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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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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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(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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Previous Installments in this blog series, the most recent of which was Installment 64, have followed key rulings of Federal District Court Judge Jed S. Rakoff in the battle between Irving Picard, the Trustee in the Madoff bankruptcy proceeding, and the Wilpon Interests. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 64.) In his latest Opinion and Order of January 17, 2012, Judge Rakoff denied the motion of Picard for an immediate interlocutory appeal to the Second Circuit Court of Appeals of Judge Rakoff’s earlier ruling on September 27, 2011 that greatly limited the amount that Picard could seek to recover from the Wilpon Interests. As a result Judge Rakoff’s “fixed and firm” trial date of March 19, 2012 remains unaffected.

As pointed out by Richard Sandomir in his New York Times article today entitled “Mets Owners Can Look Forward to Trial During Spring Training,”

The following picture, then, is a near certainty: a month into spring training, Wilpon and Katz, while fielding a team with a reduced payroll, minus its best player, Jose Reyes, and swimming in debt, will be under oath in Rakoff’s Manhattan courtroom. The trial could take at least four weeks.

Therefore, the Wilpon Interests will likely be consumed more with an ongoing trial than baseball on Thursday, April 5, the scheduled opening day of the Mets season at home against the Atlanta Braves, unless the parties can settle before then. (On a more positive note for the Wilpon Interests, March 19 itself appears to be an open date during spring training.)

The possibility of settlement, however, presently seems unlikely, since as Sandomir states, the Wilpon Interests view a trial as “a chance to formally rebut claims that they profited improperly from investing with Madoff and built their fortunes on his fraud.”

Pitchers, catchers and injured players can report as early as Valentine’s Day. Stay tuned for new developments in the ever-evolving case of Picard vs. the Wilpon Interests.

[To be continued in Installment 69]

(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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This Installment addresses last week’s Memorandum Order on Thanksgiving Eve (the “Order”) by Judge Rakoff in the Wilpon Case that has been discussed in a number of recent blog entries in this blog series. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 59.)  In the Order, Judge Rakoff granted the request of Irving Picard, the Trustee in the Madoff bankruptcy proceeding, for a jury trial on those of the Trustee’s claims that seek to avoid transfers from Madoff to the Wilpon Interests as fraudulent.

This posting will focus on discussions regarding the Order by Adam Rubin on ESPN.com in his article on November 23, 2011 and his follow-up on Thanksgiving and other considerations.

During my discussions with Mr. Rubin, we agreed that the past history for Picard with respect to Judge Rakoff’s rulings has not been very favorable to Picard. While Picard did win a procedural victory regarding his desire for a jury trial, even this Order by Judge Rakoff is fraught with uncertainty. As quoted by Mr. Rubin in his Thanksgiving article,

. . . not only is a jury totally unpredictable, this case is highly complex and has created significant controversy among legal experts. Understanding of material aspects by a lay jury may be difficult or even impossible. In such a case a jury may feel more comfortable in grasping hold of simpler or limited concepts to which it can relate and can comprehend. This can lead to unexpected results.

This concern that both the Trustee and the Wilpon Interests should have regarding a jury trial is presented in a November 29, 2011 Law360.com article by Kaitlin Ugolik entitled “The Downside To An Aggressive Defense.”  In the article Ms. Ugolik points out that some attorneys see attacking witness credibility as an integral part of defense strategy, but legal experts caution that tactics a jury may see as too harsh or aggressive can have the opposite of their desired effect, eliciting sympathy for the witness. In the Wilpon Case, it is not clear whether Picard or the Wilpon Interests, if either, will have a sympathy advantage with a jury. Moreover, the past history of open hostility between the two parties may well lead to the harsh or aggressive tactics about which Ms. Ugolik cautions, which could materially tilt the jury consensus.

On top of these factors, Judge Rakoff can still have the last word on the facts in a trial if he were to choose to take the case from the jury through a directed verdict or a judgment notwithstanding the jury verdict. As discussed in earlier blog postings there are potential material downside risks and uncertainties for both Picard and the Wilpon Interests if they cannot settle the claims in their current settlement discussions before the jury trial that Judge Rakoff has “firmly scheduled” for March 19, 2012.
 

[To be continued in Installment 65]

(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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Installment 61 of this blog series on Madoff discussed the $5.2 million clawback lawsuit (the “JASA Lawsuit”) recently filed by Trustee Irving Picard against Jewish Association for Services for the Aged (“JASA”), reaffirming the perplexing and inconsistent manner, virtually to the point of arbitrariness and unfairness, with which Picard has handled charities that invested with Madoff.

This posting will focus on and discuss the disappointing lack of transparency evidenced by JASA in its failure to provide meaningful public disclosures of the magnitude of its investments with Madoff and its loss and exposure to risk, either in media releases or in filings of Forms 990 with the Internal Revenue Service (“IRS”). In response to the recent filing of the JASA Lawsuit, David Warren, President of the JASA Board of Trustees did post a statement on the JASA web site stating that “JASA will vigorously defend its position.” It would appear that no other prior postings were made on the JASA Web site regarding the impact of the Madoff scandal.

This blog series has previously examined the manner in which other charities, such as Hadassah, Yeshiva University, American Jewish Congress and the Lautenberg Foundation, have handled public disclosure in the aftermath of their investing with Madoff. The purpose of this post is to provide a similar analysis for JASA.

Virtually the only reference to the JASA investment with Madoff prior to the JASA Lawsuit that can be located on the Internet is on page 66 of the original 162-page alphabetical list of the thousands of Madoff customers that was first published in February 2009. Even in that listing the name of JASA was not that obvious, as it was not given in full but was truncated to “JEWISH ASSOCIATION FOR.”

The most perplexing area, however, where JASA has been silent on the effects of the Madoff scandal is with respect to its filings of Forms 990 with the IRS. Since the Madoff scandal came to light in December 2008, JASA has filed Forms 990 for three fiscal years that are available on GuideStar:

(1) the Form 990 for the fiscal year ended June 30, 2008, dated February 2, 2009 (the “2007 Form 990”);
(2) the Form 990 for the fiscal year ended June 30, 2009, dated August 25, 2009 (the “2008 Form 990”); and
(3) the Form 990 for the fiscal year ended June 30, 2010, dated February 15, 2011 (the “2009 Form 990”).

JASA has had three opportunities so far to provide meaningful explanatory disclosures in Forms 990 as to the effects of its investments with Madoff and has chosen not to do so. A review of material differences in the financial statements (the “Differences”) as reported in the 2007 Form 990 and the 2008 Form 990 as to the single fiscal year ended June 30, 2008 (“Fiscal 2008”) emphasizes the need for explanatory notes. Each of the unexplained Differences listed below would be consistent with write-downs by JASA, effective as of June 30, 2008, that related to losses incurred as a result of the Madoff scandal. (There were several reclassifications of items in the financial statements for Fiscal 2008, the interpretation of which would also be aided by explanatory notes.)

The Differences include the following:

1. The 2007 Form 990 reflects a net gain from investment transactions during Fiscal 2008 of $586,579, while the 2008 Form 990 reflects an investment loss for the same Fiscal 2008 of $491,559, for a total reduction of $1,078,138.

2. The 2007 Form 990 reflects “investments – publicly-traded securities” of $7,194,170 as of June 30, 2008, while the 2008 Form 990 reflects “investments – publicly-traded securities” of $3,209,730 as of June 30, 2008, for a total reduction of $3,984,440.

