By Grant McCool
NEW YORK (Reuters) - Three years after Bernard Madoff admitted to running the biggest investment fraud in history, the first trial in the quest to recoup cash for his defrauded customers is about to begin in New York.
The owners of the New York Mets baseball club, who were long-time investors in Madoff's firm, are accused by a court-appointed trustee of building their business empire by willfully turning a blind eye to signs of the multibillion-dollar fraud.
For the already cash-strapped Mets, who have struggled on the field in recent seasons and live in the shadow of the more successful New York Yankees, the result of the case could affect its ability to pay for top players.
The civil trial also could help determine whether the trustee, Irving Picard, is likely to succeed in his efforts to recoup money from other defendants, such as HSBC and JPMorgan Chase & Co, that also did business with Madoff.
Barring a last-minute settlement, the lawsuit seeking to recover as much as $386 million from Mets principal owner Fred Wilpon and club president Saul Katz is the first among hundreds of the trustee's cases to go to trial. Some cases have settled and others are yet to be resolved in the trustee's efforts to recover at least $20 billion for Madoff's victims.
If Wilpon and Katz lose, they could be liable for $303 million -- the amount of principal they invested in the Madoff firm during the two years before Madoff's December 2008 arrest. U.S. District Judge Jed Rakoff has already ruled the trustee is entitled to recoup for other investors as much as $83.3 million in "fictitious profits" accrued by the owners.
A loss for the Mets owners at trial would not spell the end of the team, but it could be a game-changer for Wilpon and Katz, said Michael McCann, a Vermont Law School professor and director of its Sports Law Institute.
"Even though they are very affluent, it would have an impact on their wealth and potentially the payroll the Mets are used to paying," McCann said.
Mets general manager Sandy Alderson has been quoted as saying the team lost $70 million last year. Forbes magazine said in 2011 the team was worth $747 million.
Already, the ailing club has slashed its payroll and sold minority stakes. One new investor is well-known hedge fund manager Steven A. Cohen.
Madoff pleaded guilty on March 12, 2009, to defrauding thousands of people, many of them his associates and relatives. He is serving a 150-year prison sentence.
The trustee is pursuing clawbacks from investors who withdrew more money from their Madoff accounts than they invested, as well as lawsuits against lawyers, accountants and banks who Picard accuses of ignoring signs of the Madoff fraud.
The trial will test the "willful blindness" doctrine, which involves whether Wilpon and Katz knew or "should have known" about the fraud, said Neal Levin, a partner at law firm Freeborn & Peters LLP in Chicago who specializes in recoveries for fraud victims. He is not involved in this case.
Wilpon and Katz deny the allegation they ignored signs of the Madoff fraud and say they too were Madoff victims. They have the burden of showing the jury that they acted in good faith in receiving money from Madoff's firm.
BROTHERS-IN-LAW IN FORTUNE
Wilpon and Katz, brothers-in-law who made their fortunes as real estate developers, founded Sterling Equities in 1972 and began investing with Madoff in the mid-1980s. Madoff was a Mets fan and held season tickets for home games, which after his arrest were put up for sale by Picard to raise cash.
Picard has described Wilpon and Katz as "a closely held family-run business that over the last several decades has evolved into a multibillion dollar real estate, professional baseball, private equity and hedge fund empire."
Each side has an incentive to settle. A settlement would let Wilpon and Katz avoid having their business affairs spilled out in court, and could allow them to pay the trustee much less than what a jury might award.
None of the parties had any comment about possible behind-the-scenes talks to resolve the lawsuit.
If the case settles, Picard presumably could receive money for customers sooner than if the lawsuit went to an appeal. The trustee has recovered about $9.1 billion so far through all of his litigation, although he says $6.4 billion is unavailable due to appeals and reserves.
Rakoff has appeared unimpressed with some of the trustee's evidence in this case. He said in a March 5 ruling that the trial could go ahead on a "residue of disputed factual assertions" and that he was skeptical Picard can prove the owners acted in bad faith in dealings with Madoff.
The judge has yet to rule on several issues, including whether to allow the jury to hear that the trustee and his law firm, Baker Hostetler, have racked up more than $275 million in fees on the Madoff cases. The Mets' lawyers want those details told to the jury.
Witnesses could include Hall of Fame pitcher Sandy Koufax, who invested with Madoff on Wilpon's advice, as well as former Manhattan District Attorney Robert Morgenthau. Morgenthau may testify that Wilpon in 2006 donated $500,000 to the Police Athletic League, a charity that Morgenthau chaired, and advised most of it be invested with Madoff, court papers show.
The trial is expected to last about two weeks.
The case is Picard v. Katz, U.S. District Court, Southern District of New York, No. 11-3605.
(Reporting By Grant McCool; Editing by Martha Graybow, Phil Berlowitz)