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Alain Leibman writes:

It is axiomatic under the Sentencing Guidelines that interest owed on a financial obligation, such as a fraudulently-obtained loan, is not included for purposes of calculating the “loss” from the offense when the loan goes unpaid; the unpaid principal is the usual measure of loss. § 2B1.1, App. Note 3(D). But should the defendant get credit, reducing the “loss,” for interest payments which he did make over the term of the loan?

No, according to the Seventh Circuit in United States v. Peugh, 657 F.3d 736 (7th Cir. 2012). Using the legal equivalent of the “good for the goose, good for the gander” maxim, the court held that if interest cannot be added to unpaid principal to increase a “loss,” then it cannot be deducted from unpaid principal to effect its reduction. Moreover, the court held -- rejecting another loss mitigation argument-- that the payment of ordinary course and obligatory interest on a loan does not constitute “money returned to the victim” prior to detection of the offense under App. Note 3(E), either, and so cannot be credited against the “loss” on that basis.
 

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Jana C. Volante writes:

Courts of Appeal have increasingly explored their authority to review variances under the Sentencing Guidelines for both procedural and substantive reasonableness and, using those rubrics, to impose limitations on the discretion of lower courts. For example, on March 12, 2012, the Ninth Circuit handed down its opinion in United States v Ressam, 2012 WL 762986 (9th Cir. Mar. 12, 2012). In Ressam, the Ninth Circuit provided a thorough step-by-step analysis regarding appellate review of the substantive reasonableness of a sentence imposed by a federal district court under the now advisory Guidelines. Then, the Ninth Circuit vacated a sentence in which a convicted terrorist had received a far shorter prison term than the range suggested by the Guidelines.

Ahmed Ressam was apprehended as he carried out a plan to detonate explosives in LAX airport. After being convicted of nine different counts, but before being sentenced, Ressam entered into a cooperation agreement with the government. However, after briefly cooperating, Ressam refused to cooperate any further and recanted the testimony that he had given while cooperating. Despite this breach of the cooperation agreement, the district court judge sentenced Ressam to 22 years in prison and five years of supervised release, a very substantial downward variance from the applicable range of 65 years to life under the Guidelines.

On an appeal heard en banc, the Ninth Circuit embarked on an extensive analysis regarding whether the sentence imposed on Ressam was substantively reasonable in light of the factors set forth in 18 U.S.C. § 3553(a), using an abuse-of-discretion standard of review and looking at the totality of the circumstances. According to the Ninth Circuit, when a sentencing judge determines that an outside-Guidelines sentence is warranted, he/she must consider the extent of the deviation and ensure that the justification is sufficiently compelling to support the degree of variance in light of the § 3553(a) factors.

According to the Ninth Circuit, Ressam’s sentence did not adequately reflect the seriousness of his offense, one of those factors. If his plan to blow up LAX had succeeded, he would have killed hundreds of people. Furthermore, many common criminals have been sentenced to much longer prison terms for offenses with much less serious consequences. The district court should also have considered the need to protect the public from further crimes. Under the sentence imposed by the district court, Ressam would be released from prison at the age of 51, an age when he would still be capable of organizing another terrorist attack. Because terrorists have a high likelihood of recidivism, are difficult to rehabilitate, and, thus, must be incapacitated to prevent future crimes, there is a substantial upward adjustment that the Guidelines provide for federal crimes of terrorism.

The Ninth Circuit also indicated that it is appropriate for a district court to consider a defendant’s cooperation when sentencing him. However, Ressam did not begin cooperating until he had been convicted by a jury and faced life in prison, leading to the conclusion that he did not cooperate out of sincere remorse or with an altruistic motive, and he then breached his agreement with the government.

Under Ressam’s cooperation agreement, even with his full and continuing cooperation, both parties committed to a prison sentence of “not less than 27 years.” The Ninth Circuit held that even if it was determined that Ressam should be given some credit for his cooperation in the absence of a government downward departure motion, he was not entitled to nearly enough credit to justify the substantial downward variance that would result if the district court’s 22-year sentence was to be affirmed.

Because the district court based its sentence on several findings that were clearly erroneous, the Ninth Circuit vacated the sentence imposed by the district court as being not substantively reasonable. District judges who effect significant variances from the Guidelines should increasingly expect that at some point, when the extent of the variance is great, appellate courts will place some boundaries on just how low (or, perhaps, high) they can go.
 