3. The 2007 Form 990 reflects total assets of $34,020,186 as of June 30, 2008, while the 2008 Form 990 reflects total assets of $30,013,294 as of June 30, 2008, for a total reduction of $4,006,892.

4. The 2007 Form 990 reflects net assets after liabilities of $16,564,650 as of June 30, 2008, while the 2008 Form 990 reflects net assets after liabilities of $12,557,758 as of June 30, 2008, for a total reduction of $4,006,892.

Additionally, the absence of any information in the 2008 Form 990 regarding losses by JASA with Madoff is surprising in light of the following question under “Government, Management and Disclosure” on Line 5 for an answer of “Yes” or “No” by the organization:

“Did the organization become aware during the year of a material diversion of the organization’s assets?”

In the 2008 Form 990, covering Fiscal 2008, Line 5 was answered “No” by JASA. A comprehensive discussion of the IRS instructions and related issues regarding the question on Line 5 is contained in Installment 29. In summary it is disappointing that JASA has not been more forthcoming and transparent with its donors in its public statements and IRS filings as to its involvement and losses in the Madoff scandal. As stated in earlier Installments respecting other charities, JASA would be far better served to make prompt, visible, clear and consistent disclosures and explanations to justify the faith of its supporters and regain the confidence of its donors who faithfully fund its historic mission.

[To be continued in Installment 63]
 

(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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A continuing theme of this blog series on Madoff has been the perplexing and inconsistent manner, virtually to the point of arbitrariness and unfairness, with which Trustee Irving Picard has handled charities that invested with Madoff.  Installment 60 in this series had only been posted for a few hours when Picard again reaffirmed his erratic behavior in this area. This time, however, Picard may have other purposes for his actions as well.

On October 14, 2011, Picard filed a lawsuit (Picard v. Jewish Association, 11-ap-02773, U.S. Bankruptcy Court, Southern District of New York (Manhattan) (the “JASA Lawsuit”) against Jewish Association for Services for the Aged (“JASA”) to recover $5.2 million in “fictitious profits” allegedly withdrawn by JASA during the Madoff scam for a six year period prior to the Madoff bankruptcy proceeding. Founded in 1968, the nonsectarian mission of JASA is to sustain and enrich the lives of the aging in the New York metropolitan area so that they can remain in their homes and communities with dignity and autonomy.

The JASA Lawsuit is in stark contrast to the continuous and relentless efforts of Picard to recover both alleged fictitious profits and principal distributed to the charitable private foundations of the Wilpon/Katz families, the owners of the New York Mets. Moreover, absent other purposes, the JASA Lawsuit is in inexplicable contrast to the settlement that Picard made with Hadassah in March 2011 to allow Hadassah to keep permanently $32 million of a stated $77 million of fictitious profits that it received from Madoff, as described in Installment 48 and earlier Installments of this blog series,

Installment 47 reported that the Forms 990 for 2009 of Hadassah posted on GuideStar showed total unrestricted consolidated net assets for Hadassah of almost $653,000,000 and more than $1,000,000,000 in total net assets as of December 31, 2009. Yet Picard allowed Hadassah to keep $32 million of Madoff fictitious profits. Picard’s diverging treatment for JASA is evidenced by its Form 990 (the “JASA Form 990”) for the fiscal year ended June 30, 2010 (“Fiscal 2010”) that reflects net assets of $8,856,783. A successful clawback from JASA by Picard of $5.2 million, plus the costs of the litigation to JASA, would eliminate 60% or more of its net assets as of June 30, 2010, clearly a crushing or even death blow to its mission.

In Installment 45 and Installment 17 of this series, Diana B. Henriques, author of an acclaimed book on Madoff, was quoted as having written on May 28, 2009 in The New York Times:

There is the widespread fear among some — unfounded, Picard says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.

It is clear that in the case of JASA, the fear was not at all unfounded.

A closer look at the circumstances of the JASA matter reveals that Picard appears to be using the JASA Lawsuit for several potential purposes:

1. Commencing a new case against a venerable, visible and vulnerable charitable defendant to counteract or overturn the ruling issued by Judge Jed S. Rakoff in the Wilpon/Katz/Mets case that limited to two years (rather than the six years that Picard is seeking in the JASA Lawsuit and generally) the period for recovery of fictitious profits in the Madoff case. There are many potential defendants other than JASA against whom Picard could have brought such a lawsuit.

2. Placing a new type of external pressure on, and discomfiture for, Saul B. Katz, one of the owners of the Mets, who is a long-time major donor to, and, according to the JASA Form 990, a JASA Board member and Chair of its Executive Committee. The Form 990-PF for the fiscal year ended June 30, 2008 of the Saul and Iris Katz Family Foundation that is posted on GuideStar reveals contributions totaling $75,000 to JASA that year, the fiscal year immediately prior to the Madoff bankruptcy, and the last fiscal year for substantial contributions by the Foundation. The continuance of the Board relationship of Katz is confirmed by a June 2011 filing by JASA.

3. Subjecting JASA to heightened pressure to (a) distance itself from Katz in light of the costs and adverse media publicity of the JASA Lawsuit and (b) settle the JASA Lawsuit on terms acceptable to Picard that can damage materially the future viability of JASA.
Contrary to his earlier quoted statement, the new initiative by Picard against JASA endangers the financial stability of a struggling charity and its long time charitable mission. Shame on you, Mr. Picard.
 

[To be continued in Installment 62]

(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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This Installment addresses one aspect of the firestorm that is raging in the aftermath of the highly controversial and complicated September 28 opinion and order in the Wilpon Case of Judge Jed S. Rakoff in the U.S. District Court for the Southern District of New York (the “Rakoff Opinion”).  The Wilpon Case has been discussed in numerous recent entries in this blog series, most recently in Installments 59 and 58. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 58.)

After Trustee Irving H. Picard received a favorable opinion in the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) and enjoyed numerous victories in the bankruptcy court of Judge Burton R. Lifland, he suffered a major setback from the potential impact of the Rakoff Opinion, not only for the Wilpon Case but also many other pending cases in the Madoff proceedings. This posting will focus on the position of Mr. Picard that the Rakoff Opinion is arbitrary and unfair, especially in view of the inconsistent decisions, perhaps to the point of unfairness, that Picard himself has made relative to certain charities that invested with Madoff, as discussed in earlier postings in this blog series.

In his Memorandum of Law filed on October 7, 2011, in which Picard is seeking an interlocutory appeal to the Second Circuit to challenge the Rakoff Opinion, Mr. Picard stated the following:

This ruling [the Rakoff Opinion] arbitrarily provides one class of [Madoff] customers—those with avoidance liability — the benefit of the fictitious trades that all customers were previously denied. In direct contravention of the [Second] Circuit’s ruling, this result places "some claims unfairly ahead of others.” [Emphasis supplied.]

It is ironic that the view of the Picard team is that Judge Rakoff has acted “arbitrarily” to provide some Madoff customers with the benefit of fictitious trades that all customers were previously denied. The Trustee has himself “arbitrarily” provided some charities that invested with Madoff “the benefit of the fictitious trades” while relentlessly pursuing others.

