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New York Attorney General Andrew Cuomo filed a lawsuit Tuesday against Bank of New York Mellon’s investment advising unit, claiming it defrauded clients and cost them more than $277 million in Bernard Madoff’s Ponzi scheme.

The suit, which also names two former senior officers, said internal e-mails dating back to 1997 reveal that Ivy Asset Management and former chief executive Lawrence Simon and former chief investment officer Howard Wohl neglected to tell their clients "damaging financial information about Madoff" that they learned while conducting due diligence. It alleges that they did so to continue to bring in advisory fees.

In December 1998, Wohl suggested to Simon that Ivy withdraw all of the funds they managed in Madoff, including its own money. But Simon countered that Ivy’s investment amounted to less than $5 million, but their clients had around $190 million tied up.

"Are we prepared to take all the chips off the table, have assets deceased by over $300 million and our overall fees reduced by $1.6 million or more, and, one wonders if we ever ‘escape’ the legal issue of being the asset allocater and introducer, even if we terminate all Madoff related relationships?" asked Simon in an e-mail responding to Wohl.

Despite the concerns, Ivy continued wrote to clients that it has "no reason to believe this is anything improper in the Madoff operation." As a result, the advisor raked in over $40 million from clients with large Madoff investments between 1998 and 2008, according to the suit.

"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," Cuomo said in a statement. "They shamelessly profited off of their own clients’ impending misfortune and we are holding them accountable for their actions."

But Wohl’s spokesman, Jim Fingeroth, said the allegations against Wohl will not hold up when all the e-mails and relevant facts are presented in their entirety.

He said Wohl raised concerns about Madoff and urged clients to decrease their positions in Madoff investments, but the "fund managers rejected his counsel, and their investors suffered significantly as a result."

Larry Simon’s lawyer, Paul Shechtman, said Simon also advised clients to reduce their exposure to Madoff, but "that sound advice was consistently ignored."

Shechtman shared with CNNMoney several letters Simon sent to clients, including one in 1997 that recommended "more diversification, particularly with regard to the Madoff account, which represents over 40% of the Fund’s capital."

Simon’s explanation was that "we have not been able to assure ourselves as to how Bernie is able to successfully trade as much money as we believe he manages…"

Ivy’s chief restructuring officer, Douglas Squasoni, said the fund has been cooperating with the Attorney General’s investigation and that "a limited number of clients from a legacy non-discretionary advisory business of Ivy were among Bernie Madoff’s victims."

"These non-discretionary advisory clients were primarily professional investment advisors who chose to maintain Madoff exposure for their own clients," Squasoni said. "Ivy informed its clients that it had questions about Madoff that it could not answer and recommended to its clients that they reduce their exposure to Madoff."

He added that "non-discretionary advisory business" is no longer in operation and Ivy executives involved in it left the company in 2008.

In addition to hundreds of investors, the lawsuit alleges that 76% of upstate New York pension and welfare plans were victims of the fraud, losing more than $150 million in retirement funding.

The suit, filed in the New York State Supreme Court in Manhattan, seeks payment of restitution, damages and penalties from Ivy, Simon and Wohl, and repayment of the amount in fees that Ivy received. It also intends to bar Simon and Wohl from acting as investment advisors.  

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