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State, Madoff trustee clash over settlement

Irving Picard, Securities Investor Protection Act Trustee, looks

Irving Picard, Securities Investor Protection Act Trustee, looks on at a news conference announcing the recovery of $7.2 billion in the Bernard Madoff Ponzi scheme in New York City. (Dec. 17, 2010) Credit: Getty Images

The trustee in the Bernard Madoff case is clashing with New York State Attorney General Eric Schneiderman, charging that the state's recent $410 million settlement with some large investment feeder funds will cheat individual victims of the Ponzi scheme.

In papers filed Wednesday in Manhattan federal bankruptcy court, trustee Irving Picard is seeking an injunction to stop Schneiderman's settlement in June with the funds that pumped money into Madoff's company, which were run by philanthropist Ezra Merkin.

Schneiderman's deal is an attempt to do an end run around the trustee's federally mandated recovery process and give money to select individual investors in Merkin's funds, Picard claimed.

"We believe this effort by Mr. Picard to prevent the attorney general from distributing $410 million to investors who were victimized by Mr. Merkin is inappropriate and without legal merit," Jennifer Givner, a spokeswoman for Schneiderman, said.

Picard was appointed trustee under the Securities Investor Protection Act in December 2008, when Madoff's company collapsed, costing investors $17.3 billion. The bankruptcy court issued a stay against all other actions. Picard has so far recovered $9.1 billion in assets, a bit over 50 cents on the dollar for victims with approved claims.

Schneiderman announced the state court settlement on June 25 with four of Merkin's funds. He had sued to get money for individual investors who said they didn't know Merkin was investing with Madoff. The funds lost $1.2 billion.

The deal seeks to compensate certain individual investors of the funds over a three-year period to the tune of $405 million, with $5 million going to the state for expenses and costs, according to Picard's court filings.The state settlement, Picard contends, is being kept secret and conflicts with his worldwide recovery process, which is mandated by federal law.Under Picard's system, only Merkin's funds are considered Madoff customers and entitled to recover losses, while individual investors are deemed "indirect" investors who can't have their claims allowed in the special bankruptcy court.

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