As discussed in Installment 48 of this blog series and earlier Installments,

Picard and Judge Lifland have allowed Hadassah to keep $32,000,000 [of a total of $77,000,000] of fictitious profits at the expense of other Madoff victims. . . . However, the inconsistent manner in which Picard is treating charitable investors with Madoff warrants further monitoring. As stated in Installments 46 and 47 of this series, Picard is seeking a total of $7,000,000 or more (which is actually more than the amount of fictitious profits subject to clawback) from the Wilpon/Katz [private charitable] Foundations, which have given away millions of dollars each year to highly respected and worthy charities. . . .

Similarly, Installment 50 and earlier Installments highlighted the seemingly favorable treatment that Picard has arbitrarily provided to the private charitable foundation formed by Senator Frank R. Lautenberg. Picard apparently determined not to claw back hundreds of thousands of dollars in revenues of the Lautenberg Foundation that appear to have been generated by distributions of fictitious profits from its investment with Madoff.

Hadassah and the private foundations are all tax-exempt charities. While Hadassah and the Lautenberg Foundation apparently receive passes from Picard, he continues his pursuit of the Wilpon/Katz Foundations and seeks to overturn the Rakoff Opinion in the Second Circuit. The Madoff proceedings move ever onward.
 

[To be continued in Installment 61]

(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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This Installment addresses some results that came out of yesterday’s opinion and order (the “Opinion”) by Judge Rakoff in the Wilpon Case that was discussed in recent blog entries in this blog series. The most recent discussions were in Installments 58 and 57. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 58.)

This posting will focus on an apparent misunderstanding among the Wilpon Interests’ team as to the meaning of one aspect of the Opinion relating to the size of their potential exposure to fictitious profits, as reported by Adam Rubin for ESPN.com in an article yesterday entitled “Part of Case vs. Mets owners Tossed.” In that article Rubin stated as follows:

A statement released by Wilpon-owned Sterling Partners [the Wilpon Interests] disputed Kline's assertion that the statute of limitations is an open question. In Sterling Partners' view, Rakoff ruled that the two-year statute of limitations is the standard, leaving only $83 million at stake with respect to the potentially recoverable profits from the Ponzi scheme.

It is quite perplexing that the Wilpon Interests would have arrived at their conclusion regarding a limit of $83 million in their exposure for fictitious profits claimed by the Trustee to be $295 million in light of the following footnote on page 11 of the Opinion in which Judge Rakoff clearly says the opposite:

6. Although, given the difficulty defendants will have in establishing that they took their net profits for value, the Trustee might well prevail on summary judgment seeking recovery of the profits, how to determine which profits the Trustee can recover remains an open question. Specifically, the Court does not resolve on this motion whether the Trustee can avoid as profits only what defendants received in excess of their investment during the two year look back period specified by section 548 or instead the excess they received over the course of their [the Wilpon Interests] investment with Madoff. According to the Amended Complaint, defendants' profits amounted to $83,309,162 in the two years preceding the bankruptcy and $295,465,565 over the course of their investment. Amended Complaint. [pars.] 1105, 1108." [Emphasis supplied]

The Judge not only says that he did not rule in the Opinion on the amount of fictitious profits in play; he punctuated his statement by repeating the potential range of liability in his view: “. . . $83,309,162 in the two years preceding the bankruptcy and $295,465,565 over the course of their [the Wilpons Interests] investment.”

While the Wilpon Interests should be commended for their optimism, the favorable rulings in the Opinion by Judge Rakoff did not go as far as they would like to believe.
(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 60]
 

(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.)

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This Installment will address the potential legal disabilities that exist under the New York Debtor and Creditor Law for the Wilpon/Katz families, the owners of the New York Mets (collectively, the “Wilpon Interests”), in their effort to sell a minority interest(s) in the Mets, in light of the existence of the lawsuit against them (the “Wilpon Case”) by Irving Picard, the Trustee in the Bernard L. Madoff bankruptcy. Installment 57 in this blog series focused on the whirlwind of court proceedings in mid-August respecting the Madoff bankruptcy and their potential impact on the Wilpon Case.

Two weeks after these courtroom events, it was reported that negotiations had been terminated between the Wilpon Interests and David Einhorn (the “Einhorn Negotiations”) that could have provided $200 million to the Wilpon Interests in exchange for a minority interest in the Mets. Such minority interest, however, reportedly could have ripened under the Einhorn Negotiations into a majority interest under certain circumstances after the passage of time. A number of journalists who are closely following the Wilpon Case have discussed a variety of reasons for the breakdown in the Einhorn Negotiations.

On September 1, 2011 Richard Sandomir, with the contribution of Ken Belson, published an article in The New York Times entitled “Deal to Sell Piece of Mets to Einhorn Falls Apart,” which provided insights into the termination of the Einhorn Negotiations. Among other things, the Sandomir article ascribed the breakdown to:

(i) Mr. Einhorn’s view that “the Mets sought changes to their agreement. . ., setting the stage for the rupture”;

(ii) “[H]is [Mr. Einhorn’s] disappointment at the Mets’ opposition to a provision that would have given him preapproval [by Major League Baseball] to be the team’s majority owner; and

(iii) The Mets owners’ shift in tactics to “seeking to attract people willing to buy what amounts to a vanity share in the Mets,” rather than one large buyer.

On the same day, Adam Rubin wrote an article for ESPN.com entitled, “David Einhorn, Mets fail to reach deal.” The Rubin article pointed out that, among other things including items covered in the Sandomir article, a source also said that "Einhorn's claim that the Mets kept changing terms at the last minute was not accurate and that it was actually Einhorn who thought the Mets were in a compromised position and tried to bend the terms to his advantage."

Clearly there are differing perceptions and reports as to the fundamental reasons for the breakdown in the Einhorn Negotiations. However, one area that was not addressed was the potential impact that the pending Wilpon Case may have on the ability of the Wilpons to make a single large deal as opposed to multiple potential smaller deals with “vanity” investors. 

It is likely that there should be concern by Mr. Einhorn and similarly situated large potential purchasers of interests in the Mets that a conveyance by the Wilpon Interests, in light of the serious financial stress that the Wilpons are experiencing and the pending Picard lawsuit, could come under possible attack by Picard as a "fraudulent conveyance" lacking "fair consideration" under Section 273-a of Article 10 of the New York Debtor and Creditor Law (the “Law”). provides the following:

§ 273-a. Conveyances by defendants. Every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment.

Section 272 of the Law defines "fair consideration" in relevant part as follows:

§ 272. Fair consideration. Fair consideration is given for property, or obligation, a. When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, . . .

Section 279 of the Law reads as follows:

§ 279. Rights of creditors whose claims have not matured. Where a conveyance made or obligation incurred is fraudulent as to a creditor whose claim has not matured he may proceed in a court of competent jurisdiction against any person against whom he could have proceeded had his claim matured, and the court may,

a. Restrain the defendant from disposing of his property.
b. Appoint a receiver to take charge of the property,
c. Set aside the conveyance or annul the obligation, or
d. Make any order which the circumstances of the case may require. 