(Jana C. Volante, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Pittsburgh, PA office. Her practice concerns white collar criminal defense and commercial litigation)

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Michael Kline writes:

This Installment raises some questions relating to the inclusion of the Defendant Foundations, which the Trustee had sued for recovery of “fictitious profits” and principal, as parties to the global Settlement Agreement between Picard and the Wilpons. Installment 75 (Part 1) of this blog series, which should be read together with this Installment, discussed the “Schedule 1 Foundations” and concerns about their inclusion in the Settlement Agreement. (Capitalized terms not otherwise defined herein shall have the meanings assigned to them in Installment 75.)   

Unlike the Schedule 1 Foundations, the Defendant Foundations are defendants in the Litigation, and each of them is a signatory to the Settlement Agreement, with Fred Wilpon having signed as Director for the Wilpon Family Foundation and Saul B. Katz having signed as Director for the Katz Family Foundation. Moreover, the Defendant Foundations are listed on Schedule 2 of the Settlement Agreement as recipients of transfers from Madoff in excess of principal, as are the other defendants in the Litigation. 

However, the fact that the Defendant Foundations are literally “on the same page” as the other defendants in the Litigation, including Fred Wilpon and Saul B. Katz as individuals defendants, should not finish the analysis as to whether the Defendant Foundations are properly parties to the Settlement Agreement. The analysis utilized in Installment 75 for the Schedule 1 Foundations should be considered for the Defendant Foundations as well.

Simply stated, there is a possible dichotomy between the interests of the Defendant Foundations and the individuals who occupy the same status with respect to the Defendant Foundations as the “Fiduciary Defendants” of the Schedule 1 Foundations. (Such individuals will be defined as Fiduciary Defendants with respect to the Defendant Foundations.) While more subtle in the case of the Defendant Foundations, there is a potential divergence of interests that calls for analysis of (i) the duty of loyalty of fiduciaries and (iii) the avoidance of conflicts of interest and prohibited “private benefit and inurement” that was discussed respecting the Schedule 1 Foundations.  To reiterate, as indicated in the IRS Compliance Guide,

A private foundation is prohibited from allowing more than an insubstantial accrual of benefits, including non-monetary benefits, to individuals or organizations. The intent is to ensure that a tax-exempt organization serves a public interest, not a private one. If a private benefit is substantial, it could jeopardize the organization’s tax-exempt status.

Excise taxes for such violations can also be imposed by the IRS on both the non-complying private foundation and its fiduciaries. Basically, the allegation could be made that the inclusion of the Defendant Foundations in the Settlement Agreement benefited on a monetary and/or a non-monetary basis their respective Fiduciary Defendants in settling the Litigation on the most favorable terms on a global basis. 

Query, did the Trustee and the Fiduciary Defendants explore reasonably the question as to whether the Defendant Foundations could have and should have made a better deal by themselves outside of the framework of the global Settlement Agreement? Installment 60 of this blog series (and prior Installments linked therein) give examples of the flexibility and financial accommodations that the Trustee has provided in other cases of charities that realized fictitious profits in the Madoff scheme and would have suffered serious or even irreparable adversity if they were to be fully clawed back.

In conclusion, in the cases of both the Schedule 1 Foundations and the Defendant Foundations, greater scrutiny of their participation in the Settlement Agreement may be called for in order to promote an appearance of propriety for the Settlement Agreement and the Fiduciary Defendants. In addition to the questions at the end of Installment 75, query whether the Trustee, as the party moving for approval of the Settlement Agreement, has a responsibility to be pro-actively bringing the matters of the Involved Foundations to the attention of Judge Rakoff for inclusion in the court’s full and fair review and approval of the Settlement Agreement in this widely-followed Litigation.

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

(To be continued in Installment 77)

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Michael Kline writes:

This Installment addresses some of the effects on, and implications for, certain charitable private foundations (collectively, the “Involved Foundations”) and their respective officers, directors, trustees and foundation managers (collectively, the “Fiduciaries”) under the proposed settlement agreement dated April 13, 2012 (the “Settlement Agreement”), between Madoff Trustee Irving Picard and the numerous defendants, constituting the Wilpon-Katz-Mets individual, business, family trust and charitable interests (collectively, the “Wilpons”). Installment 74 and prior postings in this blog series discussed certain aspects of the Settlement Agreement. 

The Settlement Agreement, which would terminate all existing litigation between the Trustee and the Wilpons (the “Litigation”), is subject to the approval of Federal District Judge Jed S. Rakoff at a hearing scheduled for 4 PM on May 15, 2012.  Further information, including Forms 990-PF filed with the Internal Revenue Service (the “IRS”), respecting each of the Involved Foundations and their Fiduciaries may be found on the GuideStar Web site.

