WILPON/KATZ BIG INVESTORS?

Another interesting question and, frankly (and unfortunately), a phrase coined by The Times (not by Madoff, at least for this part of the interview). The Times notes that Madoff “focused his comments laserlike on the big investors and giant institutions he dealt with … .” Madoff stated that many long-term clients made more in legitimate profits from him in the years before the fraud then they could have elsewhere. He wrote, in a January 13, 2011 e-mail, “I would have loved for them to not lose anything, but that was a risk they were well aware of by investing in the market.”

There’s an awful lot here. Does that mean that defendants like Wilpon/Katz, if this quote is to be believed, made legitimate profits before the Ponzi scheme started? If so, how can the Trustee possibly recover those profits (it says here that he can’t)? And, if true, at what point “should the Wilpon/Katz group (or any group in the same situation, for that matter) have known about the fraud?” In other words, was it legit one week and a Ponzi scheme the next? When did the change take place? To this writer, these statements would help those defendants (including Katz/Wilpon) who will vehemently argue that they never knew and never should have (or could have) known. Fascinating stuff.

So, were Wilpon/Katz and their group big investors? It says here that they were. If the balance in their account was approximately $500,000,000 on the day this all blew up, and they had been investing for decades and had taken out some $300,000,000 in “fictitious profits” (and, by the way, it doesn’t seem that they knew, at the time, that these were fictitious profits), that means they invested and took out somewhere in the neighborhood of $800 million to $1 billion over the years.

To this writer, that would qualify them as big investors, despite the fact that there were a number of other investors who invested and took out many billions of dollars.

And don’t forget that when Bernard Madoff, the greatest schemer in the history of the world, says, about his long-term clients losing money, “that was a risk they were well aware of by investing in the market,” the point to the Wilpon/Katz group (and others) will be: HE NEVER INVESTED IN THE MARKET ONCE HIS PONZI SCHEME STARTED. That’s not a risk, in this writer’s opinion, that either Fred Wilpon or Saul Katz was aware of.

WHAT ABOUT THOSE MADOFF MEETINGS WITH THE TRUSTEE?

Madoff told The Times that he met with Irving Picard for four days this past summer. One quote from a Madoff e-mail to The Times is interesting here: 1) Madoff gave Picard “information that I knew would be instrumental in recovering assets from those people complicit in the mess I put myself into.” In addition, according to The Times, Madoff conceded that the Trustee conducted its own investigation “into the withdrawals made by some big clients, in the years before the Ponzi scheme collapsed, to determine who might have known what and when. Such withdrawals could indicate that investors could have been aware of the fraud, which could increase their liability.”

These two comments in the above paragraph could bode well for Wilpon/Katz. While there seem to be statements in the complaint about warnings or suggestions given to Wilpon/Katz by Merrill Lynch and others, there doesn’t seem to be a Bernard Madoff smoking gun statement. Indeed, his Wilpon/Katz quote, “They knew nothing. They knew nothing” certainly supports such a conclusion.

As for the withdrawals, the complaint does tell us that the Sterling group took out “only” (my word) $14,191,667 in transfers of principal during the “90-day Preference Period” prior to the bankruptcy. Really not discussed much in this litigation, the preference period in a bankruptcy means that the Trustee can (and usually does) sue anybody who received any monies in the 90 days immediately prior to the bankruptcy (defendants then come in and assert certain defenses to that lawsuit).  The important point here is that, if Wilpon/Katz had an inkling that something bad was going on (even at this late date), one would have to think that they would have taken out a greater amount than less than 3% of what they had in their accounts. That, plus the fact that they had $500,000,000 still in when everything blew up would lead to a common sense conclusion that they really didn’t know what was going on.

FINALLY, WHAT ABOUT MADOFF’S CREDIBILITY?

Well, what about it? Let’s be real; he doesn’t have any. He pulled off the greatest scam ever and fooled thousands and thousands of people. While The Times correctly states that defense lawyers will have a field day with Madoff, one should look at it from the other side as well: WHAT WOULD HAPPEN IF MADOFF’S TESTIMONY ACTUALLY HELPS THE WILPON/KATZ GROUP? Would the Trustee try to discredit him? He can’t be telling the truth when he’s helping the Trustee but lying when he’s helping the defendants. Or can he?

If Bernard Madoff ever takes an oath and testifies, as he told The Times, that Fred Wilpon and Saul Katz “knew nothing,” it’s not hard to believe that he would also state that they really didn’t know because, as long-time clients, they had been making legitimate money for years. Why, at a later date, “should they have known?”

