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* Trustee says Levy children approached him
* About $1.5 bln recovered so far for Madoff's victims (Recasts; adds background and comments throughout)
By Jonathan Stempel
NEW YORK, Jan 27 (Reuters) - The family of one of Bernard Madoff's top clients agreed to pay $220 million to settle claims by the trustee liquidating the Ponzi schemer's investment firm, increasing the sum available for Madoff victims.
Trustee Irving Picard announced the settlement with two children of Norman Levy, a prominent New York real estate investor who prior to his September 2005 death at age 93 was a longtime Madoff friend and a client for roughly three decades.
The Securities Investor Protection Corp, a U.S. agency that helps recover assets from failed brokerages, had hired Picard to recover assets for victims of Madoff's estimated $65 billion Ponzi scheme.
Picard on Wednesday said he has recovered close to $1.5 billion, including the $220 million. The latter sum is one of Picard's largest recoveries from a former Madoff client.
Cary Lerman, a partner at Munger, Tolles & Olson LLP who represents the children, Francis Levy and Jeanne Levy-Church, in an interview said: "The Levys were also victims of Madoff's fraud and are grateful that their settlement with the trustee will benefit other victims of the crime."
According to a court filing by Picard's lawyers, the Levy family and a charitable foundation they set up had over six years had withdrawn $305 million more from Madoff's firm, Bernard L. Madoff Investment Securities LLC, than they had deposited.
Picard sought to recover all but the $84 million that the foundation, which is shutting down, already gave to charity.
In a statement, Picard said he was "very pleased" that the Levy children approached him to discuss a settlement.
According to the court filing, Picard found the Levys "forthright and sincere in their desire to do the right thing" and negotiate a return of their "fictitious" profits.
"The Levys have acted honorably and are to be commended," Picard said. "We hope that others will follow their example."
The settlement requires court approval. A hearing is scheduled for Feb. 18.
Prior to his death, Norman Levy had led the Cross & Brown real estate brokerage.
In a paid notice in The New York Times, Madoff called Levy a "mentor and dear friend of 40 years. Your spirit and love of life have touched and changed all who knew you. You taught me so much. I'll cherish our relationship forever."
According to Wednesday's court filing, Levy named Madoff as executor of his estate's non-real estate assets. Madoff would transfer more than $250 million from the estate, essentially "stealing" this amount from Levy's heirs, the filing said.
Picard is still seeking money from other Madoff clients, including $7.2 billion from the estate of Florida investor Jeffry Picower.
The trustee also faces complaints by hundreds of Madoff victims who believe he is undervaluing their losses.
A court hearing on Picard's methods is set for Feb. 2. As of Jan. 25, Picard said he had approved 1,776 claims worth $4.96 billion, and rejected 9,973 claims.
Francis Levy was quoted last January by Fox Business News as saying his father "believed" in Madoff.
"The one thing he said about Bernie is: 'If there's one honorable person, it's Bernie,'" Francis Levy said. "His last words on his deathbed were: 'Bernie Madoff, trust Bernie Madoff.'"
Madoff, 71, pleaded guilty last March and is serving a 150-year sentence in a North Carolina federal prison.
The case is Securities Investor Protection Corp v. Bernard L. Madoff Investment Securities LLC, U.S. Bankruptcy Court, Southern District of New York, No. 08-1789. (Reporting by Jonathan Stempel; Editing by Phil Berlowitz and Tim Dobbyn)