Ok with a .obj I could finally load it in blender to see what was going on.
Here is the before pic:
Here, I cutaway all the polys around the smoothing group of interest. This was the diagnostic test I suggested earlier. It cures the problem. This suggests it is because of shared vertex normals between faces across the blade.
Solution, in blender, along with make sharp (which you already have done successfully), was to add an edge split modifier, set to split edges on the 'sharp' marked edges. This forces the geometry to be split, so there is more than one vertex normal along the edge. Thus the vertex normal can be closer to the face and doesn't have to approximate between 2 wildly different faces with different face normals:
I'm sure there must be some setting you need to make in Max to get the smoothing group to 'do its thing' (I am not a 3d studio user), because it doesn't seem to be.
And here is a more clear explanation, I've set blender to show vertex normals. Here is the original file. The normals at the side of the blade are *shared* between faces pointing in opposite directions, so it just averages, which makes it look icky on a sharp edge.
This is after the edge split, which splits the geometry so there is a separate vertex normal for each face on the edge. Notice how the normal now points more towards the face, so you get the sharp edge you are looking for.