This could actually be some excellent stuff for Wilpon/Katz. Assuming he hasn’t given the Trustee some negative information about Wilpon/Katz (that’s why it could cut both ways; my reading of this interview is that he didn’t sell out his old friends but, rather, blamed gigantic entities, like banks).

If Bernard Madoff ever does testify under oath, one question I hope he will be asked (even though we know that the answer is fear of publicity) is: “Mr. Madoff, in 2002, you had an opportunity to buy a piece of the New York Mets. Why didn’t you?”

Fascinating stuff.

© Copyright 2011 by Steve Kallas.  All rights reserved.

Steve Kallas on WFAN with Mike Francesa (2/11/11)

February 11, 2011

FORMER GOVERNOR MARIO CUOMO APPOINTED TO MEDIATE TRUSTEE/WILPON-KATZ DISPUTE: HERE’S HOW THE PROCESS WORKS

                                                                                      Kallas Remarks by Steve Kallas

 When the news broke yesterday on Mike Francesa’s show that Governor Mario Cuomo, Queens native, St. John’s grad and former minor league baseball player, had been appointed to mediate the Picard/Wilpon-Katz dispute, Mike had a number of questions about the appointment. Here are answers to some of those questions.

1) HOW DID THE APPOINTMENT COME ABOUT?

The appointment was ordered by Judge Burton R. Lifland, the United States Bankruptcy Judge for the Southern District of New York who is in charge of the massive Madoff bankruptcy proceeding. According to Judge Lifland’s Order, dated February 10, 2011, “the parties have been informed of and consented to the Court’s choice of mediator.” Obviously, this is Judge Lifland’s idea and both sides have agreed to it.

2) WHAT IS THE GENERAL PURPOSE OF MEDIATION?

According to the AAA (American Arbitration Association), “[m]ediation is a non-binding process where a neutral third-party (the mediator) works with the parties to reach a mutually agreeable settlement.” It will also speed up the process of, possibly, settling this case.

3) IS THIS A GOOD THING FOR THE NEW YORK METS?

A fascinating question. If the Mets are defined as Fred Wilpon and Saul Katz, it is a good thing because this is a chance to settle this case. If a fan is viewing this as the owners should sell the team now because of all of these troubles then, depending on one’s personal feelings about the team and its present ownership, a fan may not like this.

4) WHY DID THE APPOINTMENT COME ABOUT?

Judge Lifland decided “that there are special issues presented in the Adversary Proceeding that suggest referral to an appropriately experienced mediator.” The New York Times has reported today that Governor Cuomo started doing mediatons in the early 1970s and that Judge Lifland appointed Governor Cuomo to be a mediator in a large case involving asbestos-related diseases in 2004.

5) WHAT HAPPENS NEXT?

Governor Cuomo will now consult with attorneys for the parties and fix a reasonable time and place for an initial mediation conference of the parties with him. He will notify the attorneys in writing of the time and place. Governor Cuomo, as mediator, has the power to establish the time for all mediation activities, including private meetings between the mediator and the parties and the submission of all relevant documents.

6) WHAT HAPPENS AT THE ACTUAL MEDIATION CONFERENCE?

At the conference, a representative of each party with complete authority to negotiate all disputed amounts and issues must attend the conference. In addition, if Governor Cuomo wants to, he can require the presence of a party representative or a non-attorney principal of the party with settlement authority at any conference. Governor Cuomo can also determine when the parties are to be present in the conference room.

7) DOES GOVERNOR CUOMO MAKE A SETTLEMENT RECOMMENDATION TO THE PARTIES?

While the Governor does not have to make written comments or recommendations, he can, if he so desires, furnish the attorneys for the parties with a written settlement recommendation. Such recommendation, however, will not be filed with the Court.

8) WHAT HAPPENS WHEN THE MEDIATION IS OVER?

Governor Cuomo will have to file a final report discussing the results of the mediation. If an agreement is reached, then paperwork (a stipulation of settlement or a motion for approval of the settlement) will be presented to Judge Lifland for his review. If no settlement is reached, then the case will be heard or tried as scheduled.

9) CAN THE PUBLIC ATTEND THESE CONFERENCES?

No, these conferences are confidential. In fact, no statement made by the mediator, parties or others during the mediation can be divulged to the Court (so as not to influence the Judge one way or the other if there is no settlement reached) or any third party. Indeed, all records, reports or other documents received or made by the mediator shall be confidential and not provided to the Court, unless they would otherwise be admissible.