Using the Einhorn transaction as an example, this posting will show the potential application of the foregoing provisions of the Law. If Mr. Einhorn or another single investor were to sink $200 million or more in the future prospects of the Mets, there is a real possibility that the transaction can be attacked under the previously cited Sections of the Law by the Trustee. Because Mr. Einhorn was reportedly seeking ultimate control or ownership of the Mets for the $200 million if the Wilpon Interests failed to repay the amount after some passage of time, there may be arguments made by the Trustee that what is being really currently conveyed now is future control of the Mets and what should be “fair consideration” for the prospective current sale of control of the Mets. It is certainly arguable by him that the Wilpon Interests are not currently ready, willing and able sellers of Mets interests with no constraint to sell; therefore, the $200 million may be a bargain price for the to control the Mets in the future.

Smaller sales to “vanity” purchasers with no prospects to characterize the sales as a potential future change in control of the Mets may be less susceptible to attack under the Law.

While the questions of "fraudulent transfer" and "fair consideration" may be challenging, complex and difficult in this context or, even a stretch because of the countless personal and business involvements of the Wilpon Interests, the creative arguments and inclinations of Picard in the Wilpon Case and other cases have had few limits so far.
 

[To be continued in Installment 59]

(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.)

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This Installment in the series on this blog will focus on the whirlwind of activity this past week that had sports writers and fans of the New York Mets buzzing about an appellate opinion rendered by the Second Circuit Court of Appeals on Tuesday and a hearing in a Federal District courtroom in Manhattan at 4 P.M. on a Friday afternoon in mid-August about the Bernard L. Madoff scandal (“Madoff”).

Second Circuit Court Opinion Issued August 16, 2011

Last Tuesday, the U.S. Court of Appeals for the Second Circuit (the “Circuit Court”) issued its long-awaited opinion (the “Opinion”) regarding the method of calculating the amount that net “losers” in the Madoff enterprise are entitled to recover. The Circuit Court adopted the “Net Investment Method” proposed by the Trustee Irving Picard rather than the “Last Statement Method” for the Madoff case, which

limits the class of customers who have allowable claims against the [Madoff] customer property fund to those customers who deposited more cash into their investment accounts than they withdrew because only those customers have positive “net equity” under that method.

The Last Statement Method had been put forth by some Madoff victims to allow the “losers” to use the fictitious amounts reflected in their final Madoff account statements as the basis for the amounts that they lost in the scandal.

The Opinion immediately set off a plethora of conjecture by Mets fans, sports writers, attorneys and legal scholars as to what impact, if any, the Opinion would have on the hearing (the “Hearing”) to be held in the Trustee’s case against the Wilpon/Katz families, the Mets owners, in the Federal District courtroom in Manhattan of Judge Jed S. Rakoff last Friday (the “Wilpon Case”).

On August 18, 2011 Richard Sandomir and Ken Belson published an article in The New York Times entitled “Madoff Decision Is Significant Setback for Owners of Mets,” that provided analysis of the impact of the Opinion. The article pointed out that the Opinion dealt with alleged net “losers” in the Madoff scandal, who were trying to recover more from the Trustee, and not those parties who were alleged net “winners,” such as the Wilpons, who were trying to resist the Trustee’s $300 million “clawback” efforts and his attempt to recover $700 million in principal as well for alleged “willful blindness” of the Wilpons to the Madoff scheme.

The Sandomir/Belson article pointed out that the Opinion itself stated it was not addressing the issue of alleged willful blindness of the Wilpons: ‘It is not contended on this appeal that any [Madoff] victim knew or should have known that the investment and customer statements were fictitious.’ As to the question of the impact of the Opinion on clawback in the Wilpon case, the Sandomir/Belson article observed, “legal experts were divided on whether the appeals court ruling would embolden Picard in his bid to recoup as much money as possible from Wilpon and Katz.”

Hearing on Wilpon Case on August 19, 2011

The frenzy of activity affecting the Wilpon case continued last Friday. Installment 54 of this series pointed out that there was a new playing field and environment to be confronted by the Trustee with the entry by Judge Rakoff into the picture. By his actions at the Hearing, Judge Rakoff confirmed that the game in his court will differ from the home field advantage that Mr. Picard has enjoyed in the bankruptcy court.

On Friday, Adam Rubin wrote an article for ESPN.com entitled, “Ruling on Tossing Suit vs. Wilpons Will Wait,” in which he said “[Judge] Rakoff set a trial date for March but cautioned not to read into that about his likelihood of tossing the case beforehand.” Therefore, after summoning all parties to his courtroom for the Hearing on the eve of a late summer weekend, Judge Rakoff heard lengthy arguments by the attorney teams for the Trustee and the Wilpons but reserved ruling on any of the matters before him.

Among other things Mr. Rubin reported that “[e]xperts believe the $700 million portion [of principal return] may ultimately be rejected by Rakoff, but they still expect the Wilpons to be on the hook for a $300 million ‘clawback’. . . .” The Wilpons had argued at the Hearing that the Opinion was not applicable to the Wilpon Case.

As a consequence, under the specter of the potential for dismissal of all or part of the Wilpon Case by Judge Rakoff in late September at the earliest, the parties must now preliminarily prepare for the possibility of a highly extensive and expensive public trial, while being admonished to vigorously seek settlement. Mr. Rubin noted that former New York governor Mario Cuomo, who has been appointed mediator in the Wilpon Case, was in the courtroom.

One thing is clear. The Wilpon Case is not over and will continue to generate considerable interest and potentially new legal precedents. After his article was published, Mr. Rubin said, “Hopefully I'm done for a few days with the topic.” Presumably he desires to return his attention to the fields on which Mets baseball is usually played.

[To be continued in Installment 58]
 

(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.)

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This is the fifty-fifth in a series of Installments on this blog  that are discussing issues arising from the Bernard L. Madoff scandal (“Madoff”). A number of Installments in this series, most recently Installment 54, have highlighted the apparently inconsistent and peremptory approach that Irving Picard, the Trustee in the Madoff bankruptcy (“Mr. Picard”) has taken with respect to the Wilpon/Katz families, the owners of the New York Mets, and their Section 501(c)(3) private foundations (collectively, “Wilpon/Katz”), in contrast to other charitable organizations.

Installment 54  pointed out that there was a new playing field and environment to be confronted by Picard with the entry by Federal District Court Judge Jed S. Rakoff into various lawsuits brought by Mr. Picard. Judge Rakoff has now already indicated that the game in his court will differ from the home field that Mr. Picard has enjoyed for over 2 ½ years in the bankruptcy court. Last week there were two new developments for Mr. Picard, one in the Federal District Court and the other from a new team - the General Accountability Office (the “GAO”).

Diana B. Henriques wrote in a July 29, 2011 article in The New York Times  about Judge Rakoff’s ruling that Mr. Picard did not have the right to sue HSBC and other banks on behalf of the victims. Ms. Henriques observed that:

The opinion [in the HSBC case] will most likely be closely read by lawyers for the owners of the New York Mets baseball team, who are also before Judge Rakoff challenging a case Mr. Picard has filed that seeks $1 billion in fictional profits and damages from the team’s owners, the Wilpon family.

At a hearing on the HSBC issue earlier this year, Judge Rakoff indicated that he saw a different set of issues arising in the challenge by the Wilpon family, so it was not clear what effect this new ruling would have on that suit.

On July 29, 2011, Joe Nocera observed in his column in The New York Times entitled “The Madoff Trustee’s Bad Day”:

Ultimately, Picard and Sheehan [one of Mr. Picard’s chief attorneys] were trying to do something that has been sorely lacking in the aftermath of the financial crisis. They were trying to bring about some justice, using the only weapon at their disposal: litigation. That’s not their job, of course, and that is partly why they were handed such a stinging defeat. But at least they were trying, which is more than you can say for the Justice Department.

