A judge allowed disgraced investor Bernard Madoff to remain free on bail Monday, rejecting an attempt by prosecutors to send him to jail for mailing more than $1 million in jewelry to family and friends over the holidays.

The decision means Madoff will avoid having to leave the comfort of his $7 million penthouse and await trial in a cramped jail cell with nothing but bunkbeds, a sink and toilet. Madoff will remain under house arrest and under the constant watch of security guards.

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The ruling further outraged investors who have been clamoring for Madoff to be sent to jail for allegedly carrying out the largest financial fraud in history. They find it shocking that Madoff is free on bail, despite distributing assets that could be used to help repay investors who lost billions.

Stephen A. Weiss, a lawyer for several dozen Madoff investors, said there "are people on the street who are very unhappy" with the ruling.

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"There is a thirst for blood that transcends just those who have been victimized. There is a feeling ... that folks like Bernard Madoff get a different brand of justice than the guy in the street," Weiss said.

The judge acknowledged the huge public interest in the case, but said that sound legal considerations must take priority. He said that prosecutors failed to make a good enough argument that keeping Madoff free on bail represents an economic harm to the community.

"The issue at this stage of the criminal proceedings is not whether Madoff has been charged in perhaps the largest Ponzi scheme ever, not whether Madoff's alleged actions should result in his widespread disapprobation by the public, nor even what is appropriate punishment after conviction," Magistrate Judge Ronald L. Ellis wrote.

"The government fails to provide sufficient evidence that any potential future dissemination of Madoff's assets would rise to the level of an economic harm," the judge wrote.

The anxiously awaited bail decision does put additional restrictions on Madoff, including forcing him to come up with a list of items at his apartment and allowing a security firm to check on the items. The security company will also be allowed to search all outgoing mail from Madoff to ensure that no property has been transferred.

"It is highly suspect that a man as sophisticated as Madoff appears to be did not pause to consider the possible ramifications of this proposed course of action on his release conditions," the judge said. "Given Madoff's failing in this regard, it is appropriate that his ability to transfer property be restricted as completely as possible."

The decision can be appealed, but prosecutors have not said if they will do so. Yusill Scribner, a spokeswoman for prosecutors, said the government had no comment on the ruling.

Defense lawyer Ira Sorkin says the bail opinion "speaks for itself and we intend to comply with the judge's order." Sorkin has said the gifts were an innocent mistake and said he is neither a danger to the community nor a threat to flee.

In a separate decision, another magistrate signed off on an extension for the deadline to indict Madoff until Feb. 11. That means Madoff will remain free for at least another month, provided he does not violate conditions of the bail.

The judge also noted that it is quite common for defendants to be granted bail, even those charged with violent offense.

"Even for the most serious offense, more than half of all defendants are released on bail conditions, including 51 percent for violent offenses, 57 percent for property offenses and 73 percent for fraud."

In another development, a bankruptcy judge ruled that a trustee can issue subpoenas to investigate the flow of money in the investment fund run by Madoff. U.S. Bankruptcy Judge Burton Lifland gave permission to the trustee, Irving Picard, to subpoena witnesses. The trustee is overseeing the liquidation of the fund for the bankruptcy court.

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