A recurring theme in this blog series has been the relatively inconsistent and sometimes perplexing manner in which the Trustee has dealt with charities that invested with Madoff. Installment 60 and prior Installments discussed some of the differences in the way Picard was dealing with the Judy & Fred Wilpon Family Foundation (the “Wilpon Family Foundation”) and the Iris & Saul Katz Family Foundation (the “Katz Family Foundation” and collectively with the Wilpon Family Foundation, the “Defendant Foundations”), as contrasted to other public charities and charitable private grant-making foundations. 

The Defendant Foundations are listed on Schedule 2 to the Settlement Agreement, which is the “Summary of Six-Year Transfers from BLMIS [Madoff] to Defendants in Excess of Principal,” respecting persons subject to “clawback” efforts by the Trustee of “fictitious profits” and principal. A number of the Fiduciaries of each of the Defendant Foundations also are defendants listed on Schedule 2 for whom the Trustee was seeking clawback. The Defendant Foundations will be discussed more fully in a future Installment in this blog series. 

The remaining Involved Foundations (the “Schedule 1 Foundations”) appear on Schedule 1 to the Settlement Agreement, which is the “Summary of Allowed Net Equity Claims Against the BLMIS Estate.” Therefore, the Schedule 1 Foundations are not defendants in the Litigation; nor are they signatories to the Settlement Agreement. They are claimants that have been recognized to be entitled to share in the funds recovered by the Trustee in the Madoff bankruptcy.

The Schedule 1 Foundations include, among others, The Dayle H & Michael Katz Foundation Inc. (the “Michael Katz Foundation"). Notably, each of the Schedule 1 Foundations has one or more Fiduciaries who, in one capacity and/or another, is (i) a defendant in the Litigation, (ii) listed on Schedule 2 to the Settlement Agreement and (iii) a signatory to the Settlement Agreement. The Foundation Fiduciaries of each of the Schedule 1 Foundations have an aggregate larger amount of clawback exposure on Schedule 2 than the allowed net equity claim of the related Schedule 1 Foundation (a “Schedule 1 Foundation Claim”). Except for the Michael Katz Foundation, the amount of  the Schedule 1 Foundation Claim of each Schedule 1 Foundation is relatively small, less than $100,000. In the case of the Michael Katz Foundation, however, the Schedule 1 Foundation Claim is $617,000, while the maximum aggregate exposure reflected on Schedule 2 for clawback against the Michael Katz Foundation Fiduciaries exceeds that amount.

In the Settlement Agreement, each Schedule 1 Foundation Claim falls within the definition of a “Defendant Net Equity Claim” under Section 1(c) of the Settlement Agreement. Each of the Fiduciaries who is also a signatory to the Settlement Agreement (a “Fiduciary Defendant”) is defined as a “Defendant” in the Settlement Agreement, who, under Section 2(a) of the Settlement Agreement, has agreed, among other things, to assign all Defendant Net Equity Claims (which would include a Schedule 1 Foundation Claim) to the Trustee.  In addition, each Fiduciary Defendant has represented and warranted under Section 6(b) of the Settlement Agreement that he or she has full power, authority and legal right to assign his or her respective Defendant Net Equity Claim (which would include a Schedule 1 Foundation Claim).

The foregoing acts by the Fiduciary Defendants may be problematic. In effect, each of the Schedule 1 Foundation Claims, which would otherwise be a future unencumbered expectancy to be paid to the respective Schedule 1 Foundation by the Trustee, is being assigned under the Settlement Agreement to the Trustee to fund a portion of the monetary clawback exposure of its respective Fiduciary Defendants.   As stated earlier, the Schedule 1 Foundations are not defendants in the Litigation; nor are they directly signatories to the Settlement Agreement.

This dichotomy between the interests of Schedule 1 Foundations and their respective Fiduciary Defendants sets up a classic divergence of interests that calls for consideration of compliance requirements flowing from the duty of loyalty of fiduciaries and the potential for conflicts of interest. Moreover, the question of potential prohibited “private benefit and inurement” respecting the Schedule 1 Foundations under IRS rules can be raised as indicated in an IRS Compliance Guide:

A private foundation is prohibited from allowing more than an insubstantial accrual of benefits, including non-monetary benefits, to individuals or organizations. The intent is to ensure that a tax-exempt organization serves a public interest, not a private one. If a private benefit is substantial, it could jeopardize the organization’s tax-exempt status.

In addition, no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual. This means that an organization is prohibited from allowing its income or assets to accrue to insiders. An example of prohibited inure­ment would include payment of unreasonable compensation to an insider. An insider is a person such as an officer, director, or a key employee who has a personal or private interest in the activities of the organization. Any amount of inurement may be grounds for loss of tax-exempt status.