Mr. Picard can certainly appeal Judge Rakoff’s ruling. Nonetheless, it is clear that Judge Rakoff will be bringing a bold new perspective to issues in the Madoff bankruptcy, perhaps including the Wilpon/Katz matter. Additionally, Mr. Nocera’s article brings to mind the question as to whether the Madoff trustee should be expending millions in legal fees approved by the bankruptcy court for embarking on an adventure “that’s not their job.”

This last week also saw the entry of the GAO as a new player in the Madoff aftermath. An article written by Michael O’Keefe in the NY Daily News on July 28, 2011 reported:

A federal watchdog agency [the GAO] has agreed to investigate allegations that Irving Picard . . . is punishing the Ponzi scheme scammer's victims by filing “clawback”" lawsuits, Rep. Scott Garrett (R-N.J.) announced Wednesday.

The “comprehensive evaluation” of Picard's work as the Madoff trustee will also include a review of the legal investigative costs Picard and his firm, Baker & Hostetler, have incurred during the cost of the investigation.

This development raises a new wrinkle for Mr. Picard in that, for the first time, he and his team will be playing defense. If the review of the GAO is broad enough, then it may get into some of the decisions made by Mr. Picard in pursuing clawback in selected cases and in specific instances, such as Wilpon/Katz, even principal recovery.

Other questions may arise out of the new GAO investigation. For example, who will foot the inevitable legal bills of Mr. Picard and his law firm, potentially both internal and external, in their responses to inquiries by the GAO? Will Mr. Picard seek payment or reimbursement from the bankruptcy court of all or part of the legal time spent as reasonable and necessary costs of the Madoff proceeding? If Mr. Picard were to do so, will the bankruptcy court approve the payments requested, as it has done for his fee applications to date?

One thing is clear. The Madoff bankruptcy is far from over and will continue to generate considerable interest and new legal precedents.

[To be continued in Installment 56]
 

(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.)

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This is the fifty-fourth in a series of Installments on this blog that are discussing issues arising in the aftermath of the global Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). A number of recent Installments in this series, such as Installment 52 and, earlier, Installment 17 have used public filings and media publications to highlight the apparently inconsistent and peremptory approach that Irving Picard, the Trustee in the Madoff bankruptcy (“Picard”) has taken with respect to the Wilpon/Katz families, the owners of the New York Mets, and their Section 501(c)(3) private foundations (collectively, “Wilpon/Katz”), in contrast to other charitable organizations.

Now, however, there will be a new playing field and environment to be confronted by Mr. Picard and his army of attorneys in his crusade against the Wilpon/Katz families. In contrast to the friendly home field advantage for Mr. Picard in the bankruptcy court, Judge Jed S. Rakoff, a Federal District Court judge in Manhattan, has taken jurisdiction of the Wilpon/Katz matter. A July 6, 2011 article by Richard Sandomir in The New York Times characterized Judge Rakoff as

a former federal prosecutor and defense lawyer with an independent streak and a flair for phrase-making. He has been called an activist judge. He has been called a maverick. He has been called other things, a number of them probably unprintable. But few observers of the federal bench would dispute that he is capable of the unexpected.

The article by Mr. Sandomir goes on to say that “lawyers familiar with Rakoff and his appetite for novel rulings said this week that they would not be shocked if he tried try to say something larger about the law.” Indeed Judge Rakoff indicated some skepticism as to “a question that is critical to Katz and Wilpon’s case. How, he wondered, can investors like them not be judged by the securities laws that governed their 25 years of investing with Madoff, but by the bankruptcy laws that came into play after Madoff’s collapse.”

It is clear that Judge Rakoff may bring a bold new and perhaps refreshing and enlightening direction to the Wilpon/Katz matter. He does not appear to be willing to limit his review to the scope that has been so far carefully defined by Mr. Picard and the bankruptcy court. His involvement may have significant impact on the entire Madoff case. It is hoped that an enlarged field of inquiry by Judge Rakoff will address some of the peremptory and perplexing decisions of Mr. Picard in the Madoff bankruptcy that appear to be inconsistent and perhaps even unfair.

[To be continued in Installment 55].

(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.)

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This is the fifty-third in a series of Installments on this blog that are discussing issues arising in the aftermath of the global Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). Installments 51 and 52  and earlier Installments of this series have discussed the apparently inconsistent and peremptory approach that Irving Picard, the Trustee in the Madoff bankruptcy (“Picard”) has taken with respect to the Wilpon/Katz families, the owners of the New York Mets, and their Section 501(c)(3) private foundations (collectively, the “Wilpon/Katz Families”), in contrast to the Lautenberg Foundation, a Section 501(c)(3) private foundation (“Lautenberg”) formed by Senator Frank R. Lautenberg.

As early as Installment 17 this series raised the question as to whether the Wilpons would be treated differently from Hadassah and other charities by Picard. There has been continuing publicity regarding the spectacle of the Wilpon/Katz Families v. Picard.

In Installment 52, this series observed the following:

Thus it would appear that Picard has made peremptory and perplexing decisions not only as to the Madoff investors that he has chosen to pursue but also the extent of recoveries that he is seeking. While the Wilpon/Katz families, including the Wilpon/Katz Foundations, will spend millions of dollars in legal fees and most likely hundreds of millions in settlement or satisfaction of judgments, other Madoff investors like Hadassah and the Lautenberg Foundation will keep millions in fictitious profits or even recover payments in the Madoff bankruptcy proceeding.

Recently, I had the privilege and pleasure of hearing Jeffrey Toobin, a senior analyst for CNN Worldwide since 2003 and a staff writer at The New Yorker since 1993, who is one of the country’s most esteemed experts and authors on politics, media and the law, especially the U.S. Supreme Court. His book “The Nine: Inside the Secret World of the Supreme Court (2007),” was highly acclaimed. Mr. Toobin’s forthcoming book, “The Oath: The Secret Struggle for the Supreme Court,” will be published in 2012. He was the featured speaker on the subject of the U.S. Supreme Court at a luncheon during the partners’ retreat of my law firm earlier this month. Because I knew of Mr. Toobin’s interest and fan support of the New York Mets, I asked him a question about Picard and the Wilpon/Katz Families.

I inquired whether he thought that the aggressive and somewhat incongruous approach taken by Picard against the Wilpon/Katz Families in seeking not only fictitious profits but also principal was part of a larger strategy of Picard to use a success in recovering more than fictitious profits from these highly visible and vulnerable victims as a segue and steppingstone to his attacks on JPMorgan Chase, HSBC and other institutions.

Mr. Toobin responded that he believed that Picard is treating the Wilpon/Katz Families quite unfairly and manifestly different from other individual investors with Madoff. He added that it is possible that Picard is using the case of the Wilpon/Katz Families to set a precedent of a recovery in excess of fictitious profits to use in cases of banks that have much more financial ability to oppose Picard for an extended period of time. Mr. Toobin added that, based on published information, it appeared that the banks should have known that Madoff was operating a Ponzi scheme.

I extend my thanks to Mr. Toobin for his response.

