Madoff trustee sues Calif AG, wins feeder fund case
* Trustee: California AG interfering with recovery efforts
* Judge rules Madoff feeder fund claimants not customers
By Jonathan Stempel
(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 legal victory as a federal judge ruled that investors who sent money indirectly to Madoff's firm through so-called feeder funds did not qualify as "customers" entitled to share in what Picard recovers.
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. He was not immediately available for comment.
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.
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 had 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 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 could reduce the amount he can recover for customers.
The trustee asked the court to void the lawsuits and to order an injunction to prevent similar litigation.
Harris' office did not immediately return a call seeking comment on Thursday.
The attorney general's lawsuit against Chais' widow Pamela was originally filed by Harris' predecessor Jerry Brown, who is now California's governor. It seeks to recover $270 million of fees that Chais allegedly collected.
Barry Weprin, who represents plaintiffs in two of the other California cases, said it was "surprising" that Picard waited nearly three years to challenge his lawsuits.
"Our claims are independent from the Madoff bankruptcy case, and are based on conduct that Stanley Chais did in connection with investments by California residents," he said. "We don't think there is any basis for the trustee's motion."
Marvin Gelfand, a lawyer for plaintiffs in the other cases, did not immediately return a call seeking comment.
FEEDER FUND INVESTORS LOSE
In the feeder fund case, U.S. District Judge Denise Cote in New York said 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 upheld a June 2011 ruling by U.S. Bankruptcy Judge Burton Lifland, who oversees the liquidation of Madoff's firm. [ID:nN1E75R1K6]
Picard had rejected claims by the feeder fund customers, who did not have accounts with Madoff's firm.
Karl Geercken, a lawyer for the feeder fund customers, did not immediately return a call seeking comment.
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)