Dec. 30 (Bloomberg) -- Bernard Madoff, the financial adviser who allegedly admitted to running a $50 billion fraud, was sued by three New York investors who say he should be barred from distributing money to family and friends.

Madoff, 70, should have his assets permanently frozen and be prevented from continuing the alleged fraud, according to a complaint filed today in Manhattan federal court by investors seeking a total of about $2 million in damages.

The investors seek to “halt the fraud and prevent the defendant from unfairly distributing the remaining assets in an unfair and inequitable manner to employees, friends and relatives,” the investors said in the complaint. They didn’t give details about how the money is allegedly being distributed after a federal judge froze Madoff’s assets earlier this month.

The complaint was filed by Anthony, Maria and Toni Sciremammano, all residents of Massapequa Park, New York. The trio started investing with Madoff in 1995 and had a total of about $2 million invested as of September, they said.

Madoff’s firm, New York-based Bernard L. Madoff Investment Securities LLC, began liquidating after his Dec. 11 arrest for securities fraud. Madoff, under house arrest in his Manhattan apartment, faces as much as 10 years in prison and a $5 million fine if convicted.

Trustee in Charge

The trustee in charge of Madoff’s investment firm, which is liquidating in bankruptcy court, won a judge’s approval today to use $28.1 million out of the firm’s accounts, which may be tapped further to pay back victims of the alleged fraud.

In a parallel civil case against Madoff, brought by U.S. regulators, a judge ordered Madoff to provide to the Securities and Exchange Commission a detailed list of his assets by tomorrow, although there’s no guarantee the list will be made public. A catalog of Madoff’s assets may reveal targets for angry investors including hedge funds and charities seeking the return of their funds.

Several investors earlier filed proposed class-action, or group, lawsuits against Madoff and his firm following FBI allegations that he told his sons the business was “one big lie.”

Investment firms that did business with Madoff have also been sued. New York University said it lost $24 million in investments managed by Madoff, according to a lawsuit filed Dec. 23 in New York state court in Manhattan against fund manager J. Ezra Merkin and his Gabriel Capital LP fund and Ariel Fund Ltd.

Market Maker

Madoff’s firm was the 23rd-largest market maker on Nasdaq in October, handling an average of about 50 million shares a day, according to exchange data. It took orders from online brokers for some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.

Federal prosecutors alleged Madoff engaged in a classic Ponzi scheme in which he would pay off old investors with the money of new investors.

His lawyer, Ira Sorkin, didn’t return a call seeking comment. In a Dec. 18 interview, Sorkin said Madoff’s company is cooperating with the government. Madoff met with prosecutors earlier this month, according to people familiar with the case.

Madoff, who hasn’t formally responded to the securities fraud charge, is due in court Jan. 12, unless he is indicted before then. Prosecutors and defense lawyers may also agree to postpone the court date.

The investors’ lawyer, J. Garth Foley of New York, didn’t immediately return a call for comment. Directory assistance couldn’t locate the plaintiffs.

The case is Anthony Sciremammano v. Bernard L. Madoff, 08- cv-11332, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: December 30, 2008 18:11 EST