[To be continued in Installment 54]
 

(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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This is the fifty-second in a series of installments on this blog that are discussing issues arising in the aftermath of the global Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). Installment 51 of this series presented a tabular comparison of financial information derived from the 2007, 2008 and 2009 Forms 990-PF filed with the Internal Revenue Service by (i) The Lautenberg Foundation, a Section 501(c)(3) private foundation (“Lautenberg”) formed by Senator Frank R. Lautenberg, and (ii) the Section 501(c)(3) private foundations formed by the owners of the New York Mets: the Judy & Fred Wilpon Family Foundation, Inc., and the Iris & Saul Katz Family Foundation, Inc. (collectively, the “Wilpon/Katz Foundations”). (The Lautenberg Foundation and the Wilpon/Katz Foundations are sometimes collectively referred to herein as the “Foundations.”)

The table in Installment 51 shows that the Lautenberg Foundation and the Wilpon/Katz Foundations suffered crushing losses in fair market value of assets from the end of 2007 to the end of 2009. During that two year period each of the Foundations lost at least 80% of its fair market value of assets as a result of write-offs attributable to the revelations regarding Madoff. In addition, each of the Foundations saw disastrous losses or declines in investment income during 2008 and 2009 from the level achieved in 2007 as a result of the losses recognized from investments with Madoff.

The Form 990-PF filed by each of the Foundations for 2007 (the last full fiscal year for the Foundations before the Madoff scandal erupted in December 2008) indicated that an appreciable portion of income and contributions reflected for that year were attributable to the fictitious profits from investments with Madoff and distributions from such “profits” to the Foundation. The largest amount of Madoff "profits" so reflected for 2007 was $947,565 that was reported by the Lautenberg Foundation.

While Picard continues his relentless pursuit of the Wilpon/Katz families, including the Wilpon/Katz Foundations for not only “clawback” of $300 million of fictitious profits but also return of principal of $700 million, there is no such pursuit of the Lautenberg Foundation, even for clawback. Moreover, there is even evidence (while not conclusive because of a lack of an explanatory note) in the 2009 Form 990-PF filed by the Lautenberg Foundation that it received a cash recovery of $500,000 in the Madoff proceeding. See Installment 50 of this series for further discussion.

Thus it would appear that Picard has made peremptory and perplexing decisions not only as to the Madoff investors that he has chosen to pursue but also the extent of recoveries that he is seeking. While the Wilpon/Katz families, including the Wilpon/Katz Foundations, will spend millions of dollars in legal fees and most likely hundreds of millions in settlement or satisfaction of judgments, other Madoff investors like Hadassah and the Lautenberg Foundation will keep millions in fictitious profits or even recover payments in the Madoff bankruptcy proceeding.

[To be continued in Installment 53]
 

(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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This is the fifty-first in a series of installments on this blog that are discussing issues arising in the aftermath of the Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”).  Installments 49 and Installment 50 of this series and several prior Installments have discussed The Lautenberg Foundation, a private foundation (“Lautenberg”) formed by Senator Frank R. Lautenberg, and its investment with Madoff.  

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This is the fiftieth in a series of installments on this blog that are discussing issues arising in the aftermath of the Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). Installment 49,  Installment 41 and several prior Installments in this series have discussed The Lautenberg Foundation, a private charitable foundation (the “Foundation”) formed by Senator Frank R. Lautenberg, and its investment with Madoff. The 2008 Form 990-PF (the “2008 Form 990-PF”) and the 2009 Form 990-PF (the “2009 Form 990-PF” and, collectively with the 2008 Form 990-PF, the “Foundation Forms 990-PF”) filed by the Foundation with the Internal Revenue Service (the “IRS”) are the vehicles for the analysis on this blog of the financial impact on the Foundation of its relationship with Madoff . The Foundation Forms 990-PF are available to the public on the charity information Web site GuideStar.

Comparing the 2009 Form 990-PF to the 2008 Form 990-PF, which was filed with the IRS 15 days earlier, reveals some interesting new financial information, as follows:

The 2009 Form 990-PF reflects a fair market value of assets for the Foundation as of
December 31, 2009, of $967,302, almost the same amount as the fair market value of assets for the Foundation as of December 31, 2008 of $1,001,517. Yet the Foundation reported an excess of expenses over revenues of ($365,087) (the “Loss”) for 2009. The major source of the Loss was explained in Statement 3 to the 2009 Form 990-PF as a charge for “Madoff Theft Loss Balance Remaining” of ($296,072) to “Revenue per Books” and “Net Investment Income.”

Statement 6 to the 2009 Form 990-PF reflected Corporate Stock holdings of the Foundation in Bernard L. Madoff Investment Securities LLC with zero book and market values as of December 31, 2009. As observed in Installment 41 of this series, Statement 9 to the 2008 Form 990-PF, which was filed with the IRS 15 days earlier than the 2009 Form 990-PF, reflected Corporate Stock holdings of the Foundation in Bernard L. Madoff Investment Securities LLC with a book value of $696,072 and a fair market value of $400,000 as of December 31, 2008. No statement was given in either of the Foundation Forms 990-PF as to the basis for the valuations.

No contributions, gifts, grants, etc. were reported in the 2009 Form 990-PF by the Foundation as having been received during 2009, and the only positive income was interest and dividends aggregating $13,909.

Notwithstanding the foregoing items, the 2009 Form 990-PF discloses a new asset on line 2 of its Balance Sheet of $500,239 in “Savings and temporary cash investments.” Statement 2 to the 2009 Form 990-PF reflects $239 in “Interest on Savings and Temporary Cash Investments” from Bank of America. Nowhere, however, in the 2009 Form 990-PF is there any explanation or statement about the $500,000 cash item on the Balance Sheet.

Installment 41 raised the following question: In light of the filing of the 2008 Form 990-PF in November 2010, almost two years after the Madoff arrest, with a wealth of information available about the Madoff bankruptcy/liquidation proceeding (the “Madoff Proceeding”), was the $400,000 in fair market value reflective of an anticipated amount recoverable or already recovered in the Madoff Proceeding by the Foundation?

One can reasonably speculate that $500,000 of the cash reflected on line 2 of the Balance Sheet in the 2009 Form 990-PF may be a distribution to the Foundation in the Madoff Proceeding of the $500,000 maximum amount payable to a securities customer by the Securities Investor Protection Corporation.

In contrast to a potential payment to the Foundation in the Madoff Proceeding, Installment 41 observed that the 2008 Form 990-PF reflected charitable contributions aggregating $330,445 during 2008. It is unclear whether such contributions were made in whole or in part from cash distributions received by the Foundation from Madoff during 2008 before his arrest in December 2008. Installment 41 asked whether any or all of such amounts could be subject to “clawback” by Irving Picard, the Trustee in the Madoff Proceeding (the “Trustee”). (Similar questions could be raised about the charitable contributions reported in the Foundation’s Forms 990-PF for 2005, 2006 and 2007 in light of the fact that, in each of those years, 70% or more of the investment income and fair market value of assets were reported by the Foundation as attributable to Bernard L. Madoff Investment Securities LLC.)

Finally, a principal theme of this series on Madoff is that Irving Picard has been treating charitable organizations inconsistently in the Madoff Proceeding. Installment 48, for example, highlighted the difference in treatment by the Trustee of Hadassah and the Wilpon/Katz private charitable foundations. It would have been helpful to this analysis if an explanation had been provided by the Foundation for the $500,000 cash item that appeared on its Balance Sheet as of December 31, 2009 without a corresponding item in the Analysis of Revenue and Expenses in Part I of the 2009 Form 990-PF.
 

