Some of Madoff’s investors took money out of the scheme — not knowing it was a scheme. Now it seems those people might be out of luck — and will have to pay the money back, says Reuters.

A bankruptcy judge has decided that the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC is allowed to use a “money in, money out” method to determine who should get what. This means that if you invested but took more out than you put in— you might have to give that money back.

This is obviously not too popular with some of the Madoff victims.

In a written opinion on Monday, U.S. Bankruptcy Court Judge Burton Lifland agreed with Picard, a New York lawyer appointed by the court, despite what he called compelling arguments by investors.

“Equity is achieved in this case by employing the trustee’s method, which looks solely to deposits and withdrawals that in reality occurred,” Lifland said in a written ruling. “To the extent possible, principal will rightly be returned to Net Losers rather than unjustly rewarded to Net Winners under the guise of profits.

“In this way, the Net Investment Method brings the greatest number of investors closest to their positions prior to Madoff’s scheme in an effort to make them whole,” he said.

Madoff investors have previously said they would appeal any decision made in favor of applying his method.

They argue that victims could not have known they would not be entitled to $500,000 – the maximum allowed under the Securities Investor Protection Act to a single investor.

“Unless and until this decision is reversed, no American who invests in the stock market with the hope of retiring on his savings, has any protection against a dishonest broker,” said Helen Davis Chaitman, attorney for hundreds of victims.

Using his formula, Picard has already begun validating claims and paying fleeced investors. Still, his methodology means that some investors may receive nothing and others who may have withdrawn fictitious profits could be forced to pay back the trustee.

U.S. judge backs Madoff trustee claims method [Reuters]

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