Ivy Investment Management has been made subject to charges from New York's attorney general office, which published a 50-page civil complaint against the BNY Mellon unit.
It is alleged that Ivy Investment Management decided in 1998 that it should no longer put any of it clients' money with Madoff, after concluding that he was not investing the funds in the way they were advertised to investors, reports the Financial Times.
However, the company is then said to have decided it did not wish to lose its fee incomes from clients with investments with Madoff and as a result took no action to inform investors of its concerns.
Between 1998 and 2008, Ivy Asset Management made around $40 million in client fees tied to Madoff vehicles, the complaint alleges.
When Madoff's multi-billion dollar Ponzi scheme was uncovered that year, Ivy Asset Management customers lost $227 million between them.
Andrew Cuomo, New York's attorney general, said: "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.
"They shamelessly profited off of their own clients' impending misfortune and we are holding them accountable for their actions."
BNY Mellon, which took over Ivy in 2000, said it intends to defend itself against the allegations and stated that most of those with money in the Madoff vehicles were professional investors who had enough experience to make their own decisions.
In March, a court in Luxembourg ruled that victims of Madoff who had money in the LuxAlpha investment fund could not sue UBS.
The bank had helped set up the fund but the court told investors who were aiming to make claims against UBS for neglecting its management duties that they should instead seek redress via the liquidators of LuxAlpha.
By Tony Aynsley