When New York State Attorney General Eric T. Schneiderman announced last June that he had made a settlement of $410 million with philanthropist J. Ezra Merkin, one of Bernard Madoff's biggest investors, it was seen as a boon for Merkin's investment fund customers, whose money indirectly was invested in the Madoff Ponzi scheme and lost.

But the settlement is the subject of a fight between Schneiderman and Irving Picard, the trustee in the Madoff case. Picard said Friday in court filings that millions of dollars of the settlement was paying for the philanthropist's fight with him. Funds were also not going to the Merkin investors but to the New York attorney general's office to administer the claims process, the trustee alleged in court papers filed Friday to stop Schneiderman's settlement. Schneiderman's office has yet to reply to Picard's filings. Picard first sued in August.

advertisement | advertise on newsday

In June Schneiderman's office said that $405 million would go to investors with $5 million for costs and fees. In January filings, state officials said that most of the settlement would go to Merkin investors and the rest would be used for Picard's lawsuit against the philanthropist and cover costs of Schneiderman's office and two receivers.

The Merkin settlement remains sealed. A copy was filed under seal Monday by Picard in federal court in Manhattan. Picard said the Merkin settlement should be enjoined under federal law and that he be allowed to pursue his $550 million federal lawsuit against Merkin for the benefit of all Madoff investors, not just those who invested with Merkin's feeder funds.

Schneiderman charged in filings that Picard did nothing when the state sued Merkin in 2009. The state settlement seeks to help investors who didn't directly invest with Madoff and can't file a claim with Picard, said Schneiderman's staff.

"If the trustee were now to obtain an injunction nullifying the settlement, the . . . [attorney general's] efforts would be for naught and the investors would be severely punished," said state officials said in court filings.