Bernard Madoff’s investors could lose $3 billion if the liquidator of the con man’s firm doesn’t succeed in overturning a judge’s ruling by that dismissed much of his $1 billion claim against the owners of the New York Mets.

U.S. District Judge Jed Rakoff on Sept. 27 dismissed nine of 11 causes of action asserted by trustee Irving Picard against trusts and individuals linked to Fred Wilpon and Saul Katz. He said Picard could try to reclaim only two years of withdrawals from the Ponzi scheme.

The ruling would cut Picard’s recoveries from the Mets owners to $386 million, and halve the amount the trustee can take back from all Madoff investors, David Sheehan, a lawyer for Picard, told reporters after a court hearing yesterday.

“The difference for the whole case is about $3 billion,” he said. Under New York State law, the trustee could take back withdrawals over six years, he said.

Picard will first ask Rakoff to approve an appeal to the federal appeals court in New York. The appeals court will then decide whether to review the ruling. Picard, who got a favorable ruling from the appeals court on his formula for compensating investors who lost money, may win again, said Chip Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald PLLC in Louisville, Kentucky, who isn’t involved in the case.

State Law

“There is every chance the Second Circuit will allow the trustee to use state law to pursue claims under the New York time limits,” he said in an e-mail.

Rakoff set a trial date of March 19 for the trustee’s case against the Mets owners, after quizzing both sides yesterday on their plans to bring in expert witnesses. He said he was “skeptical” about the trustee’s desire to bring in an expert on investors’ fiduciary duties -- Picard based his claims for the $1 billion on allegations the Mets owners failed in their duty to probe Madoff’s fraud despite so-called red flags that warned of irregularities.

Rakoff, who said in his ruling, “A securities investor has no inherent duty to inquire about his stockbroker,” told Sheehan the subject was “a matter of law,” not “a matter for experts.” He was also skeptical of listening to an expert on red flags, whom Sheehan proposed bringing, he said.

“I’m inherently skeptical of all experts,” Rakoff said.

Money Raised

Picard said in July he has raised more than $8.6 billion for Madoff investors who lost money, or almost half of the $17.3 billion in principal lost by Madoff customers who filed claims. That includes more than $5 billion tied up in court challenges.

Rakoff set a high standard of proof for the trustee to take back the $700 million in principal he sought from the Mets owners, even if he wins his appeal. Rakoff ruled that Picard must prove the Wilpon group willfully blinded themselves to evidence of Madoff’s fraud. Rakoff said in his decision that the standard was lower for claiming fictitious profits.

Rakoff’s ruling that the trustee can only take back two years of withdrawals was good news for investors facing so- called clawback suits, from the Mets owners’ group to individuals who took more money out of the Ponzi scheme than they put in.

Good News

“For our clients this is very good news, because it knocks the exposure to payments within two years” of the bankruptcy filing by Madoff’s firm in 2008, Jonathan Landers of Milberg LLP said in a phone interview before the hearing yesterday. He is representing investors in more than 25 so-called clawback lawsuits brought by Picard, including some awaiting Rakoff’s attention.

“Five thousand innocent victims of Mr. Picard’s persecution will sleep well tonight for the first time in 2 1/2 years,” Helen Chaitman, a lawyer who represents Madoff investors, said of Rakoff’s ruling in an e-mailed statement.

The trustee’s pending appeal is “a lesson” for those investors, said Nancy Rapoport, a bankruptcy-law professor at the University of Nevada, Las Vegas.

“If something looks too good to be true, investigate further,” she said in an e-mail.

At the hearing, Rakoff directed both sides to file arguments on how Picard should determine how much of the money the Mets owners withdrew was principal and how much profit.

Rakoff also set deadlines for pretrial evidence exchange in the case and fixed a new trial date. The judge said it was fine for Picard to reserve his right to amend his lawsuit against the Mets owners, as Sheehan requested, though it didn’t mean he would consent.

“The whole trial will go differently if the second circuit rules in our favor,” Sheehan told reporters.

The case is: Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).