06/28/2011 05:55 pm ET Updated Aug 28, 2011

Feeder Fund Investors Ruled Out Of Madoff Restitutions, Bankruptcy Judge Says

NEW YORK (Jonathan Stempel) - Investors in "feeder funds" who lost money in Bernard Madoff's Ponzi scheme do not qualify as customers of the now-imprisoned swindler, a federal bankruptcy judge ruled on Tuesday.

The ruling by Judge Burton Lifland in New York is a victory for Irving Picard, the trustee liquidating Madoff's firm and seeking money for Madoff's victims.

Picard has rejected claims of investors who lost money after investing only indirectly with the former Bernard L. Madoff Investment Securities LLC and who had no accounts there.

Lifland's ruling also means the feeder fund investors are not eligible to receive as much as $500,000 each from a federal fund designed to help customers of failed brokerages.

"The objecting claimants lack any of the typical traits of a customer relationship with BLMIS since they made no purchases, transacted no business, and had no dealings whatsoever with the broker-dealer," the judge wrote. "Bestowing customer status on the objecting claimants would stretch that term wholly beyond its limits."

A spokeswoman for Picard did not immediately return an emailed request for comment. Helen Chaitman, a lawyer for some of the investors, was not immediately available for comment.

Lifland was reviewing claims of customers in 16 feeder funds that funneled some or virtually all of their clients' money to Madoff. Nine were based in Delaware or New York, and the rest in the Cayman Islands or British Virgin Islands.

Many of these customers were unaware of how their money was being invested, and learned about their losses only after Madoff was arrested on December 11, 2008.

Noting that many feeder fund customers have sued the funds themselves, Lifland said, "it is only appropriate that the feeder funds, and not the trustee, determine the specific amounts they owe to their own customers."

The Securities and Exchange Commission and the Securities Investor Protection Corp, which oversees the fund for brokerage customers, agreed with Picard that feeder fund customers were not customers of Madoff.

Picard has filed roughly 1,050 lawsuits to recover more than $103 billion from banks, former customers and others he said benefited from or helped Madoff commit fraud.

Madoff, 73, pleaded guilty in 2009 and is serving a 150-year prison sentence.

The case is In re: Bernard L. Madoff Investment Securities LLC, U.S. Bankruptcy Court, Southern District of New York, No. 08-01789.

(Editing by Steve Orlofsky)

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