The federal judge overseeing the bankruptcy of Bernard L. Madoff Investment Securities has ruled that investors in the many feeder funds that funneled billions into Madoff's Ponzi scheme were not clients of the fraudster.
The ruling by U.S. Bankruptcy Judge Burton Lifland means that feeder fund investors aren't eligible for payments of up to $500,000 from the Securities Investor Protection Corp. Feeder fund investors account for some two-thirds of the more than 16,000 claims filed with court-appointed receiver Irving Picard, who has been denying those claims, a stance backed by both the SIPC and Securities and Exchange Commission.
Lifland ruled that only individuals with accounts in their names with Madoff's firm are eligible for the payout.
"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," Lifland wrote. "Bestowing customer status on the objecting claimants would stretch that term wholly beyond its limits."
"It is only appropriate," Lifland added, "that the feeder funds, and not the trustee, determine the specific amounts they owe to their own customers."
Also yesterday, Lifland approved a $212 million settlement between the largest of the feeder funds, Fairfield Greenwich Group, and Picard. Under the terms of the deal, Picard dropped $212 million in claims against Fairfield Greenwich funds, which in turn have cut their claims against the Madoff estate by more than $100 million. Picard had agreed last month to a similar deal with the firm's offshore funds.