In addition to loss of the organization’s section 501(c)(3) tax-exempt status, activities constituting inurement may result in the imposition of self-dealing excise taxes on individuals benefiting from certain transactions with a private foundation.

The laws regarding duty of loyalty and conflicts of interest of fiduciaries and the IRS rules regarding private benefit and inurement are highly complex. Presumably, each of the Schedule 1 Foundations and its respective Fiduciaries would have been well advised to seek separate guidance and counsel as to their respective rights and obligations under the Settlement Agreement and its impact on a Schedule 1 Foundation Claim and the clawback exposure of the Defendant Fiduciaries.

Query, should Judge Rakoff be inquiring into these Schedule 1 Foundation matters as part of his review and approval of the Settlement Agreement?  Should the Schedule 1 Foundations properly be dropped from Schedule 1 of the Settlement Agreement altogether in order to resolve the potential issues? If the Schedule 1 Foundations were to be excluded from involvement in the Settlement Agreement, should the Defendant Fiduciaries be expected to provide substitute funding sources? Whether these questions will be addressed remains to be seen.

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 76]

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Michael J. Kline writes:

Shortly before midnight last night Adam Rubin of ESPN reported that Madoff Trustee Irving Picard had filed court papers seeking approval of the settlement (the “Settlement”), which was reached on March 19, 2012 with numerous defendants, constituting the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). A posting on this blog series earlier in the day had discussed prospects for the parties’ finalizing arrangements by the deadline set for yesterday.

The account by Rubin reflects the efforts made in the Trustee’s press release (the “Press Release”) to establish on a point-by-point basis that all of the required conditions for consummating the Settlement had been achieved to request final approval of Federal District Judge Jed S. Rakoff. Rubin’s posting states that the Trustee gave the following as his reasons for agreeing to the Settlement:

The Settlement Agreement represents a good faith, complete and final settlement between the two parties. It is a practical and fair compromise of complex litigation issues and avoids a protracted and expensive trial and lengthy appeals. The settlement is in the best interests of the BLMIS [Madoff bankruptcy] Customer Fund and the BLMIS customers with allowed claims – who were defrauded by the Madoff Ponzi scheme – who will ultimately receive distributions of recovered monies from the Customer Fund.

Rubin reports that a hearing for approval of the settlement before Judge Rakoff has been scheduled for Tuesday, May 15, 2012, at 4:00 p.m. Such approval appears to be the only condition for implementation of the Settlement. With all of the painstaking preparation that has gone into achieving the Settlement to this point, one would expect such approval to be primarily a formality.

There is, however, an open item for those who are interested in the legal reasoning and judicial thinking put forth by Judge Rakoff during the proceedings. An earlier blog posting in this series noted that Judge Rakoff had issued significant Orders on March 5 and March 14, 2012 (the "Orders") without accompanying Opinions. In rendering the Orders, Judge Rakoff had stated that an Opinion to explain the Orders would be forthcoming later. To date, the Judge has not yet published such an Opinion. Because the Orders may have played a pivotal role in leading to the Settlement by the litigants, such an Opinion would be helpful for future legal guidance on important issues.

(Michael J. Kline is the author of this entry and the author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 75]

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Michael J. Kline writes:

In a posting on March 19, this blog series reported that a settlement (the “Settlement”) was reached between Madoff Trustee Irving Picard (the "Trustee") and the numerous defendants, the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). While the Memorandum of Understanding (the “Memorandum”) respecting the Settlement stated that it was a legally binding document, the Memorandum contained a number of conditions to finalizing the Settlement to be completed on or before Friday, the 13th of April, 2012. 

Although this matter has been relatively quiescent in the media since the Settlement, the parties have undoubtedly been working around the clock to meet the deadlines. There is a possibility that some of the conditions will not be resolved by April 13 as discussed below. The conditions required for the parties’ resolution by tomorrow under the Memorandum include the following:

1. The obligations of the Trustee Irving Picard in reaching the Settlement are subject to the approval of District Judge Jed S. Rakoff. (Presumably such approval cannot occur until all other conditions for the Settlement have been resolved.)

2. The approval of the Settlement by all required lenders to the Wilpons is to be obtained by the Wilpons. (Because it may be assumed that such lenders were part of the original process of entering into the Memorandum, this condition should be satisfied by the deadline.)

