By Jonathan Stempel
NEW YORK (Reuters) - A federal judge said the trustee liquidating Bernard Madoff's firm may pursue nearly all of his lawsuit to recoup hundreds of millions of dollars stemming from New York money manager J. Ezra Merkin's ties to the now-imprisoned swindler.
U.S. Bankruptcy Judge Stuart Bernstein in Manhattan said trustee Irving Picard can keep trying to recover $280 million of alleged fraudulent transfers to Ascot Partners LP in the two years prior to Madoff's December 2008 arrest and hold Merkin liable in his former capacity as Ascot's general partner.
Bernstein dismissed a separate claim covering other Ascot transfers.
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Andrew Levander, a lawyer for Merkin, in a statement said he was disappointed with the judge's decision, but "confident that when he hears all of the evidence he will conclude that Mr. Merkin was duped by Madoff and never even remotely suspected that Madoff was operating a Ponzi scheme."
A lawyer for Ascot's receiver did not immediately respond to requests for comment. A lawyer for Picard declined to comment.
Merkin once ran "feeder funds" that sent client money to Bernard L. Madoff Investment Securities LLC.
Picard accused him of doing this and generating large fees, despite knowing Madoff was a fraud.
Lawyers for Merkin countered that the money manager and his family lost about $110 million in Madoff's fraud, and that Merkin did not willfully blind himself to Madoff's failure to actually trade securities for customers.
In Monday's decision, Bernstein said the "most compelling piece of evidence" offered by Picard that Merkin turned a blind eye to Madoff's fraud was Merkin's warning to colleagues about signs of fraud reflected in a Ponzi scheme exposed in 2005 at Connecticut's Bayou Group.
"Merkin knew that several of the red flags he identified applied to BLMIS, but there is no evidence that he did anything to confirm that BLMIS was a legitimate operation and not a Ponzi scheme like Bayou," Bernstein wrote.
"Despite the knowledge that Madoff was likely operating a fraudulent enterprise," Bernstein added, "the evidence supports the inference that Merkin did nothing to allay his suspicions."
Bernstein had narrowed Picard's lawsuit in 2014. The next year, Picard reached separate settlements with two other Merkin funds, Ariel and Gabriel Capital.
Merkin also reached a $410 million settlement in 2012 with the New York attorney general's office.
Madoff, 78, is serving a 150-year prison term.
The case is Picard v. Merkin et al, U.S. Bankruptcy Court, Southern District of New York, No. 09-ap-01182.
(Reporting by Jonathan Stempel in New York; Editing by Cynthia Osterman)