10) CAN THIS CASE BE SETTLED?

Well, this will be a very difficult case to settle. If anyone can do it, it’s Governor Cuomo. But Irving Picard, the Trustee, is starting somewhere in the high hundreds of millions to, possibly, a billion dollars. The Sterling Partners, Fred Wilpon, Saul Katz and others, are steadfastly maintaining that they knew nothing and were duped by Madoff like all of the other investors. So they are starting at or near zero. That will obviously be a huge bridge to gap.

© Copyright 2011 by Steve Kallas.  All rights reserved.

LOOKING AT SOME “RED FLAGS” IN THE MADOFF/WILPON, KATZ COMPLAINT

                                                                                       Kallas Remarks by Steve Kallas

 The unsealing of the Madoff/Sterling Partners (Sterling Partners includes Fred Wilpon, Saul Katz and others and is referred to in this article as “Sterling Partners” or “Wilpon/Katz” ) Complaint has law firms on both sides firing at each other and has Fred Wilpon and Saul Katz issuing their own public statement. Below is a listing and discussion of some of the “red flags,” alleged by Trustee Irving Picard in the complaint, that the Sterling Partners ”consciously disregarded,” according to the complaint.

I. WILPON AND KATZ WERE WARNED ABOUT MADOFF BY STERLING STAMOS

Employees of Sterling Stamos, an investment group founded by Fred Wilpon, Saul Katz and a Rhodes Scholar/Harvard Law graduate named Peter Stamos, repeatedly warned Sterling Partners about Madoff’s practices. The Trustee alleges, upon information and belief (on evidence he, the Trustee, has gathered, not his personal knowledge) that Sterling Stamos people repeatedly told the Sterling Partners that Madoff was “too good to be true” for various reasons and that the Sterling Partners discussed some or all of these warnings at one or more bi-weekly Sterling Partners meetings. Included in this evidence is an e-mail, two days after after the December 11, 2008 Madoff arrest, in which the Chief Investment Strategist for Sterling Stamos, named only Chachra in the complaint, wrote “In fact, we turned down the Madoff Funds more then [sic] 6 years ago and told many of our investors including the Wilpon and Katz families about our concerns.” It goes on to say, “Notwithstanding our concerns, the Wilpon and Katz families continued to invest with Madoff Securities.”

Davis, Polk and Wardwell, the top-notch law firm representing Wilpon/Katz, among others, responds to this allegation in their statement by pushing things over to the Securities and Exchange Commission (the “SEC”), saying that Wilpon/Katz can’t be expected to know what the SEC clearly failed to know about. They are correct that the SEC, despite being warned themselves for years by Harry Markopolos, always gave Bernie Madoff a pass until it was way too late. The Trustee will respond to this point by painting a picture (partly done in the complaint) of the close personal relationship that the Sterling Partners had with Madoff, along with a number of warnings given to the Sterling Partners.

II. MERRILL LYNCH, PURCHASERS OF A NON-CONTROLLING 50% INTEREST IN STERLING STAMOS IN 2007, ALSO WARNED WILPON AND KATZ ABOUT MADOFF

As far back as 1998, Merrill Lynch refused to do business with Madoff. Indeed, Merrill Lynch refused to recommend that its customers invest with Madoff. As early as 2007, a senior Merrill official discussed Madoff “red flags” with both Saul Katz and Peter Stamos. He also warned both Katz and Stamos that Sterling Partners had too much invested with Madoff.

Wilpon/Katz’s lawyers’ response is simply that many people could and did invest with people like Madoff and others who seemed, at least, to be using recognized (and legal) investment strategies. Obviously, Madoff was not using any of these investment strategies. It will probably be pointed out, in opposition to the Trustee’s “they knew or should have known” about the fraud accusation, that it would make little common sense for them to continue to invest “too much” money with Madoff if they knew about the fraud (this common sense argument will also be made about the approximately 178 accounts that Sterling Partners monitored for friends or associates of Sterling Partners including, apparently, Sandy Koufax). Frankly, in this writer’s opinion, you would have to be as sick as Bernie Madoff (that is, he clearly didn’t care about who he was ripping off, no matter how close they were to him) to bring in so many of your friends and family to this scam. It’s very hard to believe, on this fact pattern, that Wilpon/Katz actually knew about the fraud.

