The trustee seeking money for Bernard Madoff's victims announced a $1 billion settlement with liquidators for three feeder funds tied to Fairfield Greenwich Group, allowing higher payouts to the swindler's former customers.

The trustee, Irving Picard, also agreed not to pursue $3.8 billion he said the Fairfield funds withdrew in the last six years of Madoff's fraud, Picard and the funds' liquidators said in separate statements. Picard cited the funds' limited ability to pay cash toward any judgment for that decision.

Fairfield Greenwich had been the largest feeder of cash to Madoff's Ponzi scheme.

Monday's settlement reduces claims that the liquidators have against a fund that Picard administers for former Madoff customers. Claims by the largest fund, Fairfield Sentry Ltd, will be reduced to $230 million from $1.2 billion, he said.

Picard said the liquidators, Kenneth Krys and Joanna Lau, also agreed to pay $70 million to a fund for former customers of Bernard L. Madoff Investment Securities LLC.

The liquidators also agreed to let Picard pursue claims against Fairfield owners and management, with 15 percent of recoveries above $200 million going to investors in the Fairfield Sentry, Fairfield Sigma and Fairfield Lambda funds.

Picard has been trying to stop other parties from pursuing lawsuits to recover money for Madoff victims, saying these efforts are at cross-purposes with his own.

The trustee is confident that combining forces with the joint liquidators enables the potential recovery of billions in additional dollars for the ultimate benefit of the BLMIS customer fund, Picard's lawyer David Sheehan said in a statement. Both are partners at Baker & Hostetler LLP.

Monday's settlement requires approval by U.S. Bankruptcy Judge Burton Lifland in New York and a court in the British Virgin Islands, where the now-defunct Fairfield funds were based. A hearing before Lifland is set for June 7.

EX-SEC GENERAL COUNSEL REJOINS LAW FIRM

The settlement was announced hours after Cleary Gottlieb Steen & Hamilton LLP said David Becker, a former U.S. Securities and Exchange Commission general counsel facing scrutiny over his work on Madoff matters, would rejoin the law firm's Washington, D.C. office as a partner.

Becker, 63, has been scrutinized by Congress and SEC Inspector General David Kotz over why he was allowed to help the regulator work on Madoff matters, given that his mother once had an account with Madoff's firm. Picard has sued Becker and his brothers to recover $1.5 million of alleged fictitious profit. Becker has said he had proper SEC clearance.

Last week, Picard asked Lifland for permission to put $2.6 billion of recovered money into the customer fund and pay an initial $272 million to customers whose claims he approved.

The $272 million is in addition to the $795 million that the federally chartered Securities Investor Protection Corp has mostly advanced to cover victims with valid claims.

Picard has said he has recovered more than $7.6 billion, or 44 percent of the $17.3 billion that former Madoff customers lost, but that most cannot be paid out because of litigation.

The trustee has filed more than 1,000 lawsuits to recover about $100 billion, including against large banks such as JPMorgan Chase & Co and HSBC Holdings Plc .

Madoff, 73, was arrested on December 11, 2008. He is serving a 150-year sentence in a North Carolina federal prison.

The case is In re: Bernard L. Madoff Investment Securities LLC, U.S. Bankruptcy Court, Southern District of New York, No. 08-01789.

(Reporting by Jonathan Stempel in New York; additional reporting by Sarah N. Lynch; editing by Andre Grenon, Bernard Orr)