Irving H. Picard v. Saul B. Katz et al

Filing 90

DECLARATION of DANA M. SESHENS in Support re: 79 MOTION for Summary Judgment.. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C PART 1, # 4 Exhibit C PART 2, # 5 Exhibit D, # 6 Exhibit E, # 7 Exhibit F, # 8 Exhibit G, # 9 Exhibit H, # 10 Exhibit I, # 11 Exhibit J, # 12 Exhibit K, # 13 Exhibit L, # 14 Exhibit M, # 15 Exhibit N, # 16 Exhibit O, # 17 Exhibit P, # 18 Exhibit Q, # 19 Exhibit R, # 20 Exhibit S, # 21 Exhibit T, # 22 Exhibit U, # 23 Exhibit V, # 24 Exhibit W, # 25 Exhibit X, # 26 Exhibit Y, # 27 Exhibit Z, # 28 Exhibit AA)(Seshens, Dana)

EXHIBIT R

SEP

i

8 1990

'p

4r

September 13, 1990

LE ME'Y\ORANDUM
RE:

METS

/

TRAVELERS

Subsequent to my letter of September 10, 1990, I had a call
from Bernie Madoff with respect to those portions of the Travelers
Term Sheet that I sent to him concerning the Investment Program
that he administers for us.
His comments were as follows:

He confirmed that he did have a satisfactory telephone
discussion with Gonder that lasted for about a half hour. He felt
that Gonder understood what he (Madoff) was saying and that he
(Gander) was comfortable.
The substance of the Madoff program, as described in the
Travelers Term Sheet, is correct according to Bernie.
The name that Barry used to describe the investment -"Hedged Dividend Capture Program" -- is not the greatest
terminology. Perhaps "Hedged CoverEed Option Writing Program" is
better terminology. Since -the workings of the Program are
correctly described in the Term Sheet, neither I (nor Bernie) felt
that it would be appropriate to discuss a change in Barry's
nomenclature.
I am also attaching a copy of Barry Gonder's internal
file memorandum of 8/24/90 regarding his conversflion with Madoff.
M. B. T.

MBT/br
cc: Fred Wilpon
Saul B. Katz

Richard Wilpon1

Michael Katz J
Arthur Friedman

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To:
FROM:
DATE;
RE:

O R A N D U M

CC: FtP, JJG,
Sterling Doubleday File
Barry Gonder
CL
8/24/90
Conversation with Bernie Madoff (212-230-2424) of Madoff Securities.

Madoff manages money for the Mets and Sterling Equittes.
call as part of our due diligence.

Wilpon arranged the

The 3tro.tegy 13 baaed on writing covared calls, buying put options, and
capturing the stock's dividends. The goal in the worst case is to have a
neùtral position/return.
In this strategy, Madoff never takes a "naked position".
8asic strategy:
A
B
C

Go long the stock of a large, dividend paying company.

Sell a call, take the call premium.
Buy a put to protect the down side, pay a premium. (Generally
Madoff buys a put on the individual stock, but will use a put on
an index agairisL Lhe entire portfolio if the portfolio's
charactoristics ars a close match

to index's.)

Return is a function of:

A) Differente between the premium received from writing the call and
the premium paid to purchase the put.
U) Dividend yieldon the stock,
Stock's appreciation. (Limited by the strike price on the call
option sold.)
No RaR is yuannteed, but the down-side is protected by the put.
A severe decline in the market would yield zero to a 1% loss in the
stuck/portfolio using thls.strategy. The range of potential returns Is -1
to 20%, with E(R) - 1S% to 10% over the long term. A baise return in the
low-teens to mid-teens can be received from the put-call spread and the
dividend capture. Addftional upside is offered by tite stock's appreciation
to the strike price (after which it is called).

Put premiums are virtually always less than call premiums.
question: Why are put premiums less than call premiums?)

(BJC: Follow-tm

Example of Strategy:

Buy a stoòk at $50.00.
Sell a call with a strike price at $55.00 and receive a $4.00
premium.
Buy a put with a strike at $45.00 and pay a $2.00 premium
Collect the dividend on the stock, assumed to be $3.00.

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FROM TIC PRIL)TE PLRCEMEN1T

Net cash received Is $5.00.
- if stock's price declines to $4S.00 or lower: RETURN - $0.00;
ROR - 0%.
- If stock's price appreciates to $55.00 or higher: RETURN - $10.00;
ROR - 20%.
If stock's price does not change: RETURN = $5.00; ROR
10%.
1ts a simple strategy. You don't need to be a brain surgeon to figure it
The key is to pick stocks which have the optimal dividend and put/call
pricing and which have appreciation potential."
out.