3. The parties to the Memorandum are to enter into definitive documentation reflecting the terms of the Settlement and “other terms customary for agreements of this type as expeditiously as reasonable possible, but in no event later than April 13, 2012.” If the parties cannot reach agreement on such definitive documentation by April 13, the Memorandum calls for differences to be resolved by binding arbitration to be conducted by a lawyer selected by former Governor Mario Cuomo. (This arbitration process contemplates potential delay of finalization of the Settlement and approval of Judge Rakoff but does not change the fact that the Settlement is said to be “binding on the parties.”)

4. The Memorandum provides that from March 19, 2012 to April 13, 2012, the Wilpons are to provide the Trustee with reasonable access to information that enables the Trustee to confirm the basis for the Settlement and the representations of the Wilpons. (Query: If the Settlement is not fully finalized by April 13, 2012, does the Trustee lose his right of “reasonable access to information” thereafter?  What if the Trustee cannot confirm the basis for the Settlement and the representations of the Wilpons?)

There still may be items of interest or surprise flowing from this case before (or even after) final approval is given by Judge Rakoff.

(Michael J. Kline is the author of this entry and the author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 74]

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Alain Leibman writes:

This blog has previously explored (here and here) courts' increasingly entangled and inconsistent efforts to apply the Fourth Amendment and its hoary doctrinal analyses to the modern technology of computers, cell phones and other smart electronic devices.  Courts have struggled to determine  whether and how a search warrant authorizes agents to rummage through a computer's enormous amounts of private data in the manner of a search through a conventional file cabinet for easily-detected letters and contracts germane to the warrant.

Recently, Judge Richard Posner of the Seventh Circuit pondered similar connundra in United States v. Flores-Lopez, 670 F.3d 803 (7th Cir. 2012).  Incident to the defendant's arrest in a drug distribution case, agents had without a warrant searched his cell phone to collect its telephone number, so that they could later subpoena from his provider its call history; the expectation was that there would be a pattern of calls connecting Flores-Lopez to other conspirators' known telephone numbers.

There is no question that a conventional container of information, such as a diary, could be cursorily searched without a warrant at the time of arrest if on or near the defendant's person and if the search was limited in scope.  Quickly analogizing a cell phone to a diary, as some courts have done, would have obviated the need for an opinion of any length. 

What intrigued Judge Posner enough to write more were the features of the modern mini-computer that is a cell phone -- including the ability to use an application to obtain for the agent-holder a view of the owner's residence, if equipped with a linked camera.  Concluding that "[w]e are quite a distance [in this case] from the use of the iCam to view what is happening in the bedroom of the owner of the seized cell phone," the court easily held that the superficial intrusion into the well of data on the phone was appropriately incident to the arrest.  However, the Seventh Circuit's exploration in this case of the distinctions between paper file and computer hard drive suggest that the court may align itself with those courts of appeal applying Fourth Amendment principles differently to each medium.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Alain Leibman writes:

I was privileged on Saturday, March 24th, to speak as part of a panel addressing the ABA Business Law Section's annual meeting in Las Vegas, Nevada on the subject of "New and Evolving Threats from the Responsible Corporate Officers Doctrine."  The RCO doctrine permits misdemeanor prosecutions without any proof of intent whatsoever, where the defendant corporate officer holds sway over an area of corporate activity in which there has been a violation of law by someone else in the company.

The RCO doctrine began its germination in the federal Food, Drug and Cosmetic Act, where its use was approved in an 1975 Supreme Court case to charge an officer with product misbranding, even though the officer had no culpable knowledge of the offending activity.  Its use has gained steam in the last five years and the Department of Justice has employed the doctrine in seeking prosecutions of corporate officers in the environmental area, as well.

While misdemeanor prosecutions might be thought of as a low-level threat, based on the assumption that misdemeanants do not go to jail, recent developments suggest otherwise.  First, a recent series of prosecutions of officers of a medical device company in the Eastern District of Pennsylvania, in which those officers pled guilty to misdemeanor violations under the RCO doctrine, led surprisingly to significant terms of jail for each of them, albeit no more than the 12 month maximum allowable for a misdemeanor conviction.  Second, the Department of Health and Human Services has recently handed down draconian periods of exclusion for corporate officers of another health care company who had pled guilty to misdemeanor violations pursuant to the doctrine and had not received jail sentences; these exclusions from the industry for periods of 10 years and more would effectively end the careers of those officers if upheld.

