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NEW YORK, June 19 (Reuters) - The trustee seeking money for Bernard Madoff's victims on Friday said they will receive $140 million from a feeder fund that ignored "glaring" red flags that the swindler was running a Ponzi scheme.
Plaza Investments International Ltd will make the payment to end a lawsuit brought by Irving Picard, the trustee liquidating the former Bernard L. Madoff Investment Securities LLC.
The accord would boost to nearly $10.9 billion the sum that Picard has recovered for Madoff customers, who he estimates lost $17.5 billion of principal.
According to settlement papers filed with the U.S. bankruptcy court in Manhattan, Picard will deem valid about $405 million of Plaza's claims against Madoff's former firm.
Plaza, based in the British Virgin Islands, will also be entitled to $198.2 million of "catch-up" distributions, based on sums that the trustee has already paid out.
Picard will retain the first $140 million of this sum under the settlement, which also resolves claims against Plaza's investment manager Notz, Stucki Management (Bermuda) Ltd. The trustee had in 2010 sued the defendants for $235 million.
Friday's settlement requires court approval. A hearing has been scheduled for July 29. Neither defendant admitted wrongdoing.
Picard filed more than 1,000 lawsuits to recoup money from "feeder funds" such as Plaza that sent client cash to Madoff's firm, and former Madoff customers who withdrew more money from the firm than they put in prior to its December 2008 bankruptcy.
The U.S. Supreme Court may announce as soon as next week whether it will hear Picard's appeal of a lower court ruling limiting his ability to recoup payments made to customers more than two years before the bankruptcy.
Madoff, 77, is serving a 150-year prison term.
The case is Picard v. Plaza Investments International Ltd et al, U.S. Bankruptcy Court, Southern District of New York, No. 10-ap-04284. (Reporting by Jonathan Stempel in New York; Editing by Alan Crosby)