Dec. 23 (Bloomberg) -- Fairfield Greenwich Group, Walter Noel’s hedge-fund firm that had $7.5 billion invested with Bernard Madoff, was sued by investors for allegedly failing to protect their assets.

Noel’s Greenwich Sentry fund invested $220 million with Madoff and his Fairfield Sentry fund invested $7.3 billion solely in Madoff, jeopardizing investors’ interests while collecting “millions of dollars in fees,” according to a complaint filed Dec. 19 in New York State Supreme Court in Manhattan.

Fairfield Greenwich Group founding partners Noel, Andres Piedrahita and Jeffrey Tucker are accused of breach of fiduciary duty, negligence and unjust enrichment, as are Brian Francouer and Amit Vijayvergiya of FG Bermuda, a Noel affiliate. The complaint was filed as a class-action, or group, lawsuit on behalf of investors.

“FG defendants failed to perform even a minimum level of due diligence regarding the activities of Madoff,” according to the complaint.

Madoff, 70, was arrested Dec. 11 and charged with running an alleged $50 billion Ponzi scheme based on his own admission. He remains under house arrest in his New York apartment.

Noel, Tucker and Piedrahita didn’t immediately return calls seeking comment. Fairfield Greenwich spokesman Thomas Mulligan declined to comment.

Plaintiffs’ lawyer Christopher Lovell of New York-based Lovell, Stewart and Halebian said he was first contacted about Fairfield Greenwich by an Illinois resident, Pasha Anwar, with an investment in the fund.

‘Red-Flag Warning’

Anwar claimed that fund managers had an obligation to look into Madoff’s investment methods and that the team ignored the “red-flag warning” that Madoff’s investments produced small, steady gains in a declining market.

Lawyers analyzed Fairfield-related documents provided to them by Anwar and other fund clients and concluded that multiple breaches of fiduciary duty had occurred, Lovell said.

“Investors trust these hedge fund people to do the analysis and use due care to analyze what’s going on,” Lovell said. “That’s not what happened here.”

The plaintiffs’ lawyers filed in state court rather than federal, because in state court the proceeding can’t be put on hold, Lovell said.

‘Serve Subpoenas’

“We are going to serve them and serve subpoenas on them and ask for a document preservation order,” Lovell said. “We are going to do it as quickly as we can.”

Banque Benedict Hentsch & Cie. SA, a closely held Swiss bank, terminated its merger with Fairfield Greenwich Group on Dec. 14, after learning of Fairfield’s Madoff investments.

The Geneva-based company repurchased its entire capital to “protect the interests of its clients and those of the bank,” the company said in a statement on its Web site.

Banque Benedict Hentsch merged with Fairfield in September to create a company with combined assets under management in excess of $18 billion.

The Swiss bank said its clients’ potential losses on products managed by Madoff were about 56 million francs ($48 million), or less than 5 percent of assets under management.

‘Further Steps’

“The management of the bank and its advisers are carefully following the development of the situation in order to undertake any further steps, particularly legal, judged necessary,” the company said.

Benedict Hentsch, the bank’s managing partner, didn’t return a call seeking comment yesterday on the investors’ lawsuit against Fairfield.

Fairfield Greenwich Group said it’s assessing its Madoff- related losses and is willing to cooperate with government investigations into the alleged fraud, according to a statement posted Dec. 16 on the fund’s Web site.

“We are seeking to gather all facts, work diligently with counsel to determine the appropriate course of action toward recovery, and stand ready to assist the authorities with their investigation,” according to the statement.

The case is Pasha and Julia Anwar v. Fairfield Greenwich, 603769/2008, New York Supreme Court (Manhattan).

To contact the reporter on this story: Cynthia Cotts in New York at ccotts@bloomberg.net.

Last Updated: December 23, 2008 00:01 EST