In short, defense counsel and in-house counsel need to be cognizant of the dangers posed by prosecutors' aggressive use of this vicarious criminal liability doctrine, which marks a radical departure from the usual requirements of finding criminal intent (or at least negligence in certain environmental areas) before prosecuting.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Michael J. Kline writes:

Today, before the start of a jury trial and after months of intensive and often acrimonious exchanges of briefs and motions in court and posturing in the media, a settlement was reached between Madoff Trustee Irving Picard and the numerous defendants - the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). While the agreed upon Memorandum of Understanding (the “Memorandum”) requires the Wilpons to pay $162 million (the “Settlement Payment”) to Picard, a closer review of the terms of the Memorandum reveals that the Wilpons appear to have negotiated a very favorable result, perhaps actually an outright victory, in their efforts to keep control of the Mets for reasons including the following:

1. Rather than the Wilpons’ risking a potentially distasteful and embarrassing public jury trial that could have resulted in an adverse judgment of more than $380 million, followed by an almost certain appeal, the Wilpons agreed to a Settlement Payment of “only” $79 million more than the $83 million judgment already outstanding in the case.

2. The Wilpons will pay no money toward the $162 million out of their own pockets for three years; the only payments during that period would come from potential recoveries for the Wilpons by Picard from the Wilpons’ collective claims as victims in the Madoff scheme(“Customer Claim Recoveries”) as victims in the Madoff scandal, aggregating an estimated $178 million.

3.  The Trustee agreed to a two-year installment payment plan for the Wilpons beyond the first three years for any remaining unpaid amounts on the Settlement Payment (less any additional Customer Claim Recoveries during such two-year period).

4. The fact that Picard is allowing the Wilpons to offset Customer Claim Recoveries against the Settlement Payment is a valuable and perhaps unexpected dividend that has established the Wilpons as stakeholders in the ultimate Picard recoveries and has likely converted the Wilpons into cheerleaders for future Picard successes.

5. The certainty that has been brought about by the Memorandum now quantifies the liability of the Wilpons and promotes their ability to sell minority interests in the Mets that have been so far delayed and postponed for many months.

6. The focus on the litigation and the accompanying expenses and angst will now be dissipated, and the Wilpons can concentrate on refinancing and rebuilding the Mets.

7. The personal guarantees of the Settlement Payment by Fred Wilpon and Saul Katz are limited to a total aggregate amount of up to $29 million.

8. Potential dissension and conflicting testimony at trial among the families, businesses, family trusts, charities and friends of the Wilpons has been avoided.

9. The risks and sensationalism of a jury trial have been avoided.

There are a number of contingencies in the Memorandum to be satisfied by April 13, 2012, including the receipt of required approvals to the terms by lenders to the Wilpons and the parties’ agreement upon definitive documentation. These would not appear to be major obstacles at this point. 

On the eve of the jury trial, almost no journalist had written about the possibility of settlement, except Richard Sandomir and Ken Belson of The New York Times in their article on March 18, 2012, “Prospect of Jury Trial in Mets’ Madoff Case May Push Sides Toward Settlement.” Why then, would Picard have agreed to what appears to be such a favorable result for the Wilpons? Some of the possibilities are as follows:

1. While there have been a number of important rulings by Judge Jed S. Rakoff that are adverse to the Trustee in this case, it is at the trial court level. Although such rulings have value as authority in other cases, they are not binding precedent for any other judge or case. If Picard had to appeal an adverse final result in the Wilpons’ case, he could have received a negative result at the appellate level that would have been binding precedent.

2. Picard has taken increasing public criticism for the legal fees in the Madoff matter, which have now exceeded a quarter billion dollars.  As large a number as the Settlement Payment may be, it pales in comparison to a number of other cases brought by Picard with potential billions of dollars at stake. The Trustee can now focus on these cases more fully.

3. The Trustee wanted to obtain a significant recovery from the Wilpons, not drive them out of business, in view of the many new complexities that such a result would have brought.

4. The risks and sensationalism of a jury trial have been avoided.

There still may be items of interest or surprise flowing from this case before the final definitive agreement is inked between Picard and the Wilpons.  This blog series will follow them.

(Michael J. Kline is the author of this entry and the author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 73]

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Michael J. Kline writes:

Yesterday, Judge Jed S. Rakoff issued a new Order (the “March 14 Order”) without an accompanying Opinion, almost on the eve of the trial by jury between the plaintiff, Madoff Trustee Irving Picard, and the numerous defendants, the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). The March 14 Order is certain to create consternation in the Wilpons’ spring training camp.

The March 14 Order states “the burden of proving, by a preponderance of the evidence, that the defendants [the Wilpons] received the aforementioned transfers in good faith rests on the defendants.” As a result Judge Rakoff has now placed on the Wilpons the burden of proving the absence of willful blindness rather than placing the burden of proving the presence of willful blindness on the Trustee. The March 14 Order also states that, in issuing the Order, “the Court adheres to its prior determination.” However, there was no reference in the Order as to when and where the “prior determination” was made by Judge Rakoff.

