How could so many smart, successful people have been so spectacularly gullible? Ever since Bernard Madoff was arrested in December, it has been a puzzle to figure out how Wall Street's $65bn (£44.5bn) crook got away with cooking the books for the best part of two decades.

One answer, according to newly disclosed legal documents, is that some of his closest associates blithely turned a blind eye to warning signs. And they allowed themselves to be bullied and harangued by the 70-year-old.

The Massachusetts' secretary of state, Bill Galvin, has filed fraud charges against Fairfield Greenwich, a hedge fund which was among the biggest "feeder funds" to Madoff's investment empire. Fairfield had $14bn under management, including about $7.2bn in a fund that was 95% dedicated to Madoff.

Galvin says Fairfield was criminally negligent. He alleges it was profiting to the tune of $100m annually from its connection with Madoff and it made only the flimsiest of efforts to check what the financier was doing with its customers' money.

An intriguing insight comes in an email sent just three days before Madoff's arrest by Jeffrey Tucker, the co-founder of Fairfield. At the time, Madoff's house of cards was beginning to collapse as investors, spooked by the financial crisis, pulled out large sums of money – known as redemptions. Bernie wanted Fairfield to replace the outflow of money.

Tucker wrote to Fairfield's executive committee: "Just got off the phone with a very angry Bernie who said if we can't replace the redemptions for 12/31 he is going to close the account. His traders are 'tired of dealing with all these hedge funds' and there are plenty of institutions who can replace the money. They have been offered this all along but 'remained loyal to us'."

Shortly after midday on 8 December, Tucker signs off: "Not sure of our next step but we best talk. I believe he is sincere."

The last sentence is telling – Tucker who, ironically, is a former securities and exchange commission (SEC) official, fell hook, line and sinker for Bernie's bullying bravado shtick. It was a load of nonsense – there were no other institutions willing to provide money and Madoff confessed 72 hours later that his business was riddled with lies.

Madoff had hundreds of victims, most of whom were not financial experts. They included members of the US Jewish community who were acquainted with Madoff through country clubs and social networks in Long Island and Palm Beach. There were charities, benefactors and showbiz names such as Pedro Almodóvar, Steven Spielberg and Kevin Bacon.

Madoff abused their trust, took their savings and used the money to fund his lifestyle of four homes, six boats, four cars and lashings of bling (he has 35 sets of watches and cufflinks, according to an inventory by the department of justice). At least two suicides have been linked to Madoff's crimes.

Fairfield Greenwich is in a slightly different category. Fairfield was co-founded by Tucker and business partner Walter Noel, a Connecticut socialite who is a mainstay of the ponies and cocktails circuit. His collection of attractive grown-up daughters have gained much attention – a Vanity Fair article devoted to them in 2002 described them as "glamazons" and raved about the family being "perfect".

Fairfield had acted as a go-between for Madoff since 1989, collecting money from investors and pumping it into Madoff's fund. For this, it took a cut of 1% of deposits plus 20% of all accrued profits. To justify this commission, clients were promised that Fairfield was looking out for them by gaining "privileged access" to Madoff's accounts and conducting deep "due diligence" including "onsight reviews". Yet the paucity of some of these checks is laughable.

In a marketing document for clients, Fairfield boasted it would never have invested in a crooked venture like Bayou – a notorious hedge fund run by Samuel Israel, who famously faked his suicide to avoid prison for fraud. The reason?: "We would question Bayou's obscure auditing firm."

This is fairly brazen since Madoff was audited by a single-man accountancy firm called Friehling & Horowitz based in a strip mall outside New York City.

A Fairfield client once asked about this auditing outfit, prompting Fairfield's chief financial officer, Dan Lipton, to "investigate". He rang up Friehling's only employee, then emailed his client the following reassurance: "Friehling & Horowitz CPAs are a small- to medium-sized audit and tax firm specialising in broker dealers and other financial services firms. They have hundreds of clients and are well respected in the local community."

Lipton's subsequent interview with regulators is worth reproducing:

Q. How did you determine they had hundreds of clients?

A. That's what the partner said on the phone to me.

Q. Did you corroborate it in any way?

A. No.

Q. How did you determine that they were well respected in the local community?

A. That's what our conversation – my conversation with one of the partners at Friehling & Horowitz – that's what was told to me.

Hardly the due diligence skills of Hercule Poirot, are they?

It isn't hard to imagine that Fairfield was lulled into a lucrative sense of security over a 20-year relationship. Others smelt a rat – including Harry Markopolos, a financier who brought concerns about Madoff to the SEC's attention.

When the SEC felt moved to investigate, Fairfield's chief counsel, Mark McKeefrey, had a phone conversation with Madoff to discuss what they should say to regulators during interviews. According to a transcript, Bernie's opener in that conversation was: "Obviously, first of all, this conversation never took place, Mark, okay?"

In a statement this week, Fairfield attacked the Massachusetts regulator for making accusations with "20/20 hindsight".

The firm said: "Contrary to the allegations, FGG [Fairfield Greenwich Group] conducted vigorous and robust monitoring on an ongoing basis of the Madoff investments.

"The SEC, other regulatory agencies and every other investor in Madoff failed to detect his sophisticated fraud."

Fair point, but not all investors were promising their clients deep, constant due diligence of Madoff.

At various stages, Tucker, Lipton and Fairfield's chief risk officer, Amit Vijayvergiya, all received tours of Madoff's market making operation – but they didn't see the floors where Madoff's crucial so-called "split strike" trading operation was supposed to take place. Nor did they meet any of the individuals supposedly involved in executing it, according to this week's regulatory complaint.

How, inquired investigators, did they therefore know that such people existed or that Madoff's strategy was being executed?

Vijayvergiya replied: "Madoff, after, you know, 18 years of a very lengthy and trusted relationship, an individual who had a stellar reputation and great credibility in the industry, provided us with this information, so we had every reason to believe it was true."

That's not quite good enough, is it?