A ruling in a bankruptcy case in a federal court in New York involving fraudster Bernard Madoff and the Koch brothers, U.S. billionaires known for funding conservative causes, has put some offshore funds out of reach of trustees trying to recover funds.

Judge Stuart Bernstein’s ruling, issued Monday, means Charles and David Koch’s company, banks and fund managers will get to keep an estimated

US$2 billion in profits from Madoff’s Ponzi scheme kept in offshore accounts.

Foreign bankruptcy proceedings, the judge said, blocked the U.S. trustee from being able to use the money to pay back Madoff’s U.S. victims. The trustee can appeal the decision to the U.S. District Court.

In an email, Appleby (Cayman) partner Jeremy Walton said, “This is a sensible and welcome decision, confirming the U.S. Bankruptcy Court’s deference to foreign legal proceedings on grounds of international comity: the various offshore Madoff feeder funds are in liquidation under the supervision of their respective courts [in Bermuda, in the BVI and in Cayman], they have their own laws and rules governing the recovery of payments made to redeeming investors, and those rules have been the subject of litigation [some of which is still ongoing] in each of those jurisdictions.

Jacques Scott “This decision will allow those cases to run their course unimpeded for the benefit of the various offshore liquidation estates.”

Feeder funds typically involve a “master fund” in the U.S. and an offshore “feeder fund.” Investors put their money in the feeder fund which, in turn, invests in the U.S. master fund.

The master fund invests in the market.

Credit Suisse, UBS AG and HSBC are also listed in court papers as having proceeds from Madoff’s scheme kept overseas

Irving Picard, the trustee working to recover money for Madoff’s victims, argued that the feeder funds operated in the United States despite being registered overseas.

According to the New York Times, Koch Industries invested in Madoff’s funds but pulled out US$21.5 million before the Ponzi scheme collapsed.

Madoff created what is widely recognized as the biggest Ponzi scheme in history, using a string of new investors to pay off older investors.

Madoff’s investment funds involved billions of dollars in fraudulent investments.

Madoff pleaded guilty in March 2009 to 11 felonies and is serving a 150-year prison sentence.

The trustee for the victims has recovered about US$11.5 billion but still has roughly US$6 billion in claims outstanding.

The Times reports the trustee has recovered several large sums from the profits, including US$5 billion from the estate of a Florida investor and US$1 billion from Tremont Group.

The Kochs’s money in this case went to a British Virgin Islands fund and then to a Koch company based in London.