The trustee seeking money for victims of Bernard Madoff's fraud reached a more than $1 billion settlement with Tremont Group Holdings Inc, one of the largest feeders of customer funds into the Ponzi scheme.

Thursday's cash settlement raises the sum that trustee Irving Picard said he has recovered for Madoff victims to $8.6 billion, or half the $17.3 billion lost by former customers of Bernard L. Madoff Investment Securities LLC who filed claims.

Picard has said Rye, New York-based Tremont, part of Massachusetts Mutual Life Insurance Co, was the second-largest feeder fund group that funneled money to Madoff, after the Fairfield Greenwich Group.

He had first sued Tremont in December. In an amended complaint filed on February 28 and seeking $2.1 billion, he accused Tremont of missing red flags and blindly relying on Madoff to drive their funds' returns for nearly 15 years.

The Tremont settlement covers more than one dozen U.S. and foreign investment funds and their affiliates.

Combined with earlier accords, it sends a strong message that the financial community cannot deliberately ignore indicia of fraud, David Sheehan, a lawyer for Picard, said in a statement.

Both are partners at the law firm Baker & Hostetler.

As part of the accord, once the more than $1 billion sum is released from escrow, Picard will allow in excess of $3 billion of customer claims related to the Rye Select and Tremont funds against the Madoff firm's bankruptcy estate.

The accord gives Tremont customers a chance to recover a substantial portion of their losses, spokesman Montieth Illingworth said in a statement. Bringing this matter to a close, with proofs of claim preserved, was the best outcome.

Madoff, 73, pleaded guilty in March 2009, and is serving a 150-year prison sentence in North Carolina.

WILLFUL IGNORANCE

Tremont and its now-defunct Rye Investment Management unit lost more than $3 billion of client money sent to Madoff's firm, whose liquidation is being overseen by Picard.

Picard had alleged in his complaint that Tremont earned as much as $240 million in fees tied to Madoff, including more than $180 million in the six years before the fraud was uncovered in December 2008.

If the defendants were ignorant of the fraud, it was because they failed in their due diligence and investment management obligations, Picard said. They quite simply did not want to know, remaining willfully ignorant in order to maximize their own profits and serve their own self-interest.

Tremont had in February reached a $100 million settlement in separate litigation with former Madoff investors.

Picard has filed roughly 1,050 lawsuits seeking more than $103 billion from banks, feeder funds and others he said aided or improperly benefited from Madoff's fraud.

Much of the $8.6 billion recovered so far is tied up in litigation by customers challenging Picard's authority to act on their behalf and the actual amounts he is recovering.

On July 12, U.S. Bankruptcy Judge Burton Lifland, who oversees the Madoff firm liquidation, approved an initial $272 million distribution relating to 1,224 accounts, or about $222,551 per account.

The case is Picard v. Tremont Group Holdings Inc et al, U.S. Bankruptcy Court, Southern District of New York, No. 10-ap-05310.

(Reporting by Jonathan Stempel, editing by Gerald E. McCormick and Maureen Bavdek)

Settlement