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Lautenberg charity, other Madoff investors try to revive claims

By Jonathan Stempel

NEW YORK (Reuters) - A federal appeals court signaled that victims of Bernard Madoff's fraud more than four years ago might be allowed to eventually sue the swindler's family members over their losses, if they're willing to wait longer.

The 2nd U.S. Circuit Court of Appeals in New York weighed whether investors, including a charitable foundation for Senator Frank Lautenberg, Democrat of New Jersey, and the town of Fairfield, Connecticut, could pursue claims against Madoff's brother Peter, his son Andrew, and the estate of his late son, Mark.

Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, has largely been successful in stopping lawsuits that he believes overlap his own and impair his ability to recover money for victims of the Ponzi scheme.

But Circuit Judge Pierre Leval suggested more than once during the hour-long argument that it might be permissible to let investors pursue claims against the family members, who were all senior employees of Madoff's firm, once Picard was done.

"What prejudice would there be to the trustee" if the claims were "allowed to sit in purgatory" until Picard collected all he could, Leval asked David Sheehan, a lawyer for the trustee.

When Sheehan answered that there was none, Leval responded, "In that case, there is no need to make this (lawsuit) void."

So far, Picard has recovered about $9.3 billion for Madoff victims, and distributed $2.95 billion. He has estimated that Madoff's Ponzi scheme caused $17.5 billion of losses, meaning that many investors remain far from being made whole.

Bernard Madoff, 74, is serving a 150-year sentence in a North Carolina federal prison.

NOT AN HONEST NICKEL

The Lautenberg Foundation, which claimed $9 million of losses, accused Picard of overreaching by barring its securities fraud claims.

It said these differed from their claims because they sought property from people who worked for Madoff, not from the bankruptcy estate itself.

"The causes of action should be permitted to proceed in parallel," the foundation's lawyer, Jennifer Ann Hradil, told the three-judge 2nd Circuit panel.

Sheehan disagreed.

"The Madoff family: These are the people that ran the fraud," he said. "They never made an honest nickel. And that is the money that we're trying to bring back into the estate."

WEALTHY UNCLE

It is unclear how much money the Madoff family members might still have once Picard finishes his own recovery efforts.

Circuit Judge Reena Raggi said the trustee had made a "strong presentation" that Peter, Andrew and Mark Madoff had amassed their respective wealth through the Madoff firm.

But she said it would be "very odd" to bar lawsuits if it were found, for example, that Peter Madoff had been left money from a wealthy uncle that had nothing to do with the fraud.

Peter Madoff had been chief compliance officer at his brother's firm, and was sentenced last month to 10 years in prison over his role in the fraud.

Andrew and Mark Madoff were co-directors of trading at the firm. Mark Madoff committed suicide in December 2010.

On Friday, the 2nd Circuit also heard arguments in a second group of cases by investors in some "feeder funds" that funneled money to Madoff. Picard has long denied such claims, saying the funds themselves are the "customers" entitled to recovery.

The 2nd Circuit often takes several weeks or months to rule.

It has yet to rule on whether former Madoff customers could revive claims against the estate of Florida businessman Jeffry Picower, a one-time Madoff client whose $7.2 billion settlement with Picard is the trustee's largest.

The Lautenberg case is The Lautenberg Foundation et al v. Picard, 2nd U.S. Circuit Court of Appeals, No. 11-5421.

(Reporting by Jonathan Stempel in New York; Editing by Jan Paschal)

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