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Madoff feeder fund investors cannot recover: judge

(Reuters) - Investors in "feeder funds" who lost money with Bernard Madoff do not qualify as customers of the now-imprisoned swindler, a federal judge ruled.

Thursday's decision by U.S. District Judge Denise Cote in Manhattan upheld a June 2011 ruling by U.S. Bankruptcy Judge Burton Lifland, who oversees the liquidation of Bernard L. Madoff Investment Securities LLC.

It is a victory for Irving Picard, the court-appointed trustee seeking money for Madoff's former customers.

Picard had rejected claims made by customers that invested indirectly with Madoff through the feeder funds but did not have accounts with Madoff's firm.

Cote said the feeder fund investors knew they were buying "ownership shares" of the funds, and had no property interest in fund assets that were funneled to Madoff.

Even accepting that the feeder funds conspired to advance Madoff's Ponzi scheme, the law "simply does not protect against all cases of alleged dishonesty and fraud," Cote said.

(Reporting by Jonathan Stempel in New York, editing by Gerald E. McCormick)

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