Davis Polk Wins "Major Legal Victory" for Mets Owners in Madoff Litigation

In late 2010, the Madoff Trustee commenced hundreds of suits against Madoff Securities customers in the Bankruptcy Court for the Southern District of New York. One was a complaint against the Sterling Partners, the New York Mets, and related defendants, which demanded over one billion dollars for brokerage withdrawals over more than two decades. When unsealed, the complaint generated massive press coverage, most of it negative. Davis Polk took unprecedented action, issuing a press release refuting the Trustee's allegations and stating that the Sterling Partners were innocent victims who were being victimized again by a complaint contending that they "knew or should have known" of the Madoff fraud. Shortly thereafter, former New York Governor Mario Cuomo was appointed by Bankruptcy Judge Lifland to mediate the case.

The Trustee filed an amended complaint on Friday, March 18, 2011. Two days later, on Sunday night, Davis Polk filed a comprehensive motion for summary judgment, arguing that the Trustee's facts were wrong and his legal theories unfounded.

After the Trustee responded, Davis Polk moved to withdraw the case from the Bankruptcy Court. Ultimately, District Judge Rakoff, who had partially withdrawn another Madoff case, took the entire case and set a trial date for March 2012. Hundreds of the other customer cases followed this lead, seeking withdrawal to the District Court.

In September 2011, Judge Rakoff issued two very significant rulings in response to the Sterling Partners' motion for summary judgment. First, he ruled that the Trustee was not entitled to attack transactions that occurred more than two years before Madoff Securities' bankruptcy filing, which immediately and significantly reduced the potential liability of Davis Polk's clients. Second, Judge Rakoff ruled that, as Madoff had been a stockbroker, a withdrawal of principal invested by a customer from a brokerage account could be recovered only upon showing that the customer was "willfully blind" to Madoff's fraud -- a much higher standard than the "should have known" standard advocated by the Trustee.

Expedited discovery and trial preparation continued until additional pretrial motions were made. Judge Rakoff ultimately ruled that the Trustee could go to trial, though he expressed skepticism about key aspects of the Trustee's case. On Friday, March 16, one business day before the trial was to begin, the parties reached a settlement, which was announced in Court on the following Monday. No other customer or creditor objected, and the settlement was approved on May 31, 2012.

The $162 million settlement requires no payments for almost four years other than recoveries on the Sterling Partners' own claims of $178 million against the Madoff estate, which the Trustee accepted as valid. Pursuant to the settlement, the Trustee indicated that, after review of the evidence, he would not pursue his claim that the Sterling Partners were "willfully blind" to the Madoff fraud. Our clients have been freed from the overhang of an appeal, which was certain, and have resumed their lives and businesses free of the Madoff shadow. Davis Polk is proud and pleased to have achieved this result for our clients.

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