Commentary

Wilpons face uphill battle to hold Mets

Buried in losses on and off the field, family must clear many hurdles to retain control

Updated: January 27, 2012, 2:34 PM ET
By Adam Rubin | ESPNNewYork.com

Fred WilponAP Photo/Seth WenigDespite repeated humiliations, Fred Wilpon is determined to continue as Mets owner.

Inside U.S. District Judge Jed S. Rakoff's courtroom in lower Manhattan during the two weeks leading up to Opening Day, a jury may determine whether the Wilpon family retains ownership of the New York Mets.

Trustee Irving Picard -- the man charged with recovering funds to distribute to victims of swindler Bernard Madoff's Ponzi scheme -- originally sued principal owner Fred Wilpon, his son, Jeff, the team's chief operating officer, and the family's businesses and charities for $1 billion. Rakoff has reduced the potentially liability to $386 million -- and set the bar high for recovering more than $83 million.

Yet juries are unpredictable, and a big verdict could be a knockout blow to the Wilpons.

In reality, the Wilpons' ultimate financial responsibility in Picard's lawsuit is the least precise of several obligations the family must navigate in the upcoming few years in order to maintain ownership of the Mets.

If the team isn't competitive, the revenues that are used to service the debt are dropping as well. So what would seem like a better situation is that they sell the team to another investor, as has happened with Texas and the Dodgers.

-- Dr. Joel Maxcy, associate professor and member of Temple University's Sport Industry Research Center

Cash-flow woes prompted the Mets to seek a $40 million bridge loan from Bank of America and a $25 million emergency loan from Major League Baseball in recent months. So the upcoming obligations appear daunting.

In the interim, the Mets have slashed their payroll by roughly $52 million compared with last season, trying to close what general manager Sandy Alderson identified as a $70 million loss in 2011.

"Normally they're in the steaks sections, and I found them in the fruits and nuts category a lot," agent Scott Boras said at last month's winter meetings, referring to the Mets and their financially challenged West Coast brethren, the Los Angeles Dodgers.

Howard Megdal, author of "Wilpon's Folly," who analyzed financial records and other documents in order to chronicle the Madoff-related civil suit facing the Wilpons, cites these other upcoming -- and sometimes recurring -- financial obligations:

• $50 million annual interest payments on the nearly $700 million in bonds used to finance Citi Field construction.

• A combined $50 million in annual interest payments on hefty loans against the team and regional sports network SportsNet New York, of which the Wilpons own 65 percent.

• A $430 million loan against the team that comes due June 2, 2014.

• A $450 million loan against SNY that comes due June 4, 2015.

Even the new $20 million minority ownership blocks -- which team officials maintain will close within weeks and which are designed to infuse cash to pay off the immediate obligations -- can be viewed as loans rather than equity invested in the team. That is because the Wilpons are offering prospective minority partners the opportunity to cash out in six years and be paid 3 percent annual interest.

To add insult to injury, the Mets owe former players handsome sums because of deferred salaries from their playing days.

The Mets once were comfortable pushing salary obligations for their players into the future because the Wilpons were, Picard alleges, getting 18 percent average annual returns on money they invested with Madoff regardless of drastic market fluctuations. So why would it matter if they deferred a player's salary at 8 percent annual interest? They could pocket the sizable difference between the interest owed to the player and what Madoff could make for them.

The most glaring example: Bobby Bonilla, who has not played for the Mets since 1999, went back on the payroll last July. He is owed $1,193,248 annually for 25 years.

[+] EnlargeBobby Bonilla
Bill Hickey/Getty ImagesBobby Bonilla, who hasn't played for the Mets since 1999, is owed $1,193,248 annually for 25 years.

Carlos Beltran -- who was traded to the San Francisco Giants weeks after Bonilla returned to the payroll, during the final season of a seven-year, $119 million contract -- is among the other ex-Mets who had money deferred with interest, according to a source familiar with that contract.

The organization maintains that the $25 million emergency loan from Major League Baseball and $40 million bridge loan from Bank of America will be paid off within weeks, after minority investors close on the purchases of 4 percent shares of the team for $20 million apiece. The existence of the MLB loan originally was not disclosed to the players' association and other teams, but the union eventually learned of it, according to a source with a major league club who requested anonymity.

Team officials declined formal interview requests from ESPNNewYork.com. But one Mets executive, while not acknowledging the precise obligations, predicted the $430 million and $450 million loans -- the latter technically against SNY, not the Mets -- would be refinanced either through the same or other lenders when they are due in two to three years.

But given the need to borrow a combined $65 million from MLB and Bank of America just to limp into 2012, cash flow obviously is an issue, and any of the smaller payments in the interim could trip up the Wilpons, especially if revenue continues to evaporate. Standard & Poor's analyst Jodi Hecht projected a 10 percent decline in stadium revenue during the upcoming season, as compared with the dismal 2011 figures.

Fred Wilpon acknowledged at this month's quarterly owners meetings in Paradise Valley, Ariz., that attendance revenue is a critical cog in being able to keep up with the team's debt obligations.

