The suit filed Wednesday alleges the firm under former Chief Executive Officer Lawrence Simon and former Chief Investment Officer Howard Wohl "deliberately" kept secret "damaging information about Madoff so Ivy could bring in millions in advisory fees," the attorney general's office said in a statement.
Madoff is serving a 150-year prison sentence for conducting a Ponzi scheme that lost an estimated $65 billion in investor funds.
The lawsuit charges Ivy learned Madoff was "not investing funds as advertised."
However, the statement said, between 1998 and 2008, the firm earned more than $40 million in fees related to Madoff investments.
"Ivy and its former co-principals saw the trouble with Madoff coming around the bend, but instead of guiding their clients through the financial waters, they sold them down the river," Attorney General Andrew Cuomo said.
The lawsuit says Ivy learned in 1997 "there were not enough options to support Madoff's purported trading strategy."
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