New York Attorney General Andrew Cuomo sued a Bank of New York Mellon Corp unit and two former senior officers on Tuesday, claiming they kept clients in the dark about investing with Bernard Madoff.

Citing internal e-mails, the lawsuit claims that Ivy Asset Management LLC knew as early as 1997 that putting money with Madoff's investment firm was too risky, and that Madoff was not investing client funds as advertised.

Nevertheless Ivy did not disclose this to clients for fear of losing millions of dollars of advisory fees. The lawsuit also names Ivy's former Chief Executive Lawrence Simon and former Chief Investment Officer Howard Wohl as defendants.

The lawsuit said Ivy clients lost more than $227 million from Madoff's Ponzi scheme, including more than $150 million of losses at 76 union pension and welfare funds.

Ivy collected more than $40 million of fees from 1998 to 2008 to advise and provide due diligence for clients with large Madoff investments, the lawsuit said.

Ivy and its former co-principals saw the trouble with Madoff coming around the bend, Cuomo said in a statement. Instead of guiding their clients through the financial waters, they sold them down the river.

In one January 2003 e-mail, according to the complaint, Wohl wrote Madoff (NOT!) in urging that the now-convicted swindler not be recommended as a manager to a prospective client.

Ivy spokesman James Badenhausen and Simon's lawyer Paul Shechtman did not immediately return requests for a comment. Neither Wohl nor a representative could immediately be reached for a comment.

Madoff,72, pleaded guilty to 11 counts of securities and mail fraud, perjury and lying to the U.S. Securities and Exchange Commission in March 2009.

He is serving a 150-year prison sentence after confessing to running what prosecutors called a $65 billion Ponzi scheme, which was uncovered in December 2008.

IVY BEING WOUND DOWN

The lawsuit seeks restitution, the disgorgement of all fees, punitive damages, and an order barring Simon and Wohl from acting as investment advisers.

The Ponzi scheme caused losses for customers who had accounts directly with Bernard L. Madoff Investment Securities LLC, and customers who invested indirectly through feeder funds.

Bank of New York Mellon has owned Ivy since 2000, but is liquidating the unit in a process expected to take a couple of years. Ivy oversaw $5 billion of client assets at year end.

In a Friday regulatory filing, Bank of New York Mellon said Ivy had been in talks with Cuomo's office to avert a lawsuit, and that Ivy had not had any funds-of-funds investments with Madoff since 2000.

The case is Cuomo v. Ivy Asset Management LLC et al, New York State Supreme Court, New York County.

(Reporting by Jonathan Stempel; Additional reporting by Elinor Comlay, Joan Gralla and Grant McCool; Editing by Gerald E. McCormick, Leslie Gevirtz)

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