Just How Much "Caveating" Should an "Emptor" Have to Do?

Yes, dreadful Latin, I know. But while "buyer beware" has been a watchword for millenia, I've been wondering about just how far you should beware.

I'm not a Mets fan, so when the news first broke (two early-February New York Times articles are here and here) that Mets owner Fred Wilpon might have to sell at least a partial share of the team in order to pay what the Madoff bankruptcy / Ponzi scheme trustee is seeking from him, I didn't really care. (Full disclosure: I was born in Boston. That tells you all you need to know about what team I cheer for.)

The bankruptcy trustee, Irving H. Picard, has sued Mr. Wilpon and his associates for something on the order of $1 billion. There is no question that Mr. Wilpon did invest, and invested heavily, with Bernie Madoff. There's also no question that Mr. Wilpon and his associates took a lot of profit from those investments.

But while Mr. Wilpon claims that he was a victim like everyone else -- well, maybe not like everyone else -- Mr. Picard claims that Mr. Wilpon should have known that the "investment" fund was a fraud.

Mr. Picard's argument is simple: He considers the Mets owners to be sophisticated investors who should have known better but were "simply in too deep" to act on any warnings. For example, according to the lawsuit, advisers at other investment vehicles Mr. Wilpon used repeatedly warned him that Madoff's returns were "too good to be true."

As Floyd Norris put it in today's Times column, "The trustee cites no evidence that Mr. Wilpon or his associates actually knew Mr. Madoff was a fraud, but concludes that they should have known. And if they should have known, they can be treated as if they did know, and that means they acted 'with actual intent to hinder, delay or defraud creditors.'"

So, as Norris says, "If you should have known you were being defrauded, you do not deserve the same protection as those who were not sophisticated."

That seems like a pretty big leap to me.

I don't know how Mr. Wilpon's lawyers will argue, but it seems likely that they will point out that -- despite several whistle-blowers -- the Securities and Exchange Commission never properly investigated the Madoff "investment" fund. No doubt the SEC now has the same 20/20 hindsight we all have, and the "obviousness" of the Ponzi scheme is clear. But then?

The questions that occur to me are, Who gets to decide who deserves the fraud protection? Who gets to decide that you're a more sophisticated investor than I am? Who gets to decide that I should have known? Who will watch the watchmen of this process?

Or, to put it another, much older way: Quis custodiet ipsos custodes?