A court case getting under way in New York may offer some hope of compensation for British and European investors who have lost millions of pounds backing Bernard Madoff's allegedly fraudulent scheme.

A Manhattan judge is examining evidence for a hearing that will tomorrow start examining whether the majority of Madoff's victims who invested through feeder funds are eligible for up to $500,000 (£345,000) each from an investors' compensation scheme.

The funds were the intermediaries Madoff used to channel investors into his alleged $50 billion swindle. Although registered in the US, they were particularly active in recruiting British and Continental investors from bases in Mayfair and Geneva.

Judge Louis Stanton, who is presiding over civil claims filed against Madoff, says he may consider extending protection under the Securities Investor Protection Corporation. Created by Congress and funded by the securities industry, the SIPC is usually limited to those who made direct investments, rather than through intermediaries.

Lawyers say protection offered by the scheme to Madoff investors is unclear.In a letter to the court, indirect investor Daniel Goldenson urged Judge Stanton to consider the devastating losses by many who had used feeder funds.

"Please consider broadening access to SIPC for all individuals who lost so much or all of their life savings," he said. "This was an intertwined system of deceit and theft within our financial markets that has left retirees like ourselves having to sell our homes."

Goldenson and his wife lost $2.5 million through investments in the Ascot Fund, a Madoff feeder run by the chairman of motor financing company GMAC Financial Services, Ezra Merkin. One of Merkin's funds was also responsible for placing investments with Madoff on behalf of Swiss private bank Union Bancaire Privée, which had about $700 million in Madoff-related investments.

Judge Stanton acknowledged the letter but said these were the early stages of the case with complex legal issues. SIPC president Stephen Harbeck said he could not predict whether the judge would broaden the protection to feeder-fund clients, but added that affected investors should submit their claims.