Madoff trustee sues Herald Fund

By Martha Graybow

NEW YORK (Reuters) - The trustee hunting for assets linked to the Bernard Madoff fraud on Tuesday sued an investment fund distributed by Austria's Bank Medici and the fund's custodian, a unit of HSBC Holdings (HSBA.L), for $578 million (352 million pounds).

The case is the latest "clawback" lawsuit against a large Madoff investor. Court-appointed trustee Irving Picard is seeking the return of money withdrawn from Madoff's investment operation for the benefit of the Herald Fund, mainly in the few months before the swindler's December 2008 arrest.

The defendants are not accused of knowing about Madoff's vast fraud, but the trustee contends they ignored red flags and should have realized that the disgraced financier's returns were too good to be true.

Medici, now known as 20.20 Medici after giving up its banking licence, was a distributor or manager of several funds that had channelled at least $3.3 billion to Madoff.

The Herald Fund named in the trustee's lawsuit is also known as the Herald US fund, for which Medici was a distributor. Medici was investment manager of the related fund Herald Lux, which was not a target of the trustee's lawsuit.

Medici has called itself one of the biggest victims of the fraud run by the former Nasdaq market chairman, who entered prison in North Carolina on Tuesday to begin his effective life sentence for operating a $65 billion Ponzi scheme.

A Medici spokeswoman could not immediately be reached for comment on Tuesday. Medici previously has been sued by investors in Austria and the United States over their losses tied to the Madoff fraud.

The trustee's lawsuit, filed in U.S. Bankruptcy Court in Manhattan, says the funds transferred by Madoff for the Herald Fund's benefit should be returned to help compensate other Madoff clients. It cites transfers including $113 million in October 2008 and $423 million a month later.