Massachusetts’ securities regulators sued Fairfield Greenwich Group, a major “feeder fund” for Bernard Madoff’s Ponzi scheme, accusing the hedge fund of lying to investors and not exercising enough diligence over investments that were worth billions of dollars.

The most damning accusations in the civil charges filed on Wednesday by Massachusetts Secretary of State William Galvin may be that Madoff prepared executives at Fairfield Greenwich in 2005 on how to answer federal securities regulators’ questions about him after a whistle-blower told officials he suspected Madoff was running a fraud.

“Obviously, first of all, this conversation never took place, Mark, OK?”, Madoff told Fairfield Greenwich General Counsel Mark McKeefrey and Chief Risk Officer Amit Vijayvergiya, according to a transcript Galvin included in his complaint.

At one point on the call Madoff tells them: “I mean, the idea is that it’s, is that we’re not the one that’s making the decision how much to, I mean, you know, you know, we’re not the one that’s operating the fraud.”

“When someone begins a conversation by saying these words, that is slang for saying I am about to ask you to help me deceive someone. That at the very least should have put them on notice,” Galvin said in an interview.

The civil charges against Fairfield Greenwich mark the first action against one of Madoff’s so-called “feeder funds”.

It is the first time the public has been given an indication of how Madoff, in his own words, interacted with the hedge funds that poured billions into the scheme.

“This turns the page to a new chapter in the Madoff matter, and if there is any hope of getting any return for Madoff victims, we have to look at the entities that brought people to him,” Galvin said.

Fairfield Greenwich once managed $14 billion.

SEE NO EVIL?

Galvin accused Fairfield Greenwich executives of turning a blind eye to the fraud and abandoning their fiduciary responsibility to investors because the company earned hundreds of millions of dollars in fees through its relationship with Madoff.

The complaint said Fairfield Greenwich had not carefully evaluated Madoff’s investment model, did not visit Madoff often and had not questioned how a one-man accounting firm, Friehling and Horowitz, could handle all of Madoff’s assets.

It said that Fairfield principals “matter-of-factly discussed amongst themselves the risk that Madoff would ‘blow up,’ but did not disclose that risk to investors.”

Fairfield Greenwich pumped $14.8 million into Madoff’s business only days before the former Nasdaq stock market chairman was arrested last December.

Madoff, 70, pleaded guilty on March 12 to orchestrating the biggest investment fraud in Wall Street’s history, and David Friehling, his accountant, has been charged in connection with the case.

Also on Wednesday, U.S. Marshals seized a 56-foot yacht called “Bull” and a smaller boat in Davie near Fort Lauderdale, Florida, and a $9.4 million mansion in Palm Beach, all belonging to Madoff and his wife, Ruth.

The seizures came a day after a Connecticut judge froze the assets of Madoff’s sons and five hedge fund industry officials, including three Fairfield Greenwich executives. Assets of Madoff’s wife and his brother, Peter, had already been frozen.

Galvin said his office was also probing Tremont Group Holdings and looking at Maxam Capital. A Tremont spokesman declined to comment, and Maxam’s founder Sandra Manzke could not be reached.

A spokesman for Fairfield Greenwich called the allegations “false and misleading” and said the firm had “conducted vigorous and robust monitoring on an ongoing basis of the Madoff investments.”

Fairfield Greenwich has 21 days to respond to Galvin’s complaint. The complaint is posted on Galvin’s website, http://www.sec.state.ma.us/sct/sctfairfield/fairfieldidx.htm.

BILLIONS DOWN THE DRAIN

Fairfield Greenwich’s Sentry Funds had placed about $7.2 billion, or 95 percent of its assets, with Madoff.

Prosecutors have said Madoff’s scheme, which used money from new investors to pay earlier ones, involved as much as $65 billion over 20 years and more than 4,800 client accounts.

Galvin’s complaint suggests that Madoff’s business was a windfall for Fairfield Greenwich, earning it about $100 million a year.

The complaint contained several references to Fairfield Greenwich co-founder Jeffrey Tucker earning hundreds of millions in the last few years.

Galvin did not say how many Massachusetts residents had been affected by Madoff’s scheme or how much money they had lost. He is asking that Fairfield Greenwich return the fees that investors paid and the money they invested, as well as pay an administrative fine.

“These are obviously very serious allegations when one starts accusing parties of colluding with respect to coordinating testimony to give to the Securities and Exchange Commission,” said Brenda Sharton, who works on Madoff-related cases as a partner at law firm Goodwin Procter.

Galvin, one of the first state regulators to aggressively pursue the Madoff case, has long been concentrating on the so-called feeder funds.