The U.S. Court of Appeals for the Second Circuit ruled on Feb. 22 that investors whose money ended up in Bernard L. Madoff Investment Securities through so-called "feeder funds" cannot recover their losses from the trustee charged with unwinding Madoff’s Ponzi scheme. Judge Reena Raggi (See Profile), joined by Judges Pierre Leval (See Profile) and Debra Ann Livingston (See Profile), held that the investors were not customers of Madoff’s fund, affirming a ruling last year by Southern District Judge Denise Cote (See Profile). Cote’s decision affirmed a July 2011 opinion by Southern District Bankruptcy Judge Burton Lifland (See Profile) (NYLJ, Jan. 6, 2012).

Raggi said the basic criterion for being a "customer" of a securities broker-dealer is "the entrustment of cash or securities to the broker-dealer for the purposes of trading securities," quoting the circuit’s own 2011 case in a Madoff-related matter, In re Bernard L. Madoff Inv. Sec., 654 F.3d 229, 236. "Appellants fail to satisfy this critical requirement," she wrote in In re Bernard L. Madoff Investment Securities, 12-410-bk. "The record shows that they: (1) had no direct financial relationship with BLMIS, (2) had no property interest in the assets that the Feeder Funds invested with BLMIS, (3) had no securities accounts with BLMIS, (4) lacked control over the Feeder Funds’ investments with BLMIS, and (5) were not identified or otherwise reflected in BLMIS’s books and records."

The ruling affects 17 investors in feeder funds called Spectrum Select and Spectrum Select II. A number of other feeder fund investors that had been involved earlier in the litigation dropped their appeals in January.