Dec. 30 (Bloomberg) -- The trustee in charge of Bernard Madoff’s investment firm won approval to use $28.1 million out of accounts that may be tapped further to pay back victims of the former money manager’s alleged fraud.

U.S. Bankruptcy Judge Burton Lifland approved the agreement to remove the funds from the Madoff firm’s bank account at a hearing today in Manhattan.

“The estate requires the funding to get to the sale of certain assets, which we hope to bring before your honor in the very near future,” said Richard Bernard, an attorney at Baker & Hostetler representing Irving Picard, the trustee appointed by Securities Investor Protection Corp. to supervise the unwinding of the firm.

The firm collapsed after Madoff, 70, was arrested Dec. 11 and charged with securities fraud. He allegedly told his sons that he ran a $50 billion Ponzi scheme, according to a criminal complaint by the FBI. The firm is liquidating under the SIPC, whose funds cover securities and cash claims of as much as $500,000 per customer, including as much as $100,000 in cash.

The use of the funds won’t diminish those customers’ returns because the trustee’s costs that aren’t covered by funds from the Madoff firm’s estate will be paid by SIPC, according to a statement from the agency and Picard.

‘Satisfying Customer Claims’

“We want to be very clear that to the extent these and other funds are ‘customer property,’ they will be used for satisfying customer claims and not the administrative expenses of the trustee,” according to the statement.

Picard reached a deal with Bank of New York Mellon Corp., which holds the funds, to have them released. Lifland said the court papers outlining the agreement were very basic and asked the lawyer for more information on the accounts.

Bernard, the attorney, said there are more funds and accounts, without being specific. Bank of New York is holding some funds because it may have “set-off rights” on certain claims, he said, adding he was limited in what he could say in open court because of ongoing criminal investigations.

Picard will mail claim forms to customers and creditors of Madoff Securities by Jan. 9, the SIPC said.

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

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

List of Investments

In a Dec. 18 interview, Ira Sorkin, Madoff’s personal defense attorney, said Madoff’s company is cooperating with the government. Madoff met with prosecutors earlier this month, according to people familiar with the case.

A federal judge ordered Madoff Dec. 18 to provide a detailed list of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings to the Securities and Exchange Commission by New Year’s Eve.

Sorkin declined Dec. 27 in an e-mail to say whether a list of Madoff’s assets will be made available to investors.

Lifland last week gave Picard authority to share confidential information, such as proprietary trading programs, with potential buyers of the Madoff firm’s market-maker unit.

Picard is tasked with maximizing assets for the firm as investors that had about $36 billion with Madoff seek the return of their money.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Christopher Scinta in New York at cscinta@bloomberg.net:

Last Updated: December 30, 2008 14:57 EST