The trustee in the case of Ponzi schemer Bernard Madoff (pictured) has settled with feeder fund Tremont Group for $1 billion.
NEW YORK (CNNMoney) -- The court-appointed trustee in the case of Ponzi schemer Bernard Madoff announced that a settlement for $1 billion has been reached with the Tremont Group feeder funds.
The firm of trustee Irving Picard and Tremont Group Holdings, one of the largest feeder fund groups in the Bernard Madoff Ponzi case, said on Thursday that the feeder funds will pay $1 billion into the account that has been established to compensate victims of the largest pyramid scheme in history.
The trustee accused Tremont Group of knowingly participating in a shady deal by investing in Madoff's firm.
"The Tremont Group and related entities were aware -- through warnings in both internal communications and publicly available information -- that BLMIS [Madoff's investment firm] could be a fraud," said Picard in a press release.
A Tremont Group spokesman said the upside to the settlement is that it allows feeder fund investors the chance to recover up to $3 billion lost to Madoff's scheme.
"Tremont is pleased to have negotiated an agreement with the trustee that gives investors in our funds the potential to recover a substantial portion of their losses incurred as a result of Madoff's fraud," said spokesman Montieth Illingworth in a press release.
"We concluded that bringing this matter to a close, with proofs of claim preserved, was the best outcome for investors in our funds," said Illingworth.
The trustee said Tremont Group, based in Rye, N.Y., includes the Rye Select feeder fund. It was not the only fund implicated in the settlement.
Other defendants include Oppenheimer Acquisition Group, which is affiliated with the Oppenheimer group of funds that acquired Tremont Group, as well as Oppenheimer parents MassMutual Holding LLC and Massachusetts Mutual Life Insurance Co.
Picard said the $1 billion settlement means $8.6 billion has now been recovered of the $17.3 billion that was lost to Madoff's scam. This money will be returned to the victims, according to the trustee's firm.
Madoff's long-running scheme fell apart on Dec. 11, 2008, when he was arrested for masterminding a Ponzi scheme. He pleaded guilty about three months later in federal court in Manhattan and was sentenced to 150 years.
More than 16,500 investors have filed claims with the trustee, saying they were victimized by Madoff. The majority of those claims have been rejected, and the majority of those rejections were because the victims had invested in feeder funds, and therefore have no protection.
These claimants were shot down because they're considered "third party" investors who put their money into feeder funds, rather than directly in Madoff's firm.
This detail is essential in getting money back from the seized assets, or in becoming eligible for insurance coverage from the Securities Investor Protection Corp., the organization that restores lost assets to investors burned by bankruptcy or fraud. 
