* Trustee allowed to use net investment method
* Some investors would get nothing
* Appeal by investors expected
* SIPC says opinion does ‘greatest good’ for victims (Recasts first paragraph with investor impact; adds comment by spokesman for trustee Picard)
By Grant McCool and Chelsea Emery
NEW YORK, March 1 (Reuters) - A U.S. judge has sided with a trustee’s formula to determine the claims for thousands of people swindled by Bernard Madoff, a decision that frustrates investor efforts to get more money back from the debacle.
Defrauded Madoff investors have previously said they would appeal any decision made in favor of applying the trustee’s “money in, money out” method, based on how much they put into the firm minus how much they withdrew over the years.
The investors challenged trustee Irving Picard in court, arguing their claims ought to be determined by the amounts in their accounts as of Nov. 30, 2008 -- two weeks before Madoff’s arrest for orchestrating Wall Street’s biggest investment fraud of up to $65 billion.
In a written opinion on Monday, U.S. Bankruptcy Court Judge Burton Lifland agreed with Picard, a New York lawyer appointed by the court, despite what the judge called compelling arguments by former customers of Bernard L. Madoff Investment Securities LLC.
“To the extent possible, principal will rightly be returned to Net Losers rather than unjustly rewarded to Net Winners under the guise of profits,” wrote Lifland.
The investors had also taken aim at the Securities Investor Protection Corp (SIPC), a nonprofit established by Congress in 1970 to maintain a fund for customers of failed brokerages. Picard works under the auspices of SIPC.
They argue that victims could not have known they would not be entitled to $500,000 - the maximum allowed under the Securities Investor Protection Act to a single investor.
“Unless and until this decision is reversed, no American who invests in the stock market with the hope of retiring on his savings, has any protection against a dishonest broker,” said Helen Davis Chaitman, attorney for hundreds of victims.
Her spokesman said lawyers would try to appeal in the U.S. Court of Appeals for the 2nd Circuit in New York, bypassing the district court.
Using his formula, Picard has already begun validating claims, paying fleeced investors and suing fund managers who made huge profits from Madoff. Still, his methodology means that some investors may receive nothing and others who may have withdrawn fictitious profits could be forced to pay back the trustee.
A spokesman for Picard said the trustee’s team of lawyers was pleased with the ruling and “continue to move forward processing victims’ claims.”
Madoff, 71, is serving a 150-year term in a North Carolina prison after pleading guilty last March to the massive, worldwide Ponzi scheme that ruined investors large and small, including charities.
He and others at the firm falsified account statements, and few actual trades in securities were ever made over two decades, investigators say. Six people, including Madoff, have been criminally charged so far.
“As difficult as this ruling no doubt is for Madoff victims, it would be unrealistic to expect returns based on a fantasy,” said law professor Lois Lupica at the University of Maine in Portland, Maine.
The unraveling of the fraud shook investors and confidence in market regulators such as the U.S. Securities and Exchange Commission, which missed the Ponzi scheme despite several investigations. A Ponzi scheme is one in which early investors are paid with the money of new clients.
Lifland said he “recognizes that the application of the Net Equity definition to the complex and unique facts of Madoff’s massive Ponzi scheme is not plainly ascertainable in law.
“Indeed, the parties have advanced compelling arguments in support of both positions.”
Ronnie Sue Ambrosino, an investor who lost life savings to Madoff and is a vocal critic of the Securities Investor Protection Corp (SIPC) overseeing the trustee’s work, said she was “empowered” to continue legal challenges.
“The Madoff victims will continue to work for the justice they deserve, and also to ensure that all American investors are truly secure in the protection offered by SIPC,” said Ambrosino, coordinator of the Madoff Coalition for Investor Protection.
SIPC is a nonprofit established by Congress in 1970 to assist investors in failed brokerages by maintaining a fund.
SIPC president Stephen Harbeck said in a telephone interview that while no one likes to say “no” to fraud victims, the methodology “does the greatest good for the greatest number of people consistent with the law.”
The judge said in his opinion that more than 15,000 claims had been filed. Customer money totaled $73.1 billion as of Dec. 11, 2008, the day of Madoff’s arrest. He said the net of “negative” accounts was approximately $8.3 billion, with customers purportedly owed a staggering $64.8 billion.
The trustee's worldwide search for assets has so far gained only about $1.5 billion, according to court records. As of Friday, the trustee has allowed 1,936 investor claims totaling $5.2 billion and denied 10,111, according to the official www.madofftrustee.com web site.
The case is Securities Investor Protection Corp v Bernard L. Madoff Investment Securities, U.S. Bankruptcy Court for the Southern District of New York, No. 08-01789 (Reporting by Grant McCool and Chelsea Emery, additional reporting by Jonathan Stempel; Editing by Tim Dobbyn)