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Statement by Robert B. Fiske, Jr., Karen E. Wagner, and David L. Caplan of Davis Polk & Wardwell LLP on Behalf of the Sterling Defendants

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.

With regard to the complaint:

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.

Second, in 2002 the partners diversified their securities investments by establishing a new company to be run by Peter Stamos. The Sterling partners were investors and had no role with respect to investment decisions. Nonetheless, we understand the complaint to contend that, because two of the partners were involved in the selection of Mr. Stamos and the establishment of the fund, they became expert in market trading, hedge fund due diligence, and broker dealer regulation, and, therefore, if people said things to them like "I don't know how Madoff does it," the Sterling partners should have realized that Madoff was doing 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.

Similarly, we understand the complaint to claim that, because Merrill Lynch, when it acquired part of the Stamos company in 2007, would not permit investment with managers employing "black box" or other similar strategies, the Sterling partners should have concluded that Madoff's registered brokerage operation was fraudulent. In fact, many people invest with managers using such proprietary strategies, which are entirely lawful. That Merrill Lynch decided not to means nothing.

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.

The complaint is further undercut by another fundamental fact not mentioned by the Trustee: if the Sterling partners had thought Madoff might be engaged in a fraud - a conclusion they never reached - their recourse would have been to go to the SEC, the watchdog that licensed Madoff and that is there to protect customers. This would have been a futile exercise. As we know now, the fraud would not have been uncovered.

The complaint, in our opinion, is an unwarranted reach by the Trustee. The Sterling partners lost more than money in the Madoff fraud - they lost faith in someone they thought was a trusted friend. But their faith in the legal system remains strong, and we are confident they will prevail.

Davis Polk & Wardwell LLP
Tom Orewyler, 212-450-6039
tom.orewyler@davispolk.com