[To be continued in Installment 51]

(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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Several Installments in this series about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”), the most recent of which was Installment 47, have discussed the proposed settlement with Hadassah (the “Hadassah Settlement”) by Irving Picard, the Bankruptcy Trustee for the Madoff Estate (“Picard”) in contrast to his vigorous pursuit of the Wilpon/Katz Family private charitable foundations.

On March 10, 2011, as requested in the Motion filed by Picard, the Honorable Burton R. Lifland, Bankruptcy Judge for the Madoff Estate, approved the Hadassah Settlement, whereby Hadassah will pay, within 60 business days, $45,000,000 of its alleged $77,000,000 clawback exposure. This grants Hadassah the benefit of retaining $32,000,000 of the fictitious profits that it withdrew from the Madoff scheme.

As I have stated previously, while I agree that Hadassah is a very worthy charity and deserves to survive and thrive, it is perplexing that Picard and Judge Lifland have allowed Hadassah to keep $32,000,000 of fictitious profits at the expense of other Madoff victims. Nevertheless this chapter of the decades-long involvement by Hadassah with the Madoff scandal appears to be concluded.

What does remain is to see how many millions of dollars the effort to retain the fictitious profits probably cost Hadassah in professional fees to lawyers, accountants and consultants in 2010 and 2011. The 2010 costs will not likely become public until Hadassah publishes its financial statements and files its Forms 990 for 2010 with the Internal Revenue Service (“IRS”) later this year.

However, the inconsistent manner in which Picard is treating charitable investors with Madoff warrants further monitoring. As stated in Installments 46 and 47 of this series, Picard is seeking a total of $7,000,000 or more (which is actually more than the amount of fictitious profits subject to clawback) from the Wilpon/Katz Foundations, which have given away millions of dollars each year to highly respected and worthy charities according to their Forms 990-PF filed with the IRS.

[To be continued in Installment 49]

(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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Several Installments in this blog series  about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”), the most recent of which was Installment 46, have discussed the proposed settlement with Hadassah (the “Hadassah Settlement”) by Irving Picard, the Bankruptcy Trustee for the Madoff Estate (“Picard”) in contrast to his vigorous pursuit of the Wilpon/Katz Family private charitable foundations.

As set forth in the Motion filed by Picard respecting the Hadassah Settlement (the “Motion”), Picard is seeking approval by the bankruptcy court of the Hadassah Settlement. The terms of the Hadassah Settlement would allow Hadassah to pay $45,000,000 of its alleged $77,000,000 clawback exposure for the final six years that Hadassah invested with Madoff. This would allow Hadassah to keep at least $32,000,000 of the Fictitious Profits that it withdrew from the Madoff scheme. The hearing on the Hadassah Settlement is scheduled before the bankruptcy court on Thursday, March 10, 2011.

Paragraph 16 of the Motion states the following:

A review of the Financial Statements and other information provided by Hadassah supports Hadassah’s contention that it does not have sufficient
assets and free cash to both satisfy the potential judgment the Trustee could obtain in a lawsuit . . . and continue to meet its charitable mission domestically and abroad, including completing construction and continued support of the Hospital Project [a new hospital to be built in Jerusalem, Israel with a cost to Hadassah of $318 million plus $45 million for equipment and furnishings over the next three years].

Paragraph 26 of the Motion adds:

While the Trustee believes that he would have prevailed in recovering all transfers to Hadassah [$77 million in the last six years before the arrest of Madoff on December 11, 2008], in the instant case the litigation risk and potential dissolution of an historic charitable organization, nominated in 2005 for a Nobel Peace Prize, outweighs any potential additional recovery from Hadassah.

Finally, Paragraph 29 of the Motion concludes by stating the following:

In sum, the Trustee submits that the [Hadassah Settlement] Agreement should be approved for two reasons (a) because it represents a reasonable compromise . . . that benefits the [Madoff] estate . . . and (b) to avoid burdensome and time consuming litigation with a historic charitable organization, litigation which would result in the demise of the organization and its worthy causes. Accordingly, since the Agreement is well within the “range of reasonableness” and confers a substantial benefit on the estate, the Trustee respectfully requests that the Court enter an Order approving the Agreement.

Paragraph 14 of the Motion mentions in passing that there was “a Bankruptcy Rule 2004 examination of Sheryl Weinstein, former chief financial director of Hadassah; . . . .” Among other Installments of this series, Installment 23 and Installment 14 of this series reported on the alleged close personal relationship of Ms. Weinstein with Madoff while she was the chief financial officer of Hadassah and Hadassah was investing heavily with Madoff.

The Hadassah Settlement appears to be based largely on the subjective conclusions of Picard that Hadassah, as a former nominee for a Nobel Peace Prize with substantial charitable commitments in future years, is a venerable charity that should be preserved but would be destroyed if it were subjected to the full measure of clawback that Picard is aggressively seeking from many other investors with Madoff.

I agree that Hadassah is a very worthy charity and deserves to survive and thrive. Nevertheless, I find it to be perplexing that Picard has apparently concluded that Hadassah should be allowed to keep $32,000,000 of fictitious profits at the expense of other Madoff victims who may be already impoverished and deserving of recovery.

Additionally, in my view, it is an overstatement for Picard to conclude that the payment by Hadassah of the full $77,000,000 “would result in the demise of the organization and its worthy causes.” As of December 31, 2009, the audited Consolidated Balance Sheet of Hadassah showed total unrestricted net assets of almost $653,000,000 and more than $1,000,000,000 in total net assets. With that level of equity, it would appear that Hadassah could finance relatively easily over a period of years the additional $32,000,000 (approximately 8.8% of the total Hospital Project) in fictitious profits that Picard is willing to provide them.

Moreover, Picard’s willingness to let Hadassah keep $32,000,000 in potential clawback amount highlights the inconsistency of his personal approach to charitable victims. As stated in Installment 46, Picard is seeking a total of $7,000,000 or more (which is actually more than the amount of fictitious profits subject to clawback) from the Wilpon/Katz Foundations, which have given away millions of dollars each year to worthy charities according to their Forms 990-PF filed with the Internal Revenue Service. This developing scenario warrants continued monitoring.

[To be continued in Installment 48]

(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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Several Installments in this blog series about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”), the most recent of which was Installment 45,  have discussed certain aspects of the scheme’s impact on the Wilpon Family, who are best known as the owners of the New York Mets. The Installments revolved primarily around potential “clawback” exposure from investments with Madoff of Judy & Fred Wilpon Family Foundation, Inc., a charitable Section 501(c)(3) private foundation (the “Wilpon Foundation”).

Installment 45 discussed the vigorous pursuit of the Wilpon Family by Irving Picard, the Bankruptcy Trustee for the Madoff Estate (“Picard”), in contrast to his proposed settlement with Hadassah (the “Hadassah Settlement”). On February 17, 2011, Picard moved for approval by the bankruptcy court of the Hadassah Settlement, under which Hadassah would pay $45,000,000 of its alleged $77,000,000 clawback exposure for the final six years of the reported 20 years that Hadassah invested with Madoff.

