Madoff trustee sues Calif AG, gets feeder fund win

Attorney General of California Kamala Harris attends a news conference to announce the creation of the Mortgage Fraud Strike Force in Los Angeles May 23, 2011.

(Reuters) - The Bernard Madoff bankruptcy trustee has sued California Attorney General Kamala Harris to stop her from interfering with his efforts to recover money for the swindler's former customers.

Irving Picard, the trustee, won a separate victory as a federal judge said more than 1,700 investors who sent money indirectly to Madoff's firm through 16 so-called feeder funds did not qualify as "customers" who could recover losses from the firm's bankruptcy estate.

Picard has recovered about $8.7 billion for former customers of Bernard L. Madoff Investment Securities LLC, but much of that sum is tied up in litigation.

The developments are the latest arising from Madoff's estimated $64.8 billion Ponzi scheme, which was uncovered in December 2008. Madoff is serving a 150-year prison sentence.

Investigations have shown that Madoff and some employees created fictitious accounts, and paid out consistently high but made-up returns to customers over three decades.

CHAIS CASE

Picard's lawsuit against Harris and four other defendants relates to Stanley Chais, a Beverly Hills money manager for Hollywood elite and longtime Madoff friend who died at the age of 84 in September 2010.

The trustee and the U.S. Securities and Exchange Commission in separate 2009 lawsuits accused Chais of sending client money to Madoff despite red flags about the business, while pocketing hundreds of millions of dollars for himself and his family.

Chais claimed that he too was a Madoff victim.

In a complaint filed Wednesday night in the U.S. bankruptcy court in Manhattan, Picard sued to stop Harris and four other defendants from pursuing five California lawsuits filed in 2009 against Chais' estate, related entities and family members.

Picard said these cases "side-step the trustee's exclusive right to seek recovery of fraudulently transferred property," and might reduce the amount he could recover for customers.

The trustee asked the court to void the lawsuits and to order an injunction to prevent similar litigation.

Lynda Gledhill, a spokeswoman for the attorney general, said that office is reviewing Picard's complaint.

The state's lawsuit against Chais' widow, Pamela, was filed by Harris' predecessor Jerry Brown, who is now governor. It seeks to recover $270 million of Madoff-related fees that Chais supposedly collected between 1995 and 2008.

Lawyers for the other defendants said Picard had no basis to challenge their cases, and that it was "surprising" for him to wait nearly three years to try.

Barry Weprin, who represents two of the defendants, said his clients' claims "are based on conduct that Stanley Chais did in connection with investments by California residents."

Marvin Gelfand, a lawyer for the other defendants, said his clients "didn't know anything about Bernard Madoff," and that it was "totally improvident" for Picard to intervene. "He can only seek claims that Madoff could have sought," Gelfand said.

Picard's spokeswoman Amanda Remus said the trustee "is obligated to ensure that certain victims are not favored" in a manner contrary to federal law on brokerage liquidations.

FEEDER FUND INVESTORS LOSE

In the feeder fund case, U.S. District Judge Denise Cote in Manhattan said in a decision on Thursday investors in 16 funds that sent much of their money to Madoff, mistakenly believing that Madoff would invest it, had no property interest in the funds' assets.

Cote said this was because the investors knew they were buying "ownership shares" of the funds, and had only indirect ties to Madoff that fell short of making them customers.

Even accepting that the feeder funds conspired to advance Madoff's Ponzi scheme, the law "simply does not protect against all cases of alleged dishonesty and fraud," the judge wrote.

Cote's decision upheld a June 2011 ruling by U.S. Bankruptcy Judge Burton Lifland, who oversees the liquidation of Madoff's firm.

Karl Geercken, a lawyer for the feeder fund customers, did not immediately respond to requests for a comment. Picard's spokeswoman said the trustee had no comment on the decision.

The case against Harris and others is Picard v. Hall et al, U.S. Bankruptcy Court, Southern District of New York, No. 12-01001. The feeder fund case is Aozora Bank Ltd et al v. Securities Investor Protection Corp et al, U.S. District Court, Southern District of New York, No. 11-05683.

(Reporting by Jonathan Stempel in New York; Additional reporting by Tanya Agrawal in Bangalore, editing by Maureen Bavdek, Matthew Lewis and Carol Bishopric)