Recovered Madoff money blocked by appeals

NEW YORK (CNNMoney) -- Getting the money back from Bernard Madoff is only half the battle for Irving Picard, the trustee in charge of recovering assets stolen in the world's most notorious Ponzi scheme.

Picard, appointed as trustee by the U.S. Bankruptcy Court in New York, plans to file a request to the court by the end of the month to start disseminating money from stolen assets back to the victims. However, the lion's share of the recovered money is being blocked by appeals from thousands of investors who consider themselves victims, but were excluded by the trustee.

The trustee has recognized 2,408 claims, totaling nearly $6.9 billion, as legitimate. Although the trustee has already paid out $793 million from the insurance fund set up by the Securities Investor Protection Corporation, he has yet to dole out any of the $10 billion recovered from Madoff's stolen assets.

That's because of the appeals related to the $7.2 billion Picower estate, which was surrendered to the trustee and federal authorities last Dec. 17. Barbara Picower inherited the estate from her husband Jeffry, who died of a heart attack in 2009.

The trustee considers Jeffry Picower to have been greatest beneficiary of the Ponzi scheme, having withdrawn $7.8 billion from Madoff's firm since the 1970s, even though he only invested $619 million. Barbara Picower agreed to hand over the difference, some $7.2 billion, to give back to the victims.

The majority of the 16,518 investors who filed Madoff claims with the trustee were rejected. More than 10,000 of those investors had their money in feeder funds, rather than having given it directly to Madoff, and were therefore excluded from SIPC protection.

Thousands of other investors were rejected -- and some of them have also been sued by Picard -- for allegedly profiting off the Ponzi scheme, even if they didn't know it was a scheme.

James Beasley of the law firm Beasley Hauser Kramer & Galardi in West Palm Beach, Fla., is representing some 3,000 Madoff investors whose claims were rejected by the trustee because he considers them "net winners." These investors are accused of having withdrawn what they were told were profits from their investments - like skimming the interest off a legitimate bank account.

But many of the so-called "winners" identify themselves as victims who were wiped out by Madoff, since the principal from which any profits were taken had vanished.

"The bankruptcy court, at the request of the trustee, says we cannot pursue the Picowers, for any reason," said Beasley. "We think that is completely wrong."

The trustee's decision to treat some investors as victims deserving of compensation, while excluding or suing others for profiting from the alleged Ponzi scheme, is the basis for Beasley's appeal.

Some of these victims were living off remittances from Madoff's firm and they believed his fraudulent statements claiming that their accounts were substantial. They lived accordingly, and had nothing left when the Ponzi scheme unraveled.

Beasley said his lead plaintiff, school teacher Adele Fox "took out a portion of what she thought was the income that Madoff was generating for [her] every year" and was left "penniless."

Beasley sued the Picower estate on behalf of Fox and other victims last year, but their suit was blocked by the bankruptcy court as part of the trustee's settlement agreement with Barbara Picower. Beasley has appealed the decision with the U.S. District Court in New York.

"We have legitimate claims," said Beasley.

Beasley also said his clients should also be reimbursed for the taxes that they paid on their accounts over the years. Even if the account statements from Madoff's firm were fictional, the taxes that investors paid were real, he said.

The trustee has sued about 1,000 people for approximately $100 billion. Many of these defendants have been designated, as "winners." The defendants include financial firms UBS, HSBC and JPMorgan Chase, and also high-profile individuals such as the owners of the New York Mets and members of the Madoff family.

Meanwhile, Madoff is languishing in a federal prison in Butner, N.C. He was sentenced to 150 years after pleading guilty, in March 2009.