Judge Rules That Investors in Madoff 'Feeder Funds' Are Not Customers Under SIPC

A federal judge handed a significant victory to the trustee overseeing the liquidation proceeding of Bernard L. Madoff Investment Securities on Tuesday, ruling that investors who placed their money in Madoff's hands indirectly through 'feeder funds' could not be considered customers entitled to share in any recovery by Picard.  Picard stated in a recent filing that he has recovered over $7 billion for the benefit of defrauded investors, although some of that amount remains tied up in litigation.

In addition to precluding the so-called customers from recovering from any money Picard may distribute, the ruling also stated that the customers were not entitled to the protections afforded by the Securities Investor Protection Act, which reimburses customers of failed broker-dealers up to $500,000 of allowed losses.  Drawing on the definition of customer in the Securities Investor Protection Act, Judge Burton Lifland reasoned that "bestowing customer status on the objecting claimants would 'stretch that term wholly beyond its limits.'"  

Judge Lifland agreed with Picard that the feeder funds, and not Picard himself, should determine how much any investors should recover.  Picard noted that the majority of the feeder funds were eligible to file claims since they had suffered a net loss on their total investment.  Thus, allowing both the feeder funds and their investors to file claims would be akin to double-dipping on losses.  Additionally, many of the feeder fund customers have initiated litigation against the funds themselves for the decision to invest in Madoff.  

According to Picard's website, over 16,000 claims have been filed to date, with Picard allowing less than 15% of those claims.  Picard has filed a motion to approve his first distribution of monies recovered to date, with a hearing set on that motion for July 12th.