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.

Madoff investors had appealed a decision from March 2009 by U.S. Bankruptcy Judge Burton Lifland who rejected their arguments that their claims be assessed on their Nov. 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.

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.