The Forms 990-PF filed with the Internal Revenue Service (the “IRS”) by the Wilpon Foundation in recent years provide helpful information on its distributions from the Madoff scheme and may be accessed on GuideStar. The Forms 990-PF filed with the IRS by Iris & Saul Katz Family Foundation, Inc. (the “Katz Foundation”), a charitable Section 501(c)(3) private foundation formed by members of the Katz Family, are also accessible on GuideStar.

Installment 45 of this series also discussed the Complaint filed by Picard against dozens of Defendants comprised of members of the Wilpon and Katz Families, their business associates and business investments, including the New York Mets, numerous real estate ventures and others (collectively, the “Defendants”). The Complaint revealed Picard’s determination to seek not only alleged “Fictitious Profits” relating to clawback but also additional hundreds of millions in principal transfers from Madoff to named Defendants. Two of the Defendants named in the Complaint are the Wilpon Foundation and the Katz Foundation (collectively, the “Foundations”).

The Complaint alleges on pages 264-265 that the Wilpon Foundation received not only $2,230,588 in Fictitious Profits from Madoff, but also “other direct transfers . . . of principal in an amount subject to discovery and proof at trial [‘Principal Transfers’].” The Katz Foundation numbers alleged in the Complaint are even higher. Pages 262-264 of the Complaint alleges that the Katz Foundation received $3,272,382 in Fictitious Profits from Madoff and other direct Principal Transfers. In addition, the Complaint seeks from the Katz Foundation alleged indirect Fictitious Profits and Principal Transfers as a subsequent transferee.

A review of the 2008 Forms 990-PF filed with the IRS by the Wilpon Foundation (the “Wilpon Form 990-PF”) and the Katz Foundation (the “Katz Form 990-PF” and, collectively with the Wilpon Form 990-PF, the “Forms 990-PF”) sheds some light on at least a portion of the Principal Transfers that Picard is seeking from the Foundations.

Each of the Foundations filed as Appendix A to its Form 990-PF an IRS “Statement by Taxpayer Using the Procedures in Rev. Proc. 2009-20 to Determine a Theft Loss Deduction Related to a Fraudulent Investment Arrangement.” It applies to information only as to tax years of the Foundations that were still open to tax audit.

Appendix A to the Wilpon Form 990-PF revealed for open tax years an initial investment of $114,227 with Madoff, subsequent additional investments of $1,963,189 and income reported in prior years of $1,312,617, for a total of $3,390,033. More significantly, the Wilpon Foundation Appendix A reports withdrawals of $3,296,500. The withdrawal figure of $3,296,500 presumably is the least that Picard would be seeking from the Wilpon Foundation in Fictitious Profits and Principal Transfers for the years covered by Appendix A to the Wilpon Form 990-PF.

Appendix A to the Katz Form 990-PF disclosed for open tax years an initial investment of $1,335,000 with Madoff, subsequent additional investments of $1,376,702 and income reported in prior years of $1,030,854, for a total of $3,742,556. More significantly, the Katz Foundation Appendix A reflected withdrawals of $3,742,122. The withdrawal figure of $3,742,566 would be presumably be the least that Picard is seeking from the Katz Foundation in Fictitious Profits and Principal Transfers for the years covered by Appendix A to the Katz Form 990-PF.

It would appear that Picard is seeking $7 million or more from the Foundations, which have given away millions of dollars each year to worthy charities according to their Forms 990-PF. The Wilpon Foundation reported charitable contributions, gifts and grants paid totaling $6,318,421 in the three years ended December 31, 2010, while the Katz Foundation reported charitable contributions, gifts and grants paid totaling $4,038,879 in the same period. Nevertheless, Picard is willing to settle for approximately 58% of the Fictitious Profits reported for Hadassah, presumably because they may be a worthier charitable vehicle in his eyes than the Foundations. This developing scenario warrants further monitoring.

[To be continued in Installment 47]
 

(Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders, 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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Several Installments in this blog series about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”) have discussed certain aspects of the scheme’s impact on the Wilpon Family, who are best known as the owners of the New York Mets. Installment 27 was the most recent to discuss the involvement of the Wilpon Family with Madoff. These Installments revolved around potential “clawback” exposure and the investments of the Judy and Fred Wilpon Family Foundation with Madoff.

Similarly, numerous other Installments, the most recent of which was Installment 44, 
have discussed Hadassah and its unfortunate involvements with Madoff. The matters covered include Hadassah’s potential “clawback” exposure, the questionable approach that Hadassah has used to disclose its investments with Madoff in Forms 990 filed with the Internal Revenue Service, its proposed settlement with the Madoff Trustee and other matters.

Installment 17 of this series, published on October 26, 2009, was entitled “The Madoff Profit Game: Will the Mets End up Losers Off the Field While Charity Stakeholders Become Winners?” In Installment 17, Diana B. Henriques was quoted as having written on May 28, 2009 in The New York Times, “There is the widespread fear among some — unfounded, [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

I stated the following in Installment 17:

Will Picard choose to pursue the Mets and the Wilpon family while passing on Hadassah? All charities, especially those providing social services like Hadassah, are “struggling” with materially reduced contributions because of the economy, increased demands by individuals who are unemployed and suffering financially, losses in endowment funds from the substantial market declines and increased regulatory activity.

While the position earlier stated by Picard as to charities may be humanitarian and emotionally appealing, there is little basis in the law for the disparity in treatment between charities and for-profit entities. This inequality of approach will more likely than not lead to protracted litigation and uncertainty in the Madoff matter.

Picard has now fulfilled my concerns beyond my expectations. Both the Wilpons and Hadassah have made news recently relating to how Picard is dealing with their status as “winners” under his formula for determining “Fictitious Profits” from Madoff that were subject to clawback. Most recently, on February 4, 2011, the Madoff bankruptcy court unsealed a 796-page Complaint, including Exhibits, against dozens of Defendants comprised of members of the Wilpon Family, their business associates and their respective families, business investments including the New York Mets, numerous real estate ventures and others (collectively, the “Wilpons” or the “Defendants”).

The Complaint revealed Picard’s determination to seek recovery from the Wilpons of not only $300,000,000 of identified transfers of Fictitious Profits but also additional hundreds of millions in principal transfers from the named Defendants. The Complaint describes the alleged existence of many “red flags” from which the Defendants knew or should have known over decades that Madoff was operating a Ponzi scheme as the basis for recovery beyond Fictitious Profits.

Contrast this dramatic Complaint of Picard with the disclosure in early December 2010 from Nancy Falchuk, National President of Hadassah in a letter respecting the Madoff scandal. The letter stated that Hadassah was voluntarily paying $45,000,000 to settle, subject to approval of the bankruptcy court, a potential clawback claim for Fictitious Profits by Picard of as much as $97,000,000. Installment 42 of this series reported on the Falchuk letter and the fact that Hadassah had been investing with Madoff for a period of 20 years. Moreover, Hadassah had sophisticated investment advisers over the period of their Madoff investments.

It is difficult to rationalize the stark disparity in approach to these cases by Picard, other than the fact that Hadassah is a charity. In the case of the Wilpons, Picard is seeking hundreds of millions of dollars beyond the alleged Fictitious Profits. In the case of Hadassah he has agreed to let Hadassah retain $55,000,000 of Fictitious Profits at the expense of other Madoff victims. Both the Wilpons and Hadassah had been investing with Madoff for decades. This perplexing matter warrants further monitoring.

[To be continued in Installment 46]
 

(Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders, 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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