The Madoff/Wilpon Mess: A Simple Guide

Maybe you're wondering: why do I need to follow the lawsuit by Irving Picard, trustee for Bernie Madoff victims, against Fred Wilpon and his business partners, who own the New York Mets? Regardless of the outcome, will Luis Castillo hit any better? Will Oliver Perez pitch any better? Will Johan Santana heal any better?

The answer to all three questions is, sadly, no. But the ramifications of the suit, unsealed last Friday, will impact the way the Mets are run for years to come, whether Fred Wilpon is forced to take on a minority owner, sell the entire team, or spend the upcoming months (and possibly years) in litigation.

The Mets' ownership group is being sued for $300MM in fictitious profits, along with another $700MM in damages, for their connection to the Ponzi scheme operated by Bernie Madoff. The impact on the franchise is likely to be immense. Here's what you need to know about the current circumstances:

• Fred and Jeff Wilpon said late last month that they would sell 20-25% of the team to guard against any potential Madoff settlement. Since then, settlement talks have broken down, leading to the unsealing of the lawsuit last week.
• Picard is seeking $300MM in fictitious profits from Wilpon and his business partners. In addition, Picard seeks an unspecificied amount beyond that (the New York Times reports it "could reach beyond $1 billion") alleging that Wilpon should have known or suspected Madoff's scheme. 
• The standard by which Picard arrived at the $300MM is pretty common in these cases- fictitious profits are distributed to those who lost money in Ponzi schemes, scams where new backers are consistently recruited to pay off old investors. For the Wilpons to incur losses above $300MM, Picard's standard will be to prove that a "reasonable man" would have suspected something was amiss regarding Madoff's scheme, and alleges numerous instances of the Fred Wilpon and his partner/brother-in-law Saul Katz receiving warnings from both business partners and Katz's own son.
• It isn't clear how Wilpon would raise anything approaching even the initial $300MM from a minority sale of the Mets. Forbes valued the team at $845MM in April 2010, but Wilpon has borrowed heavily against the team. Forbes reported this week that the combined book value of the Mets and Citi Field, including debt, is negative $225MM, though Adam Rubin of ESPN New York has cast doubt on that figure. That was before the Mets were named specifically in Picard's suit, giving the team even more potential liability.
• Even if someone would pay a premium to own the Mets outright, it is far less clear that someone will pay that same premium for a minority stake and no authority. In other words, a 25 percent stake in the Mets is worth $211.25MM as per April 2010, absent any of the debt or other mitigating factors, and assuming that a 25 percent stake (minority) is actually worth one quarter of 100 percent stake (majority). (It isn't.) Obviously, with all the mitigating factors, 25 percent of the Mets isn't worth close to $211.25MM – which is, itself, far less than the $300MM Picard is likeliest to recover.
• SNY is enormously profitable, and would earn a decent amount in a straight sale. However, Wilpon and his partners have borrowed against SNY as well, diluting the value. And far more ominously, the New York Post reported this week that any proceeds from a sale of SNY would be distributed to those lenders. In other words, when Jeff Wilpon described SNY as wholly separate from any sale of the Mets last Friday, he may not have been making a choice.
• At the end of the day, no one knows what the maximum amount of money Fred Wilpon and his partners can raise without selling a majority stake in the New York Mets. But there is a number, X, and as long as Picard's settlement would be higher than X, Wilpon will face the choice between fighting in court and losing his team.
• It may well be that there is a certain amount of money Wilpon needs to raise to avoid bankruptcy, even including a full sale of the team. If we call that Y, and Picard's settlement would be higher than Y, Wilpon has even greater reason to fight this in court, hoping a judge sees things his way.
• Either way, the longer Wilpon doesn't settle, the likelier it is that one of these two scenarios has come to pass. The results would be disastrous for the New York Mets. With cases such as these often taking a year or more, Mets ownership could be in the midst of this battle next November, just as Albert Pujols and Jose Reyes are scheduled to hit free agency.