Court rules on Madoff's fake profits

Investors who lost billions of dollars in Bernard Madoff's massive multidecade fraud are not entitled to recover fake profits that were described to them in phony statements, a federal appeals court said Tuesday.

The Second U.S. Circuit Court of Appeals concluded that a trustee's calculation of the investors' losses was "legally sound" and that a bankruptcy court was correct when it rejected arguments from lawyers for investors who said their clients should receive more than what they initially gave to Madoff.

A three-judge panel of the Manhattan court said customer statements showing that initial investments of about $17.3 billion had ballooned to more than $65 billion "reflect impossible transactions and the trustee is not obligated to step into the shoes of the defrauder or treat the customer statements as reflections of reality."

A lawyer for investors who argued before the appeals panel in March did not immediately return a telephone call for comment.

Amanda Remus, a spokeswoman for trustee Irving Picard, called the ruling "an important step forward for customers with allowed claims."

"We have maintained all along that our definition of net equity -- which is supported by long-standing precedents in bankruptcy and securities laws -- is the fairest approach to the determination of claims, and we hope that the court's decision can be the final word on the issue," she said in a statement.

Madoff had told thousands of investors just before his December 2008 arrest that their investments had more than tripled. Prosecutors said it was actually a Ponzi scheme and promised investments were not made.

"As is true of all Ponzi schemes . . . Madoff used the investments of new and existing customers to fund withdrawals of principal and supposed profit made by other customers," the Second Circuit said. "Madoff did not actually execute trades with investor funds, so these funds were never exposed to the uncertainties and fluctuations of the securities market."

The court said that Picard, responsible under the Securities Investor Protection Act for sorting out decades of fraud, had chosen a method for carrying out his responsibilities that "is legally sound under the language of the statute."

The process left many investors angry at Picard, particularly those who had recovered and spent more than their original investment based on expectations that they had much more money than they actually had.

Madoff is serving a 150-year sentence in a federal prison in North Carolina after admitting the massive fraud.