From Lawyers: Sterling Defendants Don't Owe Madoff Trustee Money - CNBC, by Darren Rovell, 2011 February 03
The attorneys, David Caplan and Karen Wagner, from the law firm at Davis Polk & Wardwell, told CNBC that Wilpon and Katz knew nothing of Madoff's $65 billion scheme, as it has been alleged. Caplan and Wagner also say that more than 700,000 pages they turned over to Picard failed to show a connection. ..... < snip > ..... "The customer of the broker is not subject to clawbacks, even if the broker has engaged in fraud," Wagner said. "Since customers no longer hold physical securities, they rely on the broker to provide them with accurate account statements. The law is clear, even inside of bankruptcy, that the statement provided to the customer constitutes a legal obligation of the broker to pay that amount." Wagner says that even if it turns out that the money isn't being really earned, as was the case in the Madoff Ponzi scheme, the customer is still owed the amount that the broker said the customer was due and has the right to withdraw whatever is reflected in the statement. Mets LLP, owned by the defendants, reportedly profited off its Madoff accounts. ..... < snip > ..... Other ponzi schemes have resulted in clawbacks, but Wagner said that they are argue that those ponzi schemes involved being an equity investor in a product. That wasn't the case here, they say, because Madoff was a registered broker and the account statements are legal obligations that the broker promises to the customer. ..... < snip > ..... A story by the New York Times that was published on Tuesday suggested that the Mets ownership sometimes put money that was owed to players in future years into Madoff's fund to grow until the deferred payments were due. That is inaccurate, a source close to the team, said. ..... < snip > Lawyers representing Sterling Equities, whose principals Fred Wilpon and Saul Katz also own the New York Mets, said Wednesday that the lawsuit that is being built against their clients by Madoff bankruptcy trustee Irving Picard is without merit.
Mmmmmmm........typical lawyerly defense. The legal team is paid to deny, deny, deny.
Collusion looms large here----appears Wilpon and his BIL Katz were engaged in massive money-laundering and tax evasion---and were an unlicensed feeder fund to Madoff, suckering in a lot of people, including Mets players.
.......the breadth and depth of investing w/ Madoff by the Wilpon and Katz families, their financial holdings, including the Mets finances, are astounding.
Trustee Picard’s lawsuit seeking hundreds of millions of dollars from the two, takes aim at roughly 100 accounts held by Wilpon, Katz, their families or business operations. An outside auditor's analysis of Madoff’s 15,000 clients, found more than 500 accounts tied to Wilpon and Katz. Wilpon had at least 17 accounts under his name alone........
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EXCERPT FROM ARTICLE: “Madoff was an investment vehicle that existed for Fred Wilpon and the Mets organization,” one former Mets employee said.
---substantial aspects of the Met’s financial operations seemed to flow through, or wind up with Madoff — annuities set up for players, cash generated by sponsorship deals, and more. The team regularly discussed investing deferred money from long-term player contracts in Madoff accounts. Bobby Bonilla was among the players who had their deferred money put with Mr. Madoff, one former employee said. In those cases, the players would agree to take less money up front and be paid over a number of years, earning interest.
The Wilpons profited when the Mets kept any money earned over that agreed rate......When disability insurance costs piked, the Mets began to self insure....investing premiums with Madoff.
For his part, Madoff continued to "produce" returns that outdid prevailing interest rates........on paper.
In order to correct, we first have to understand the basics of deferred comp. It is a NON-QUALIFIED plan, as opposed to a pension plan..in that the participant has NO rights or protections under ERISA. Here's a simple example that explains it.. Say an executive earns a bonus of $5 million. If it's paid to him in a lump sum, and living in NYC, he'll pay about 50% in taxes to fed, state and city. He doesn't really need the money. He's age 60, looking to retire in 5 years, so he enters into an agreement with his employer to "defer" the pay out until age 65, at which time he will receive 5 equal payments of $1 million. The agreement may, or may not, stipulate that he will earn interest on the money at a specified rate, which would result in a larger payout. The employee is a general creditor of the employer, and may stand behind senior bondholders. If the employer goes belly up, the employee is stuck. Just recently, A-Rod was owed $250 mill by the group that owned the Texas Rangers. They filed for bankruptcy, and A-Rod was ultimately made whole, but he was at risk. The employer may, or may NOT decide to set aside funds now against the future obligation. The employer does NOT get a tax deduction for the funds set aside, unlike payments to a qualified pension plan..only when the $$ is actually paid to the employee.
As owners of a baseball team, where players salaries are the single biggest expense, deferred comp can be a very attractive management tool. If the player is willing to sign now, with substantial money deferred, then the team has far greater financial flexibility. And if they can somehow assume, or count on, extravigant rates of return via Madoff investment accounts, then that makes it much easier for ownership.
Taking the earlier example, let's assume that management wanted to fully fund the deferred comp agreement, now, and that they could earn 5% in a T-bond, if they set aside today (this is using round numbers) about $3.7 mill, then in 5 years they would be able to withdraw $1 mill for the next 5 years and send it to the player. However, suppose that they "knew" that they would earn, say 30% on their money each year via Madoff, well, then, the amount they would have to set aside today would be about $1.2 million, and the agreement is fully funded.
That's a HUGE difference, and it could explain why the Mets were willing to enter into several player contracts that at the time seemd to make NO financial sense whatsoever..