* Picard seeks to make $272 million distribution
* Trustee says billions of dollars tied up in litigation (Adds interview, background, byline)
By Jonathan Stempel
NEW YORK, May 4 (Reuters) - The trustee in charge of recovering funds for victims of Bernard Madoff asked a bankruptcy judge to allow him to begin payments, 2-1/2 years after the imprisoned swindler's Ponzi scheme was uncovered.
Court-appointed trustee Irving Picard sought authorization to make an initial payout of $272 million to former customers of Bernard L. Madoff Investment Securities LLC.
Picard also asked Manhattan U.S. Bankruptcy Judge Burton Lifland on Wednesday for permission to put $2.6 billion of recovered money into a customer fund, from which the $272 million distribution would be made. The average payment would be $222,551 on claims relating to 1,224 accounts.
"This initial distribution represents a significant milestone in the trustee's recovery efforts," David Sheehan, like Picard a partner at Baker & Hostetler LLP, said in a statement. "We can now begin to return stolen funds to their rightful owners."
Picard's requests require Lifland's approval. A hearing is set for July 12.
The $272 million is in addition to the $795 million that the Securities Investor Protection Corp (SIPC) has advanced or agreed to advance to cover victims with valid claims.
Almost all of this $795 million is in the hands of victims, Kevin Bell, senior associate general counsel at SIPC, said in an interview.
The SIPC is a federally chartered agency that supervises the liquidation of brokerages. Federal law limits SIPC protection to $500,000 per valid claim.
Picard said he has recovered more than $7.6 billion for former Madoff customers, or 44 percent of the $17.3 billion of principal they lost.
This sum includes $5 billion of a $7.21 billion settlement that he and federal prosecutors reached in December with the estate of Jeffry Picower, a Madoff investor who died in October 2009. The other $2.21 billion went to the government.
Much of the money that Picard believes should go to former Madoff customers has been tied up in litigation, including challenges to the Picower settlement and a $220 million accord with the family of longtime Madoff client Norman Levy.
Other lawsuits challenge Picard's "net equity" method to determine which Madoff customers may recover for their losses.
Picard believes some of these customers are in fact "net winners," meaning they withdrew more from their Madoff accounts than they invested, and should forfeit ill-gotten gains.
The trustee has filed more than 1,000 lawsuits to recover about $100 billion. Among his targets are Madoff's longtime bank JPMorgan Chase & Co (JPM.N), and owners of the New York Mets baseball team.
Madoff, 73, was arrested on Dec. 11, 2008. He 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. 08-01789. (Reporting by Jonathan Stempel in New York; Editing by Phil Berlowitz and Ted Kerr)