This blog series reported previously on the Order issued by Judge Rakoff on March 5, 2012 (the “March 5 Order” and, collectively with the March 14 Order, the “Orders”). In his March 5 Order, Judge Rakoff denied the Wilpons’ motion for summary judgment, while expressing that "the Court remains skeptical that the Trustee can ultimately rebut the defendants' showing of good faith, let alone impute bad faith to all the defendants.” The language of the March 5 Order is somewhat perplexing in light of the March 14 Order, as it would appear to require the Trustee to prove bad faith by the Wilpons at least with respect to actions of defendants on an individual basis.

In each of the Orders, Judge Rakoff promised to issue an explanatory Opinion later. More complete clarity may have been accomplished by Judge Rakoff through issuance of Opinions contemporaneously with the Orders on these major trial matters. The preparation of such Opinions may have been forestalled at least in part by the “firmly scheduled” trial date of March 19, 2012 that Judge Rakoff imposed last fall on the litigants. The trial date may have been ambitious in light of the many complex issues that required pre-trial resolution.

[To be continued in Installment 72]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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Alain Leibman writes:

I have co-authored with my colleague Jana Volante, Esq. an article appearing this week in BNA's Criminal Law Reporter entitled "Attacking Eyewitness Identification Testimony."  In the article, we examine the various approaches available to defense counsel to exclude such evidence altogether, or at least to blunt its potentially devastating impact.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

This blog series has been monitoring key milestones in the epic battle of Madoff Trustee Irving Picard against the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). Yesterday Judge Jed S. Rakoff issued an Order (the “March 5 Order”)  (sans Opinion, which he said will come some time later) in the ever-heating litigation that will culminate with an upcoming March 19 trial date. Even after a trial, however, either or both sides can be expected to appeal. The effect of the continuing uncertainty on efforts of the Wilpons to sell minority interests in the Mets remains unclear.

In his March 5 Order, Judge Rakoff denied the Wilpons’ motion for summary judgment while expressing the view that “the Court remains skeptical that the Trustee can ultimately rebut the defendants' showing of good faith, let alone impute bad faith to all the defendants.” Therefore, absent a settlement, which appears unlikely, Judge Rakoff’s jury trial commencement date of March 19 looms ahead for the Wilpons and Picard.

Additionally, Judge Rakoff granted Picard’s partial summary judgment motion, subject to determination of “the exact amount thereby due the Trustee (though capped at the $83,309,162 that the Trustee expressly seeks on this motion), and how payment should be apportioned among the defendants.”

In writing about the March 5 Order in his article entitled “Mets Must Pay, Go to Trial,” Adam Rubin pointed out,

. . . how the judge apportions the money owed among the cash-strapped Wilpon family, its business and charities will be “critical.” Any member of Wilpon's party seeking to appeal the ruling likely will be required to post a bond worth 110 percent of Rakoff's verdict against them. That would ensure that Picard ultimately will collect the money if the ruling is not overturned by a higher court.

Installments 69 and 58 of this blog series discussed earlier postings by Mr. Rubin and Richard Sandomir of The New York Times regarding the often-alleged continuing efforts of the Wilpons to sell for $20 million each, up to 10 minority 4% pieces of the Mets (the “Minority Sales”). The earlier Installments discussed the legal complexities for Minority Sales, which were originally rumored to be scheduled for the end of January, then the end of February and now still indefinite in time frame. Each time an important trial date surfaces for the Wilpons, discussion of putative Minority Sales becomes almost inaudible.

As stated in Installment 69,

Minority Sales could be delayed indefinitely by the concerns of cautious lawyers for the potential buyers about the pricing of the Minority Interests that theoretically gives the Mets a total value of $500 million. If such value can be found to be inadequate under some credible valuation standard, Picard could possibly attack the sales under New York law as inadequate.

This case clearly will have many more developments in the near future.
 

[To be continued in Installment 71]

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This posting will focus on the implications of recent postings on ESPN.com regarding multiple events that are occurring with respect to the continuing economic and legal challenges facing the New York Mets and their owners in the Madoff aftermath. While most journalists are focusing on the March 19, 2012 date for the scheduled commencement of the Wilpons-Katz-Mets jury trial in their litigation against Madoff Trustee Irving Picard, Andrew Marchand recently discussed the earlier significant February 16 and 23 motion dates that can be crucial in either terminating the litigation in Federal District Judge Jed S. Rakoff’s court room or setting the stage for the issues to be addressed in a later jury trial. 