III. THE STERLING PARTNERS, THROUGH STERLING STAMOS, INVESTED MONEY IN THE BAYOU PONZI SCHEME, WHICH HAD RED FLAGS SIMILAR TO THE MADOFF SCAM AND WHICH CAUSED STERLING STAMOS TO SETTLE THE BAYOU CASE BY PAYING $13 MILLION

This is the story that the New York Times recently broke and which, at a minimum, put Wilpon/Katz in a bad light with the public (question: did the Times have a copy of the Madoff Complaint before it was unsealed?) . The Bayou case was a $450 million Ponzi scheme perpetrated by Sam Israel, III (the guy who faked jumping off the Tappan Zee Bridge and is now doing 22 years in prison). According to the Madoff Complaint, Sterling Stamos withdrew a lot of their money from Bayou after their review of Bayou raised concerns for Sterling Stamos. The $12.9 million that Sterling Stamos paid the trustee in the Bayou case amounted to all the fictitious profits and just under half the principal that Sterling Stamos withdrew from Bayou months before the Ponzi scheme was discovered. The point here being that, if they discovered problems with Bayou, they should have discovered problems with Madoff. Sterling Stamos did not admit any liability in the Bayou case.

The Davis, Polk statement, defending Wilpon/Katz with respect to the Bayou claim, states that Sterling Partners had no involvement with the actual investment (that is, they just put up investment monies) and that Bayou was a hedge fund, whereas Madoff’s brokerage entity was a registered broker-dealer, regulated by the SEC. This again shows that much of the defense will be if the SEC didn’t know about it, how could Wilpon/Katz and the others? While this whole Bayou claim arguably cuts both ways, it certainly has hurt Wilpon/Katz in the court of public opinion.

IV. THE STERLING PARTNERS “KNEW OR SHOULD HAVE KNOWN THAT MADOFF’S CONSISTENTLY HIGH AND EXTREMELY NON-VOLATILE RETURNS OVER ALMOST A QUARTER-CENTURY WERE ‘TOO GOOD TO BE TRUE.’”

According to the complaint, for the 10-year period 1998-2008, despite 60 losing months of the S&P 100 (a stock market index of 100 blue chip stocks), Madoff’s investments and specifically the 483 Madoff accounts that Sterling Partners opened for themselves, their families and their friends, hardly ever had any losing months. There is also an allegation in this section that Saul Katz told his friends that he could not figure out how Madoff generated such smooth, positive returns. To show, apparently, that the Sterling Partners should have known there was a problem with the Madoff returns, the complaint points out that, during “the ‘Black Monday’ stock market crash in 1987, the bursting of the dotcom bubble in 2000, the terrorist attacks of September 11, 2001 and the recession and housing crisis of 2008,” Sterling’s KW (for Katz/Wilpon) Madoff accounts “produced positive returns.”

The Davis, Polk and Wardwell statement on behalf of Wilpon/Katz states that, even if Sterling Partners suspected something was wrong, they would have gone to the SEC, which, of course, did nothing to stop the fraud.

A NUMBER OF QUESTIONS TO BE LITIGATED

Conscious avoidance (Wilpon/Katz essentially stuck their heads in the sand and raked in the profits) is a tough thing to prove. But many questions will be fought tooth and nail by Katz/Wilpon and their lawyers. Can the second part of the “knew or should have known” standard be applied in this case? While, generally, bankruptcy “clawbacks” and fraudulent conveyances go back two to six years from the date of the filing of the bankruptcy, can a Trustee really go back after principal that was invested 10 or 20 or 25 years ago? It makes no sense that people like Wilpon and Katz would drag their family and friends into this mess, leave about $500 million in their accounts and actually know about the fraud, does it? As for “should have known” about the fraud, a sometimes vague standard, just because people say you shouldn’t invest with someone doesn’t mean you can’t invest with that person. Were Wilpon and Katz duped? Were they stupid? Well, the reality is that this was the greatest scam in the history of the world and thousands and thousands of investors, some sophisticated, many unsophisticated, were fooled.

CONCLUSION

It says here that there is little chance that the Wilpon/Katz group actually knew about this fraud. Whether they “should have known” (absent a settlement that, right now, appears unlikely) is the hundreds-of-millions (billion?) dollar question that will be decided down the road.

© Copyright 2011 by Steve Kallas.  All rights reserved.

