Madoff trustee wins dispute over fraud victims' damages

By Jonathan Stempel

NEW YORK (Reuters) - A federal bankruptcy judge said victims of Bernard Madoff's fraud are not entitled to interest or inflation adjustments on their claims, a decision that could speed the return of $1.36 billion to the swindler's former customers.

U.S. Bankruptcy Judge Burton Lifland in Manhattan ruled in favor of Irving Picard, the trustee liquidating Madoff's firm, in concluding that it would be unfair to award "time-based" damages to victims of the Ponzi scheme uncovered at Bernard L. Madoff Investment Securities LLC.

He said a contrary ruling would likely have "significant unintended consequences" by favoring investors who have recovered their principal over those who have not, and perhaps giving a "windfall" to traders of claims on potential recoveries from Madoff's estate who were never victims of the fraud.

Amanda Remus, a spokeswoman for Picard, said the trustee looks forward to "a final, unappealable order from the court. When that occurs, we will seek to distribute, at the earliest possible opportunity, the funds then available to defrauded BLMIS customers with allowed claims."

Picard has distributed more than $5.4 billion to former customers of Bernard L. Madoff Investment Securities LLC, roughly half of the $11.1 billion of claims he deems "allowed."

But he has kept the $1.36 billion in reserve pending a determination of whether customers who invested with Madoff for longer periods should recover more because of that extra time.

Lifland ruled on what he called a novel legal issue: whether customers' "net equity" claims could be adjusted for time-based damages under the Securities Investor Protection Act, a federal law used to help recoup money for victims of failed brokerages.

'OBVIOUS NEED'

In rejecting such adjustments, Lifland noted that Madoff's victims had never bargained for guaranteed rates of return or inflation protection when they opened accounts.

The judge also said it was impossible to have their claims reflect "market reality" in the first place, because their final account statements proved to be fabricated.

"In this zero sum game where funds are limited, hard choices must be made," Lifland wrote. "The plain language, purpose, framework and distribution scheme of SIPA, as well as (legal) precedent, all support the method chosen by the trustee."

Lifland delayed distributing the $1.36 billion for 10 days to allow an appeal. Citing "the obvious need" to free that money promptly, the judge said he will look favorably upon a request to appeal directly to the 2nd U.S. Circuit Court of Appeals.

That court in 2011 upheld Picard's method to calculate losses based on amounts taken out of Madoff's firm minus amounts invested, rather than amounts shown on final account statements.

P. Gregory Schwed, a partner at Loeb & Loeb representing some of the objectors, declined to comment.

Helen Chaitman, a lawyer who represents some objectors and has frequently tangled with Picard over Madoff claims, did not immediately respond to a request for comment.

The trustee has recovered $9.35 billion for Madoff victims, including all sums held in reserve pending legal challenges.

Madoff, 75, was arrested in December 2008, pleaded guilty three months later, and is serving a 150-year sentence in a North Carolina federal prison.

The case is In re: Bernard L. Madoff Investment Securities LLC, U.S. Bankruptcy Court, Southern District of New York, No. 08-1789.

(Editing by Eric Walsh)