A U.S. appeals court on Tuesday upheld a method developed by the trustee liquidating Bernard Madoff's firm for determining how to calculate investor losses, handing a defeat to so-called net winners.

The trustee, Irving Picard, has argued that investor losses should be the amount deposited into the Madoff firm less any withdrawals, rather than the amount shown on their account statements.

The 2nd Circuit U.S. Court of Appeals in New York agreed.

Use of the Last Statement Method in this case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations, the court said.

A spokeswoman for Picard said in a statement that the decision is an important step forward for customers with allowed claims.

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

His targets include so-called net winners, investors who withdrew more from their Madoff accounts than they initially deposited.

Picard said last month that he has recovered more than $8.6 billion, or nearly half the approximately $17.3 billion in principal that was lost to Madoff's Ponzi scheme.

ENTIRELY FICTITIOUS

Madoff investors had appealed a decision from March 2010 by U.S. Bankruptcy Judge Burton Lifland who rejected their arguments that their claims be assessed on their November 30 account statements from Bernard L. Madoff Investment Securities LLC.

Lifland ruled that such statements were entirely fictitious and did not reflect the actual securities positions that could be liquidated.

The 2nd Circuit also found that the statements could not be relied upon.

BLMIS customer statements 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, said the court.

Helen Chaitman, an attorney for investors who appealed Lifland's ruling, said in an email that the decision was bad for all investors.

She said the law that establishes procedures for liquidating broker-dealers does not give the trustee in each case the right to decide if and to what extent insurance from the Securities Investor Protection Corporation will be available to innocent investors victimized by dishonest brokers.

The 2nd Circuit's holding will destroy investor confidence in the capital markets because the promise of SIPC insurance is illusory, she said. The message to every American who invests in the stock market is clear: invest at your own risk and assume that SIPC insurance does not exist.

Madoff, 73, is serving a 150-year prison sentence in a North Carolina federal prison after pleading guilty in March 2009.

The case is In re: Bernard L. Madoff Inv. Sec. LLC, 2nd U.S. Circuit Court of Appeals, No.10-2378.

(Reporting by Andrew Longstreth, editing by Dave Zimmerman)