More recently, Adam Rubin has published several postings about the often-alleged continuing efforts of the Wilpon/Katz group to sell for $20 million each, up to 10 minority 4% pieces of the Mets (the “Minority Sales”).  His January 31 posting highlights the delay that has developed for such potential Minority Sales until the end of February.

It is not surprising that there is a further delay in sales of Minority Interests. Installment 58 of this blog series described the potential under certain circumstances for Picard to upset such sales before or after they take place.

Potential buyers of Minority Interests would appear to be waiting before committing any funds at least until the outcome of the Wilpon-Katz summary judgment motion and the Picard partial summary judgment motion to be considered in late February by Judge Rakoff.   The outcome of those cross-motions could, although unlikely, end the matter completely on Judge Rakoff's playing field. However, it is more likely that, whatever disposition Judge Rakoff makes of the cross-motions, the potential sales of Minority Interests, if any, could be further delayed by a jury trial in Judge Rakoff's court commencing on March 19 or an almost certain appeal by Picard to the Second Circuit should the Wilpon-Katz motion for summary judgment be granted. 

In fact, the Minority Sales could be delayed indefinitely by the concerns of cautious lawyers for the potential buyers about the pricing of the Minority Interests that theoretically give the Mets a total value of $500 million. If such value can be found to be inadequate under some credible valuation standard, as discussed in Installment 58, Picard could possibly attack the sales price under New York law as inadequate.

While time is clearly not on the side of the Mets and their owners, sales of Minority Interests continue to progress in their knuckleball style.

(Michael J. Kline, Esq., is the author of this entry and the author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 70]

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In an earlier post we explored the relatively new SEC policy encouraging cooperation. An individual facing an SEC inquiry and his/her counsel must, of course, consider all of their available options, which in certain circumstances sensibly include not cooperating and not responding to the SEC’s questions at all.

The Fifth Amendment privilege against self-incrimination, which enables a refusal to provide testimony and records to any governmental authority, is naturally available to an individual subject to a civil investigation by the SEC, where the alleged conduct may also drive a parallel or subsequent criminal proceeding. The ways in which the same conduct can readily support both civil and criminal charges was explored in an earlier post on Raj Rajaratnam of Galleon.  See Marchetti v. United States, 390 U.S. 39, 53 (1968) (privilege available when invoker “is confronted by substantial and ‘real’ . . . hazards of incriminating); Hoffman v. United States, 341 U.S. 479, 486-87 (1951) (privilege applies where a response constitutes a “link in the chain” of evidence of criminal conduct).

Invoking the privilege carries its own set of issues. See, e.g., SEC Division of Enforcement, Enforcement Manual § 4.1.3 (2011). These include the public perception and reputational consequences of “taking the Fifth,” especially for high profile targets. See Ullmann v. United States, 350 U.S. 422, 426 (1956) (“Too many, even those who should be better advised, view this privilege as a shelter for wrongdoers. They too readily assume that those who invoke it are either guilty of crime or commit perjury in claiming the privilege”). Asserting the privilege may preclude an opportunity to provide mitigating evidence of the kind which could affect the outcome of the SEC proceeding. See, e.g., SEC v. Grossman, 887 F. Supp. 649 (S.D.N.Y. 1995) (precluding evidence about matters as to which the defendant refused to testify, including exculpatory evidence in opposition to summary judgment). Invoking the right to remain silent in a civil deposition may also subject the deponent to a devastating adverse inference or assumption by the fact-finder that the testimony or information withheld would have been unfavorable. Baxter v. Palmigiano, 425 U.S. 308, 316-20 (1976).

One way to avoid the dilemma posed by the Fifth Amendment issue is to seek a stay of the civil proceeding. However, this relief may be unavailable if the criminal prosecution is merely inchoate. A federal court in New York recently refused to stay an SEC proceeding in the face of claimed criminal jeopardy because no indictment had yet been returned, leaving the individual to the Hobson’s choice between invoking or waiving the Fifth Amendment privilege before the government’s criminal investigation was complete and thereby risking prejudice to his defenses in both matters. SEC v. Wheeler, No. 11-cv-6169-CJS (W.D.N.Y. Oct. 7, 2011).  Following the decision, the defendant in Wheeler was reported by the Rochester Business Journal to have invoked his Fifth Amendment right and declined to answer the SEC civil suit, preferring, it seems, to face the civil penalties able to be summoned by the SEC, rather than put his head in the criminal noose and risk losing his liberty.
 

(Edward J. Mullins III, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Roseland, NJ office. His practice concerns litigation in the areas of financial services and corporate governance, including white collar defense and securities)

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