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 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.

Noting that many feeder fund customers had 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.

Picard, in a statement, said he was pleased with Lifland's important clarification.

Helen Chaitman, a lawyer for some of the investors, did not immediately return calls seeking a comment.


In Tuesday's ruling, Lifland had reviewed claims of customers of 16 feeder funds that funneled at least some client 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.

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

Separately, Lifland on Tuesday approved Picard's settlement with two bankrupt funds affiliated with Fairfield Greenwich Group, the largest feeder of cash to Madoff.

The trustee agreed to drop $212 million of claims, and in exchange can pursue the funds' claims against Fairfield owners, and management, including Connecticut financier Walter Noel.

Picard in a separate statement said that accord added significant value to the bankruptcy estate and, ultimately, to customers.

Lifland had previously approved Picard's efforts to recover money from former Madoff customers he considered net winners, meaning they withdrew more money from Madoff's firm than they deposited. The U.S. 2nd Circuit Court of Appeals has yet to rule on an appeal by some investors of that March 2010 ruling.

The trustee 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.

(Reporting by Jonathan Stempel; Editing by Steve Orlofsky, Bernard Orr)