(BJG:
Would shortIng against the boxe provide a similar result?
Kadoff: Similar results can be achieved, but you would lose the premium from
writing the call. Shorting against the box Is typically used to lock. in a
gain but not trigger a tax event.
It is not an income generating strategy.)

The strategy focuses on locating high yielding, volatile stocks. The
strategy works best in a volatile market. Madoff keeps portfolio at a
(The 1%
neutral (0%) risk level to a risk of -1% to -2%, at any given time.
to -2% risk results because he can not always achieve a perfect hedge on the
down sido.) Thoroforo, the worst caso down-sido ft 1% to 2%.

long-term bear market with low volatilitles and low volumes will lead
zero or slightly negative return.

A

to a

The strategy is helped by an increasiñg (appreciating) market over time.
A long-term bull market with high volatility and high volumes Is optimal,
although Nadoff can achieve good returns in a nèutral market if there are
All lt
solid volumes (in excess of 120MM shares traded/day) and volatility.
takes are some 8.10 point spikes on the Dow Industrials to give the requisite
volatility. Ilowévor, to achi4vo high ROR'c, tho stratogy needs the market to.
appreciated by 10% per year.
- If thç market is flat, but volatility and volumes are satisfactory,
as described above; E(R) D
- If the market Is up 10%/year with good volatilitles and volumes;

-

E(R)

18%+

If the market is down; E(R) - 0% to 1%.

it

has àver the last few
The market looks better today for this strategy than
months because r4eos hava cono down and thora is appreciatina nt.ant4*l.
Volatility has teen good recently. A quick down-turn, like we have recently
experienced is better for the strategy than a prolonged bear market of slow
price deterioration..,

Stocks purchased must be large-cap stocks, virtually all ire in S&P 100, with
The POCUS lt mainly tin
a few exceptions, which aro all in the 5&P 500.
chips like IBM, GM, Ford, 3M, etc. The markets for the stocks and the
options on the stocks must both have good liquidity.. All options used are
listed. Stocks used in implementing this strategy are not purchased on
margin and Madof? does not take any uncovered positioned. All stocks
omloyed are issued by domestic corporations and all are of high quality, S&P

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"A" or "B". The strategy Involves a lot g-f trading. (All returns discussed
above are after transaction costs, but are pre-tax.)

Key variables driving the strategy are: call premiums, put premiums, dividend
yields, each stock's volatility and the market's volatility. Madoff uses
computer models, and experience (his own and that of his staff) to determine
the individual stocks to purchase.
'With this strategy you never hit any home runs, but have lots of singles and
a few doubles, and no strike-outs.
The risk/return trade-off for this
strategy is that you risk earning nothing to have the potential to earn twicc
the treasury rate.
If you want to lock in the treasury rate you can buy
TBills."
Macluff has been in the brokerage and money management businesses for about 30
years. He has been using this technique for about 25 years. During the
first 15 years he did not purchase protective puts. However, for the last 10
years he has consistently used puts to protect his down-side.
Over the last
10 years the returns have ranged from 12% - 25% per year depending on the
year.
Ills worst quarter in the last ten years was the 3rd quarter (October)
of 1987, when he lost 1% Qn the portfolio's value for thequarter. (B40:

follow-up QuestiÑi;

u this 2% loss at an annual fltç..)

going forward, Madoff expects to have returns in the 16% to 18% range.
Returns will be lower than in the past because: 1) there are too many people
using similar techniques; 2) the market will probably be lower, With less
appreciation over the next year or so; and 3) put premiums are higher--as the
stock market has became more volatile, more people have been buying
protective puts, bidding the prices up. However, Madoff notes that put and
call premiums tend to move in paralTel, although the spread between the two
have declined somewhat in recent years.

The monies invested by Sterling Equities' and the Mets' are managed in
separate, special accounts. Bernie Iladoff reviewt the performance and
positions in the accounts at the end of each day and helps develop the
strategies. His traders and staff manage the accounts on a day to day basis.
Wipon is provided with monthly statements for the accounts which show all
(All confirmations are
positions and trades/activity for the month.
forwarded as well.) Quarterly reports are also pYepared for Wilpon which
contain calculation of the ROR and an analysis of the activity for that
quarter.

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