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Court Won’t Unravel Madoff Settlements

MANHATTAN (CN) - Victims of Bernard Madoff's massive Ponzi scheme can collect on a $410 million settlement despite obstruction from Madoff's bankruptcy trustee, the 2nd Circuit ruled.

Irving Picard, as trustee for the liquidation of Bernard L. Madoff Investment Securities and Madoff's bankruptcy estate, launched "adversary proceedings" to block the settlement of three lawsuits on behalf of investors in "feeder funds" that funneled cash to perpetuate the scheme. Picard claimed that the settlements on those three cases would "hinder" his ability to recoup fraudulent transfers.

Such concerns failed Friday, however, to sway the 2nd Circuit on Friday.

"The injuries alleged by the plaintiffs in both actions are alleged to have been caused directly by the non-debtor defendants - not by Madoff or BLMIS," Judge Robert Sack wrote for a three-judge panel, abbreviating the name of Madoff's firm. "That renders them 'particularized' and outside the Trustee's purview. The actions are therefore not voided by, and the settlements are not subject to, the automatic stay."

A group of investors brought one of the class actions at issue here in December 2008 on behalf of those who invested in four feeder funds run by Fairfield Greenwich Group, which invested their money in Madoff's company. A second, consolidated and amended complaint was filed in September 2009, citing securities violations.

Separate federal judges shot down Picard's motions to dismiss the lawsuits.

Settlement talks in 2010 led to a $50.2 million deal for the plaintiffs, with another $30 million escrow fund set up for future settlements or judgments.

But the night before the courts were set to approve the proposal, Picard filed papers in U.S. Bankruptcy Court in Manhattan to block the settlement, arguing that it injured his own efforts to recover victims' money.

"Pursuing a parallel strategy," Picard then asked the court to intervene directly.

The courts declined, however, and New York's Attorney General Eric Schneiderman then sued in April 2009, claiming Ezra Merkin and his investment company, Gabriel Capital Corp., lied to several hundred investors in several feeder funds to take in $2 billion, "while turning all, or a substantial portion, of [investors'] funds over to Madoff and others."

In September 2010, Bart Schwartz also filed suit against Merkin as a receiver of two Merkin funds, Ariel Fund Ltd. and Gabriel Capital.

Schneiderman and Schwartz settled in June 2012 for $410 million as part of a joint settlement. Merkin agreed to pay $405 million over a three-year period, and $5 million to the state to cover fees and costs.

Schneiderman's office said it was the first settlement stemming from a government's lawsuit against Merkin.

Picard again sought to block the settlement, arguing that he had priority over Merkin's assets, and that distribution should await resolution of his separate claims against Merkin. In each case, the courts rejected his arguments. His appeal brought the case before the 2nd Circuit.

Schneiderman hailed the circuit's decision Friday, calling it a victory for "justice and accountability"

"Many New Yorkers entrusted their investments to Mr. Merkin, who then steered money to Madoff and received millions of dollars in management and incentive fees," Schneiderman said in a statement.

Victims "should begin receiving the money in the coming months," the AG added.

Certain eligible investors, he said, can expect to recover 40 percent of their losses.

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