A ruling this week in a case the trustee for victims of Bernard L. Madoff’s Ponzi scheme had filed against the owners of the New York Mets could wind up cutting the amount available to pay all victim claims by up to $11 billion, a lawyer for the trustee said on Wednesday.
The lawyer, David J. Sheehan, said the ruling in the Mets case also would require the trustee, Irving H. Picard, to delay an initial cash payment to eligible victims, scheduled for later this week, until he can determine the ruling’s impact on the amounts owed to other victims of the epic fraud.
Mr. Sheehan’s warnings underscored how potentially damaging the Mets ruling could be for the trustee’s broader effort to recover cash from all of the so-called net winners in the case — those, like the Mets owners, who took more cash from their Madoff accounts than they put in. Those recoveries are the primary source of cash available to the trustee to compensate the net losers, those who took less from their Madoff accounts than they put in.
On Tuesday, United States District Judge Jed S. Rakoff threw out all but two of the 11 claims filed by the trustee and ruled that he could seek no more than $386 million in fictitious profits that Mr. Madoff paid out to the Mets owners, Fred Wilpon and Saul Katz. That figure was based on the sum the men invested in the two years before the fraud was discovered in December 2008, the recovery window set by federal bankruptcy law. The trustee had been seeking $1 billion in fictitious profits and principal paid out in the last six years of the fraud, as permitted under New York State law.
But if Mr. Picard is limited to the two-year federal window in all of the nearly 1,000 lawsuits he has filed against other net winners, his potential recovery would be cut by a total of $5.9 billion, according to Mr. Sheehan. Another element of the ruling could erase another $5.5 billion he is seeking in court, he said.
The enormous scam took in thousands of investors and generated paper losses of almost $65 billion and cash losses of about $18 billion. To date, the trustee has raised about $10.6 billion to cover the cash losses, primarily through out-of-court settlements.
Tuesday’s ruling, consequently, could significantly reduce the amount of money the trustee could seek through lawsuits to compensate the net losers in the fraud.
“This does have real ramifications,” Mr. Sheehan said.
The elimination of the six-year recovery window in the Mets case was cheered by lawyers for other net winners who have been sued, most of whom said their clients would owe far less under the two-year standard.
“This is the first victory for the Madoff net winners,” said Barry Lax, a lawyer for a number of net winners. “Nine of the 11 claims were dismissed and since the Wilpons and Katzes were net winners, other net winners will benefit from the ruling.”
A second element of the ruling is less clear-cut but potentially just as damaging to the trustee. Among the claims thrown out by Judge Rakoff was an attempt by the trustee to recover cash the Mets owners had withdrawn from their Madoff accounts in the final 90 days of the fraud, so-called preference claims.
For the Mets owners, that figure added up to $14.2 million. But if all the 90-day preference claims asserted in all the lawsuits filed by Mr. Picard were eliminated, it would reduce his potential recovery by another $5.5 billion, according to Mr. Sheehan.
Because of the ruling’s broad impact, Mr. Sheehan in a hearing Wednesday asked Judge Rakoff to allow the trustee to seek an expedited appellate review of the decision. “I want clarity from the courts,” Mr. Sheehan said.
Judge Rakoff has set March 19 as the trial date for the two claims remaining in the trustee’s case against the Mets owners, and the trustee has already indicated he will seek a jury trial in the case.
Mr. Sheehan said he would continue to prepare for trial even as he sought an expedited appeal, adding: “If he gets reversed, the whole trial will be different,”
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