"This is a tough time," Wilpon told reporters. "We're bearing up, I can promise you that."

The wild card is what the jury decides in the lawsuit brought by the Madoff trustee.

Picard originally sued the Wilpon family, its businesses and charities for $1 billion. That figure included $300 million in profit the Wilpons allegedly withdrew in the six years before Madoff was arrested in December 2008. Picard wanted the Wilpons to forfeit $700 million in principal from that six-year period, claiming the family buried its head in the sand amid warning signs a fraud might be occurring.

After the Wilpons' attorneys successfully had the case moved from bankruptcy court -- which was considered Picard's turf -- to the more friendly U.S. District Court for the Southern District of New York, Rakoff ruled Picard may only seek money from the immediate two years before Madoff was arrested rather than six years, relying on the federal statute being four years shorter than New York state law.

Rakoff's decision reduced the Wilpons' potential liability from $1 billion to $386 million -- of which $83 million is alleged profit and $303 million is principal.

Rakoff also substantially raised the standard Picard would need to prove to a jury in order for the trustee to recover the principal rather than just the alleged $83 million Ponzi scheme profit. Rakoff decided the standard ought to be that the Wilpons would have had to willfully have turned a blind eye to Madoff's fraud -- essentially they knew and continued investing -- rather than the standard Picard advocated.

Picard maintains the correct standard in order to forfeit principal is "should have known." That is, that there were red flags of potential fraud that a sophisticated investor ought to have at least investigated. Among Picard's allegations: The Wilpons shopped for Ponzi-scheme insurance for their Madoff investments, which the trustee suggests indicates the Wilpons had concerns something might be amiss. The Wilpons dispute Picard's conclusion -- and even the use of the term "shopping."

In court filings late last year, Picard asked that Rakoff, before the scheduled March 19 trial, permit an appeal to the Second Circuit Court of Appeals on both the two- versus six-year recovery period and the appropriate standard in order for the Wilpons to be liable for forfeiting principal. Rakoff denied that request for a pretrial appeal last week.

Bankruptcy attorney Chuck Tatelbaum of Chicago-headquartered Hinshaw & Culbertson said district judges generally allow those types of appeal requests before the trial. Now, if a jury reaches a verdict and the appeals court subsequently finds that Rakoff's standards were incorrect, the time and expense of the original trial would have been wasted.

Tatelbaum believes Rakoff's standards would have been affirmed pretrial by the Second Circuit anyway, although that is not the uniform opinion from bankruptcy attorneys unaffiliated with the case.

If the Second Circuit, upon appeal, ultimately ups the allowable collection period to six years and lowers the burden of proof for seizing principal to "should have known," it would dramatically impact not only how much Picard could collect from the Wilpons, but also from the other "net winners" in Madoff's Ponzi scheme. Picard is collecting the money to distribute to net losers -- people who deposited more with Madoff than they withdrew.

Wilpon
AP Photo/John BazemoreFinancial problems forced Jeff Wilpon and the Mets to seek a $40 million bridge loan from Bank of America and a $25 million emergency loan from Major League Baseball.

Both sides filed court documents on Thursday requesting the judge rule in their favor, in whole or in part, without the need for a trial. The Wilpons' attorneys requested a summary judgment to toss the case, claiming it is meritless. The trustee requested the judge automatically award $83 million -- the profit for two years -- even before the trial, maintaining as a matter of law, even under the judge's current standards, they are entitled to no less than that amount. Rakoff has set a Feb. 23 hearing for oral arguments relating to all these requests.

The Wilpons' attorneys originally -- and unsuccessfully -- argued that Rakoff alone, and not a jury, should decide the case should it go to trial. Juries can be swayed by emotion and can get lost amid complexities, especially if Picard paints the Wilpons as greedy investors allegedly averaging 18 percent annual returns regardless of the general state of the stock market.

An ultimate $83 million verdict -- two years' profits -- obviously would not be comfortable given the Wilpons' other enormous financial burdens, but it probably would not be catastrophic in terms of retaining the team. If the jury ultimately returned a $386 million verdict -- the maximum with the recovery period now capped at two years by Rakoff -- the Wilpons would appear in serious danger of not being able to continue owning the Mets.

Tatelbaum noted the burden of a large jury verdict against the Wilpons could be overwhelming to the family -- even if the subsequent appeal is ultimately successful. That is because the Wilpons likely would need to post a bond for 110 percent of the value of the verdict in order for a court to stop Picard's collection until a higher court has the opportunity to review the decision.

"Given the financial condition of the Wilpons and the Mets, they may not be able to post the bond," Tatelbaum said. "... If you appeal, you can say to the court, 'We want you to stay this [judgment]. Because we've got a good chance of winning on appeal, we don't want you to allow them to try to collect it until we get our chance to appeal.' Courts will usually grant a stay, but they're going to say, 'We don't want the plaintiff, in this case Picard, to be hurt if it's collectable today and it may not be collectable in two years when the appeal is over. So we will grant the stay if you post a bond with the court that guarantees Picard that if you lose and the $386 million judgment stands, that they can collect and don't have to go chase the money that could have disappeared.'

