The idea did not come out of nowhere. The company of a close adviser of theirs had already bought such insurance to protect its investments with Madoff, and the adviser suggested that they might do so.
As a result, a senior executive in Wilpon’s and Katz’s company met with an insurance representative. The executive, Arthur Friedman, then reported back to his bosses — both what the insurance would cost, and the fact that it would protect against a variety of frauds, including a Ponzi scheme.
Wilpon and Katz ultimately chose not to purchase the insurance, but the events of 2001 have become a key element in the $1 billion lawsuit brought against the owners of the Mets by the trustee for the victims of Madoff’s huge Ponzi scheme.
According to the trustee, Irving H. Picard, the decision by Wilpon and Katz to go “shopping” for fraud insurance for their Madoff holdings is a telling bit of evidence that supports the claim at the heart of his case: the men had reason to be suspicious of Madoff’s investment operation, and to be fearful that their fortunes might one day be at risk, but they nonetheless kept investing with him.
“The very fact” that Wilpon and Katz and their business partners “were in the market for this ‘one of a kind’ insurance policy” to protect their investments against a Ponzi scheme “establishes incontrovertibly” that they were on “notice” of Madoff’s “possible fraud,” Picard asserted in court papers filed Thursday.
Picard, who cited the fraud insurance episode when he filed his suit last December, fleshed out his argument in Thursday’s filing in federal bankruptcy court in Manhattan. The fuller version of his accusation is part of a formal 117-page response to a motion by Wilpon’s and Katz’s lawyers to dismiss the lawsuit.
In Thursday’s filing, Picard repeated and expanded on what he has argued were a litany of warnings and red flags concerning Madoff’s possible wrongdoings that Wilpon and Katz chose not to heed — all because they were too concerned about continuing to enrich themselves with the startlingly consistent and often hefty returns from their Madoff investments.
Wilpon and Katz, both in public and in their own court papers, have said they were innocent victims of Madoff’s frauds, and they have accused Picard of twisting or inventing evidence as part of an effort to damage their reputations and strong-arm them into a giant settlement.
Wilpon and Katz, personally and on behalf of their partners at their holding company, Sterling Equities, have insisted they received no warnings, and that they were not sophisticated enough investors to have figured out Madoff was a fraud, something even federal regulators had failed for years to do.
But Picard, in his filing, seeks to persuade the judge in the case of what he argues is a critical point: in his efforts to recoup hundreds of millions of dollars from Wilpon and Katz, he does not have to prove they knew Madoff was a fraud, only that they ignored a whole range of evidence over many years that he might have been doing something improper or illegal.
“The Sterling defendants believe they are entitled to keep the money they took from Madoff, whom they suspected and were warned might be engaging in fraudulent or criminal activity, because they did not actually know Madoff was engaging in a fraud,” Picard asserts.
Sterling said in a statement Thursday: “For months our reputations and our businesses have been subjected to the Trustee’s false allegations, and today’s filing recklessly rehashes the same fictitious claims.
“As the Partners have said all along, they did not know Bernie Madoff was engaged in a fraud. There were no red flags and they received no warnings.
The Trustee’s opposition papers filed today say nothing different. The only thing the Trustee has debunked is the veracity of his own story.”
The episode involving the insurance played out over a number of months in 2000 and 2001. According to Picard’s filings, the question of fraud insurance was first raised by Charles Klein, a managing director at American Securities, a private equity firm that had a long business relationship with Wilpon’s and Katz’s Sterling Equities.
According to Thursday’s filing, it appears that Wilpon and Katz had made it possible for affiliates of Klein’s firm to invest with Madoff, but over the years Klein raised concerns about Madoff. In 2000, American Securities acquired what it termed a “one of a kind” insurance policy against fraud with its Madoff accounts.
Klein’s concerns regarding Madoff were apparently profound,” Picard has said in court papers.
In early 2001, Klein recommended the same insurance policy to Katz.
Friedman, a senior vice president at Sterling who administered the hundreds of Madoff accounts held by the partners at Sterling and their families and friends, began to research the nature and cost of the insurance.
In his filing Thursday, Picard suggested that at roughly the same time, Wilpon, Katz and their partners were aware of news accounts calling into question Madoff’s operations. In fact, he said, the Sterling partners had circulated articles detailing those suspicions among themselves.
“A few weeks after the articles about Madoff were circulated,” according to Picard’s filing, “Friedman wrote a memorandum to all Sterling partners” in which “he reported on a meeting he had with insurance broker, Robert Duran, on the subject of ‘Madoff insurance.’ ”
The memo noted that the policy covered both fraud and “insolvency for any reason.” Friedman’s handwritten notes on the memo, according to Picard’s filing, contained the following entry: “Coverage: Fraud and Fidelity (Ponzie)”.
Picard has said that Wilpon and Katz ultimately decided against buying the insurance because their holdings in Madoff were so great they amounted to “an uninsurable risk.” On this point, he cited the sworn testimony of Saul Katz’s son, David.
“We couldn’t get anywhere near the amount we needed to cover it,” David Katz told Picard’s lawyers.
Picard, as he has done repeatedly in his court filings, said he found it hard to understand why Wilpon and Katz never made any effort themselves to determine if Madoff was in some way shady.
“The Sterling defendants were aware of facts that caused them to consider obtaining insurance to cover a Ponzi scheme or insolvency, but there is no evidence that these facts led them to do any diligence,” Picard asserted in Thursday’s filing.
Lawyers for Wilpon and Katz have derided and dismissed Picard’s interpretation of the episode, saying it is just one example of him making unfounded assumptions and conclusions.
They have said in court papers that the “allegations” that Klein recommended that Wilpon and Katz obtain fraud insurance were “irrelevant,” in part because Wilpon and Katz determined the insurance was “an unnecessary expense” given their “comfort level” with Madoff.
In sworn testimony, both Katz and Friedman said they had no reason to mistrust Madoff, with whom they had invested for many years, and that as a result, as Friedman said in a deposition, “We didn’t see any need and the cost was very high.”
The case is before Judge Burton R. Lifland. It is unclear when he might rule on Wilpon’s and Katz’s motion to dismiss Picard’s suit.
Earlier this year, the judge enlisted former Mario M. Cuomo, New York’s former governor, to help mediate the lawsuit, and perhaps work out a settlement. But whether any progress has been made remains a question.