With Bernard Madoff packed off to prison in North Carolina, the next big concern for his cheated investors is the outcome of a crucial legal fight that could impact how much money they might recover.

The battle pits special trustee Irving Picard against some disgruntled investors who have sued him to challenge the way he is calculating losses in Wall Street's largest Ponzi scheme.

Battle lines sharpened last Friday when Picard filed papers in Manhattan federal bankruptcy court not only asking that the lawsuit be thrown out but also claiming that the attorney for the investors, Helen Davis Chaitman, had a potential conflict of interest.

Picard said in his filings that since Chaitman was herself a Madoff victim and had filed a claim for recovery from the Securities Investor Protection Corp. that she had a vested interest in the outcome of the lawsuit that could be in conflict with some of her clients.

In her original complaint, Chaitman, of the Manhattan firm of Phillips Nizer Llp, charged that Picard was computing the "net equity" in each investor's account improperly and in violation of the law that set up SIPC. Madoff investors are eligible to get up to $500,000 from SIPC to cover their losses. Other assets being recovered by Picard would be used to make up part of the losses.

Picard maintains that because Madoff never purchased any securities for his customers, there were no profits, despite what Madoff's last statement to his investors issued in November showed.

As a result of Madoff's fraud, customers who took money out of their accounts were paid with funds stolen from others, Picard has said. Those who took out less than they put in were eligible for some payment from SIPC while those who took out an amount greater than their investment were out of luck, according to SIPC and Picard.

But Chaitman and her clients - Pennsylvania investors Diane and Roger Peskin and Maureen Ebel - claim that federal law provides for "net equity" to be calculated on the basis of the values contained in the November 2008 statement from Madoff. Those records totaled $64.8 billion.

Richard Friedman, 59, of Jericho, is an investor who didn't sue Picard but believes the law and Congressional intent supports Chaitman's argument.

"As long as your record of [account] confirmation of activity showed securities we have a legitimate expectation of recovery," said Friedman.

advertisement | advertise on newsday

Also on Friday, Picard filed an analysis by a certified public accountant that claimed Chaitman's three investors would ultimately recover as much as 172 percent more money if the trustee's method is upheld. Chaitman couldn't be reached for comment Monday.

It will be up to Bankruptcy Judge Burton Lifland to decide the issues. A hearing is slated for late August.