"Sure you have the right to appeal," Tatelbaum continued. "But unless you have the wherewithal to post a bond, it could be moot. Because then what happens, if they don't post the bond, Picard can then force the sale of the Mets or whatever else. And then two years later, if the appeals court rules the other way, it doesn't do a whole lot of good [if the team already was forcibly sold]."

He's been a great owner, loves his team. He's everything you'd want in a local owner. He's had some economic problems not caused by himself, and I have a lot of faith in him that he's working his way through that.

-- Bud Selig, defending Fred Wilpon

Still, bankruptcy attorney Doug Furth of Manhattan-based Golenbock Eiseman Assor Bell & Peskoe LLP said about the Wilpons: "There is certainly less pressure on them from the Madoff trustee than there was a year ago because they've done very well in court [with Rakoff's rulings]."

The odds of a settlement before the March 19 court date may have diminished with Rakoff disallowing a pretrial appeal on his standards.

With Picard still having the opportunity to restore the potential liability to $1 billion with an appeal to the Second Circuit after the March trial, and with the Wilpons currently looking in good shape under the current standards to forfeit no more than $83 million, the potential outcomes once litigation has run its course remain wide-ranging. Had the Second Circuit been allowed to consider ruling pretrial, then the amount at stake would have become more focused and the likelihood of a settlement may have increased.

Former New York Governor Mario Cuomo has been appointed by the court as a mediator.

"If [Picard] settles it, then Rakoff being a district judge and having published the opinion he did, it's going to be persuasive on any other decision," Tatelbaum said, referring to other Madoff-related lawsuits. "Unless Picard gets some phenomenal settlement [from the Wilpons], it pays for him to go forward with the appeal because otherwise he is hurting himself in any future cases. ... To use a baseball analogy: The outfield fences are moving now. Nobody wants to get up to bat until they know where the fence is."

Baseball commissioner Bud Selig already could have derailed the Wilpons' ownership through means such as not extending the emergency loan, or by demanding the $25 million already be repaid. But Selig's three-decade relationship with the Wilpons has prompted considerable leeway.

Fred Wilpon has been a solid MLB citizen, voting with the commissioner on issues and loyally adhering to his policies, such as capping the amount paid to amateur draft picks. That loyalty clearly is being reciprocated.

Selig endorsed Fred Wilpon again two weeks ago at the owners meetings, telling reporters: "He's been a great owner, loves his team. He's everything you'd want in a local owner. He's had some economic problems not caused by himself, and I have a lot of faith in him that he's working his way through that."

Selig, at those same meetings, just re-upped for an additional two years as commissioner.

Outgoing Los Angeles Dodgers owner Frank McCourt complained last year about disparate treatment -- that Selig took a hard line with him in blocking loans, while the treatment of the Wilpon family has been lenient. MLB sources privately differentiate the situations. MLB's stance is that McCourt removed $200 million from the organization to address personal debt, whereas the Wilpons merely are trying to reorganize and stabilize their organization -- with their intention being to act in the best interest of the Mets.

McCourt, through a Dodgers spokesman, declined to comment.

Given all the looming obligations, can the Wilpons survive? One major key, as Fred Wilpon noted, will be revenue generated by attendance, since plentiful financial reserves do not exist. Another component of the recovery plan is payroll austerity, which hurts fans desiring the most competitive team. The Mets' Opening Day payroll is projected to be less than $91 million -- a historic $52 million drop from last season.

"I think the thing that would be a disappointment to baseball fans is that if he holds on, he has to sort of play this game of reducing payroll and not putting a particularly competitive team on the field," said Dr. Joel Maxcy, an associate professor and member of Temple University's Sport Industry Research Center. "That's a downward spiral, too. If the team isn't competitive, the revenues that are used to service the debt are dropping as well. So what would seem like a better situation is that they sell the team to another investor, as has happened with Texas and the Dodgers. But it seems like he is pretty adamant about trying to hang on."

The Mets' 2012 financial obligations could be paid off through the $20 million investment blocks the organization maintains will close soon. The ballclub eventually hopes to raise roughly $200 million via that route.

The $430 million and $450 million loans, due in 2014 and 2015, can be refinanced like an individual refinances a mortgage, assuming lenders are satisfied with the organization's progress toward financial stability.

In the interim, the Mets' payroll could continue to operate on austerity as it will in 2012 -- meaning the team's success primarily will depend upon production from the farm system, as would be the case with a middle- or small-market team.

"It could work," Maxcy said. "Maybe the Madoff settlement is less than expected. Maybe revenues are greater than expected. Maybe the $200 million is raised through the [minority ownership] shares and everything works out. Maybe the team is much more competitive on the field next year than expected -- a good team with a low payroll -- and the economy picks up and so forth.

"But it's certainly a precarious situation that typically, you would say, it would be better for the Mets if a new owner were able to purchase the team."

Adam Rubin has covered the Mets since 2003. He's a graduate of Mepham High School on Long Island and the Wharton School of the University of Pennsylvania. He joined ESPNNewYork after spending 10 years at the New York Daily News.
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