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WAGNER, AND
DAVID L. CAPLAN OF DAVIS POLK & WARDWELL LLP ON
BEHALF OF THE STERLING DEFENDANTS
NEW YORK, N.Y., February 4, 2011 -- Following days of leaks and press
speculation, the Court, with the agreement of the Sterling partners, has released
the complaint against our clients that was previously filed under seal.
While the heated rhetoric in the complaint may generate headlines, it is not
supported by the facts, the law, or the extensive discovery record developed by
the Trustee before he formulated the complaint – numerous depositions and over
700,000 pages of documents provided by the Sterling partners over the last year
and a half.
The bottom line is that the Sterling partners were innocent victims of the Madoff
fraud, and the Trustee’s massive discovery effort did not uncover one shred of
evidence to the contrary. Nevertheless, the complaint further victimizes the
Sterling partners by arguing that they “knew or should have known” that Madoff
was a fraud and therefore are somehow liable for amounts beyond their very
substantial losses. This suggestion is false.
The complaint appears to contend that, because the Sterling partners are wealthy
and successful individuals, they should have known Madoff was not trading any
securities and was engaging in a Ponzi scheme. Yet the Sterling partners had over
$500 million in their Madoff accounts at the time of his failure – some put in only
days before – and all of it lost. Anyone who knows Fred Wilpon and Saul Katz
knows that they would not have dealt for one minute with someone they thought
might be engaged in fraud. Moreover, as a matter of elementary common sense,
no rational person who thinks his broker might be a fraud would leave such a
substantial sum with him.
Contrary to what the Trustee asserts, the returns on the Sterling-related brokerage
accounts were not “staggering,” “easy money,” or “too good to be true.” The
$300 million of profit alleged in the complaint, even if accurate, would not be
“staggering” or extraordinary when viewed in the context of the amount of
principal invested over the past 25 years.
In addition, the $300 million claimed in the complaint reflects only those accounts
that the Trustee has selected for inclusion because they were profitable. It ignores
numerous accounts that, in the Trustee’s parlance, were “net losers,” which,
according to our clients’ analysis, total approximately $160 million.
Madoff investments did not “fuel” our clients’ operating businesses. The Sterling
partners’ wealth was generated by their hard-earned success in real estate, sports,
media, and other businesses – not by investments with Madoff.
The complaint also ignores the fact that Madoff was viewed as a person of
considerable stature in the financial community. He had been the chairman of the
board of directors of NASDAQ, a member of the NASD board of governors, and
a member of the board of what now is SIFMA – an eminent figure in the
investment world. He also partnered with prominent financial institutions to
create Primex, an electronic auction trading system that was approved by the SEC
and adopted by NASDAQ. Moreover, the Sterling partners knew, and relied upon,
the fact that the SEC – the federal agency charged with uncovering and
prosecuting fraud – had investigated Madoff and taken no action against him.
For 25 years the Sterling partners saw nothing to indicate that Madoff was not
trading securities as he was reporting he did. Moreover, the partners took
legitimate comfort from the fact that numerous highly regarded and sophisticated
lending institutions readily accepted their Madoff investments as security for
multi-million dollar loans.
The Sterling partners’ dealings with their broker were entirely lawful. While the
Trustee calls payments made to them “fictitious profit,” he ignores a large and
consistent body of state and federal law that permits a customer of a registered
broker dealer to rely on statements he receives from the broker – and which
imposes no investigatory obligation upon a customer who in any event would
have no way of confirming what the broker was doing. Payments made in
connection with those statements are lawful. Our entire system of customer
dealings with brokers is structured so that customers receive, and rely on, their
account statements and confirmations. Any suggestion to the contrary is simply
incorrect.
The complaint appears to argue that the partners should have known that Madoff
was a fraud for three principal reasons:
First, they were friendly with Madoff and could have asked him if he was
engaging in a fraud. Neither the law nor common sense supports such a
proposition.
2
no trading and running a Ponzi scheme. Thus, the theory of the complaint appears
to be that comments of this type should have led the Sterling partners to reach a
conclusion that the SEC, with the benefit of substantially more information,
trained fraud investigators, and subpoena power, did not reach.
Third, the complaint suggests that, because Sterling Stamos had invested in the
Bayou hedge fund, the Sterling partners should have realized that Madoff was a
fraud. Again, the proposition is wide of the mark – the partners had no
involvement with the Bayou investment, and Bayou was a completely different
situation. Bayou was a hedge fund. Madoff’s brokerage entity, on the other hand,
was a registered broker dealer, regulated by the SEC, that issued statements
reflecting trading for customers.
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