Madoff Trustee, New York Battle Over Settlement

Mar 28 2013 | 9:19am ET

A federal judge suggested that investors in Bernard Madoff feeder funds may be entitled to no payouts as he considers a dispute between the bankruptcy trustee for the Madoff estate and the New York State attorney general.

The trustee, Irving Picard, has moved to block New York's $410 million settlement with J. Ezra Merkin, who ran three Madoff feeder funds. Picard himself is seeking $500 million from Merkin and complains that the New York deal is an "end run" around bankruptcy law.

New York Attorney General Eric Schneiderman says that Picard has no claim to the settlement money and no power to stop him. And his lawyer told U.S. District Judge Jed Rakoff that, if Picard is successful, Merkin's investors, who lost more than $1.2 billion, will be left with nothing.

The argument didn't seem to do much to move Rakoff, who noted, "When someone like Madoff commits a fraud of this magnitude, an awful lot of people get screwed." Rakoff suggested that the law could require that Madoff feeder fund investors get nothing; Picard pays out only to those who invested directly with Madoff.

Schneiderman's office also argued that Picard waited too long to try to stop its lawsuit, which now leaves Merkin's investors in a bind, given that many did not file their own lawsuits in deference to the state suit.

"There would be real prejudice—not theoretical prejudice—to real people with real claims," David Ellenhorn, a lawyer for Schneiderman, warned Rakoff.

Tough, Picard's lawyer all-but said.

"We get to go first," according to David Sheehan. "We get the opportunity to try to bring that money in."

Rakoff said he would rule on Picard's request by April 15.

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