REFILE-Lifting the Lid-Madoff clients fear losing out on refunds

(Refiles to specify which U.S. Court of Appeals in next-to-last paragraph)

By Martha Graybow

NEW YORK, Jan 8 (Reuters) - Attempts by Bernard Madoff clients to recover a portion of their savings lost in the alleged swindle could turn into a clash with the investor protection group that is reviewing their claims, lawyers for the investors say.

The recovery process for investors is still in its early stages, with applications for claims mailed to Madoff clients only a few days ago.

But investors who have received the forms have started rummaging through their files for proof of their accounts to send to the nonprofit Securities Investor Protection Corp (SIPC). Their lawyers say many people fear they have not kept sufficiently detailed records to get money back from the group.

And with only $1.6 billion in its recovery fund plus an additional $1 billion line of credit from the U.S. Treasury Department, it is clear that SIPC's coffers will stretch only so far.

Madoff was charged last month with an alleged $50 billion fraud, accused of running a vast scheme that took money from new investors to pay old investors. He has not yet formally responded to the accusations in court.

For its part, SIPC says it will pay valid claims, though the maximum that can be paid to any individual is $500,000.

Madoff clients are "petrified," said Brad Friedman, an attorney at law firm Milberg who represents or has been in contact with more than 100 investors who lost a combined $1.5 billion or more in the alleged swindle.

"There is a real concern on the part of the victims that SIPC is going to act like most insurance companies and do everything it can to frustrate and deny claims," he said.

CLAIMS UNDER REVIEW

SIPC, set up by Congress to help investors with accounts at failed brokerage firms, has said it must review an investor's paperwork before determining if he or she has a valid claim. It says it hopes to begin paying investors in a few months.

"That's when we hope that some of the simpler claims can be resolved," SIPC President Stephen Harbeck told Reuters in an interview on Wednesday. The group is funded by broker-dealers who are its members.

Many investors, though, are expected to be ineligible for the recoveries, because the group's provisions do not apply to people who invested indirectly through hedge funds or other vehicles that gave Madoff money to manage, lawyers say.

Lawyers for the investors are busy pursuing possible recoveries from other sources, including lawsuits against hedge funds and other third parties that invested client funds with Madoff.

SIPC has said it does not need to wait until there is a resolution of the criminal case against Madoff to begin paying claims.

SIPC has mailed more than 8,000 claim forms to Madoff investors. They are asked to provide their most recent account statements, and proof of wire transfers or canceled checks showing deposits "from as far back as you have documentation."

The form also asks for all information regarding any withdrawals or payments received from Madoff.

Supplying such records could be nearly impossible for many longstanding clients, said Harry Susman, a partner at law firm Susman Godfrey LLP. "You've got people who were investing with Madoff for 20 years and didn't keep records," he said.

OUT OF LUCK?

Investors could potentially bring legal action against SIPC if they are not allowed access to its reserve fund, said Howard Elisofon, a lawyer at law firm Herrick Feinstein LLP.

"Invariably as claims are denied and people feel that they have a good-faith effort to go forward, there may well be a battle with SIPC," he said.

Investor lawyers say SIPC also may deny payments to people who took out more money from Madoff funds over the years than what they initially invested.

That means that even if an investor had millions of dollars in purported investment gains listed on his or her account statement before Madoff's arrest, a claim for recovery could be viewed as invalid.

A 2004 ruling from the U.S. Court of Appeals for the Second Circuit in a different case backed a SIPC argument that investors' claims should be valued only according to how much they initially invested, and not based on fictitious numbers in artificial account statements.

Denying payouts to such investors on that basis "is a nice mathematical concept, but try telling that to a 69-year-old woman whose only money in the world is in her Madoff account," Friedman said. (Reporting by Martha Graybow, editing by Matthew Lewis)