When their hedge-fund partners raised red flags about Bernard Madoff's outsized financial returns, the Mets' owners dismissed repeated warnings and questioned why the fund wasn't doing as well, according to a lawsuit unsealed Friday.
Fred Wilpon and Saul B. Katz, the baseball team's top executives, were cautioned on several occasions about possible irregularities with Madoff, whom the pair had been investing with since 1985, the suit from the bankruptcy trustee for Madoff's swindled investors said.
Investment guru Peter Stamos, who joined Wilpon and Katz to form a hedge fund, started asking in 2002 about Madoff's secretive practices and consistently strong profits that seemed immune to Wall Street's gyrations.
Stamos was rebuffed by Katz, who in turn complained about the Sterling Stamos hedge fund's inferior returns. Katz brought Stamos' warnings to Wilpon and other partners in Sterling Equities, a real estate and baseball investment company based in Great Neck. But none of them took a closer look at Madoff, according to the suit.
"Rather than undertake a reasonable inquiry into the red flags identified by Stamos . . . Sterling [Equities] categorically dismissed each and every one of them without undertaking any diligence," trustee Irving Picard said in the suit.
Katz - who received most of the warnings about Madoff - and Wilpon denied knowing anything about Madoff's disastrous swindle until it was uncovered in late 2008.
"The plain truth is that not one of the Sterling partners ever knew or suspected that Madoff ran a Ponzi scheme," Wilpon and Katz said Friday.
The pair said the bankruptcy trustee "has created a claim that we 'knew or should have known' that Madoff was a fraud. Why should we 'have known' when the [U.S.] Securities and Exchange Commission and other government agencies that had oversight responsibilities did not know?"
The men didn't directly comment on the Stamos warnings.
Stamos and Sterling Stamos, through a spokesman, declined to comment.
The hedge fund was created in 2002, in part to diversify the Wilpon/Katz investments, which had largely been in Madoff's hands, according to the suit. Several years earlier, Katz's son, David, had expressed concern about Madoff's lack of transparency and the need for diversification, the suit said.
As they sought investors for the hedge fund, the Mets' owners were told by one prospect, Ivy Asset Management, to redeem their Madoff investments, the suit states. Ivy officials "strongly suspected fraud or illegality" by Madoff.
Ivy, with offices in Uniondale and Manhattan, declined to comment Friday.
Around the same time, a financial consultant told Katz he "couldn't make Bernie's math work and something wasn't right," the suit states.
Several years later, in 2007, a Merrill Lynch executive told Katz that Madoff didn't meet the brokerage firm's criteria to do business with because of his investment methods. Merrill by then had purchased half the Sterling Stamos fund. The suit charges Katz, Wilpon and their other partners ignored those red flags, too.
The Wilpon and Katz lawyers retorted that "many people invest with managers using such proprietary strategies, which are entirely lawful. That Merrill Lynch decided not to means nothing," the lawyers said.
A Merrill spokesman didn't immediately return a telephone call seeking comment.