Madoff trustee: ‘Willfully blind’ Mets owners benefited from returns and must return $1 billion

Irving Picard, the trustee in the Bernard Madoff fraud case, is using the principle of "willful blindness^*," an oft-used weapon in money laundering cases, to pursue the recovery of money from third parties who did uncommonly well in their "investments" with Madoff or helped facilitate the mega-Ponzi fraud. The latest targets: Fred Wilpon and Saul Katz, owners of the New York Mets.

While the owners of the New York Mets are waging war in the court of public opinion, a legal precept called "willful blindness^*" could determine the winner of the more important battle—the one in the court of law and the continuing legal battles spawned by the massive fraud carried out over nearly 20 years by the mega-fraudster Bernard Madoff.

It's not just the owners of the major league baseball franchise that are running for cover. Now, Bernard Madoff is pointing the "willful blindness^*" finger at major multinational financial institutions where he held his fraud proceeds-laden accounts for many years. The New York Times front-page story of Feb. 16, 2011, reports an exclusive interview it conducted with Madoff at the federal prison where he now spends his time in Butner, North Carolina. The term "willful blindness^*" is found near the top of the story.

Fred Wilpon, Saul Katz and the Wilpon family are being sued for a $1 billion that trustee, Irving H. Picard, asserts is due for unjust returns on their Madoff investments. The Wilpons and Katz, while railing against the trustee, have denied the allegations and that they knew about the Ponzi scheme^*.

The trustee's case does not allege that Wilpon and Katz had "actual knowledge" of the fraud, but that they were willfully blind. The complaint filed by Picard cites substantial circumstantial evidence to support that legal precept. The Wilpons, who are described as savvy investors who run their own hedge fund, should have known from the circumstances around them that their earnings from investments in Madoff were too good to be true.

Picard alleges that Wilpon and Katz had been advised to steer clear of Madoff by investment professionals, auditors, accountants and personal acquaintances and that as sophisticated financiers, the baseball magnates ignored many red flags. Instead of paying heed to them, they borrowed money to continue investing in Madoff, who was a longtime Mets season-ticket holder. Picard alleges that for nearly two decades they also referred new investors to Madoff.

One of the many Madoff victims was the legendary baseball pitcher Sandy Koufax, who was a high school classmate of Fred Wilpon in Brooklyn. It is not clear if Koufax invested money with Madoff at the suggestion of Wilpon or Katz.

Willful blindness^* can bite hard in asset recovery^* and money laundering cases. In a money laundering case, a defendant’s claims of ignorance of the dirty source of money can be overcome by circumstantial evidence that he averted his eyes. Similarly, in asset recovery^* cases, a third party's insistence that he had no actual knowledge of wrongdoing by somebody he was collaborating may be nullified by a showing that he took pains to remain ignorant.

Courts in criminal and civil cases define willful blindness^* as the "deliberate avoidance of knowledge of the facts" and consider it the direct equivalent of "actual knowledge." Knowledge is an essential element in proving nearly all cases except those based on negligence. Where third parties are targets of recovery efforts by fraud victims, receivers, trustees, or government agencies, willful blindness^* may serve to prove knowledge.

The testimony of those who alerted the Wilpons could be the turning point. Picard must prove that there was smoke, not necessarily fire, and that the Wilpons should have known that the smoke would lead to fire.

The trustee’s complaint says the warning signs that Wilpons and Katz ignored "were many and varied," including:

• Frequent warnings by Sterling Stamos, one of their partnerships in which Peter S. Stamos was a principal, that Madoff was "too good to be true," a concern voiced repeatedly echoed by the firm’s investment strategist Ashok Chachra. Reached by telephone, Chachra declined to comment.
• A meeting in 2007 between Katz and an unnamed executive at Merrill Lynch who voiced suspicions about Madoff. The Picard complaint says Wilpon and Katz ignored these warnings from the giant securities dealer, which was also an investment partner.
• An early fax in December 2000 to Sterling executives from Steven Kenny, a Fleet National Bank executive, sending a profile of Madoff's fund. The profile pointed out that Madoff's website bragged about an extensive "computerized processing" operation, although Madoff customers were unable to access real-time account balances and received only paper transaction confirmations from Madoff, a loud indicator of fraud. The Picard complaint says this warning sign was also ignored by Wilpon and Katz. A call to Kenny, now with Bank of America, was not returned.
• At least six audit and due diligence professionals in the years running up to the collapse of the Madoff fraud had given various warnings to the Sterling partners about Madoff, but Wilpon and Katz failed to conduct their own due diligence, the Picard complaint says. 

The Wilpons and Katz are scrambling for cash to meet the potential liability that the Picard initiative threatens, hoping their major asset, the New York Mets, a franchise valued at $858 million, is not threatened. Meanwhile, major financial institutions that have drawn the trustee's ire, such as JPMorgan Chase, Bank of America and HSBC, undoubtedly are studying the Picard lawsuit against Wilpon and Katz closely and examining their own circumstances to see if they are vulnerable to the "willful blindness^*" sting.