The 2nd U.S. Circuit Court of Appeals concluded that a trustee's calculation of the investors' losses was "legally sound" and that a bankruptcy court was correct when it rejected arguments from lawyers for investors who said their clients should receive more than what they initially gave to Madoff.
A three-judge panel of the Manhattan court said customer statements showing that initial investments of about $17.3 billion had ballooned to more than $65 billion "reflect impossible transactions and the trustee is not obligated to step into the shoes of the defrauder or treat the customer statements as reflections of reality."
Helen Davis Chaitman, who argued the case for investors, said the 2nd Circuit ruling "will destroy investor confidence in the capital markets" because investors will no longer trust that they will recover their money if they are cheated by dishonest brokers.
"The message to every American who invests in the stock market is clear: invest at your own risk" because insurance cannot be relied upon, she said in a statement.
Amanda Remus, a spokeswoman for trustee Irving Picard, called the ruling "an important step forward for customers with allowed claims."
"We have maintained all along that our definition of net equity - which is supported by longstanding precedents in bankruptcy and securities laws - is the fairest approach to the determination of claims, and we hope that the court's decision can be the final word on the issue," she said in a statement.
Madoff had told thousands of investors just before his December 2008 arrest that their investments had more than tripled.
Prosecutors said it was actually a Ponzi scheme and promised investments were not made.
"As is true of all Ponzi schemes ... Madoff used the investments of new and existing customers to fund withdrawals of principal and supposed profit made by other customers," the 2nd Circuit said. "Madoff did not actually execute trades with investor funds, so these funds were never exposed to the uncertainties and fluctuations of the securities market."
The court said that Picard, responsible under the Securities Investor Protection Act for sorting out decades of fraud, had chosen a method for carrying out his responsibilities that "is legally sound under the language of the statute."
It added that letting investors claim the amount that was on their last financial statements from Madoff "would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations."
In a statement, Orlan Johnson, board chairman of the Securities Investor Protection Corp., which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, said the ruling confirms that Picard's method of calculating losses "does the greatest good for the greatest number of Madoff victims."
So far, SIPC has advanced $780 million to Picard to be distributed to investors.
Picard's process left many investors angry at Picard, particularly those who had recovered and spent more than their original investment based on expectations that they had much more money than they actually had.
Madoff is serving a 150-year sentence after admitting the massive fraud.