10 SUPER BOWL THOUGHTS

                                                                                       Kallas Remarks by Steve Kallas

  1. So much for Super Bowl experience.  The “inexperienced” (in the Super Bowl, anyway) Packers spread the Steelers out, just like the Patriots did in their 39-26 victory over the Steelers during the regular season.  But for a few key drops, the Packers easily could have scored 45 points.
  2. Turnovers (as often happens) were the key to the game.  With a 3-0 Packer edge in turnovers (two Roethlisberger picks, one Mendenhall fumble, which led to 21 Packer points), the Packers won the all-important turnover battle.  Before the game, teams with three or more turnovers were 30-4 in the Super Bowl.  After the game, they were 31-4.  Great credit to the Steelers for even having a chance to win the game late in the fourth quarter.
  3. The best Fox catch of the day was showing (on tape) Kevin Greene, former Steelers great and now Packers outside linebackers coach, telling Clay Matthews III, present Packers outside linebacker great (who should have been the NFL Defensive Player of the Year), “it’s time, it is time” to make a play.  This was as the teams were switching sides for the fourth quarter.  On the next play, Matthews caused Rashard Mendenhall to fumble the ball, which led to the game-clinching Super Bowl touchdown.  The Matthews family (father Clay, Jr., uncle Bruce and, now, Clay III) have a combined 40 years in the NFL.  And, now, one Super Bowl victory.
  4. Some receivers have no feel for the game.  Late in the fourth quarter, with the Packers driving and trying to run out (or, at least, run down) the clock with a three-point lead, MVP Aaron Rodgers threw a sideline completion to James Jones for a first down.  If James falls down, the clock keeps ticking.  If he lets himself get knocked out of bounds, the clock stops.  He tries to gain an extra yard and gets knocked out of bounds.  Not-very-smart football.  When Tom Crabtree makes a diving one-yard catch on the next play, the clock keeps ticking (nobody in the booth understood how important that catch was, because (of course), if Crabtree doesn’t catch it, the clock stops).  Conversely, when the Steelers, down six with less than two minutes left  and only one timeout remaining, have QB Ben Roethlisberger, left with no other choice, throw a five-yard pass to Hines Ward and Ward has to leave his feet to make a nice catch in the field of play, what’s the point of catching that ball?  Refusing to use their final timeout, the clock ran down from 1:33 to 1:08, a colossal waste of time late in the game.  In this case, Hines should have dropped the pass and saved his team a precious 25 seconds.  Nobody in the Fox booth (Joe Buck, Troy Aikman) understood the importance of any of these plays.
  5. Antwaan Randle El, returning to the Steelers this season but unable to win a starting job, got his chance after an injury to rookie Emmanuel Sanders and made the most of it.  A pretty good NFL wide receiver, with only 22 catches in 16 games this season, Randle El caught two passes for 50 yards (including a 37-yarder that set up the Steelers first touchdown right before the half) and took an option pitch from Ben Roethlisberger to score an important two-point conversion.  At 31, he can still play effectively in the NFL. 
  6. The Dumbest Play of the Game Award goes to #57 on Green Bay, Keyaron Fox, who got an incredibly stupid personal foul penalty (half the distance to the goal line) on Pittsburgh’s final possession.  Aggravated that he got pushed, Fox, in front of an official, committed the foul that moved the starting position of the Steelers final drive from their 26 back to their 13.  Earlier, Tramon Williams of Green Bay got a similarly stupid penalty after he failed to catch a punt and then got pushed around and retaliated.  But, since the Packers won, Fox gets the dumbest play award.  What are these guys thinking?  Probably, they are not thinking at all. 
  7. Did Maurice Jones-Drew, or any other NFL player, tweet about the lack of courage of either Charles Woodson or Donald Driver (both excellent players and team leaders), both of whom were unable to finish the Super Bowl due to injury?  Just asking.
  8. While the Vince Lombardi Trophy, emblematic of a Super Bowl victory, was “returned” to Green Bay, it wasn’t called the Vince Lombardi Trophy until after Vince Lombardi died in 1970.
  9. The biggest hero at the Super Bowl, by far, was Staff Sergeant Salvatore Giunta, who got the greatest ovation when introduced at the Super Bowl.  Giunta is the first living Medal of Honor recipient (for saving the lives of members of his squad in Afghanistan in 2007) since the Vietnam War.
  10. If you are keeping score at home, it’s Super Bowls Won:  Aaron Rodgers 1, Brett Favre, 1; Super Bowl MVPs Won: Aaron Rodgers 1, Brett Favre 0.

© Copyright 2011 by Steve Kallas.  All rights reserved.