Judge sees "novel" aspects in NY pension probe

New York State Attorney General Andrew Cuomo answers questions during a news conference held on Wall Street in New York October 15, 2008.

NEW YORK (Reuters) - A New York criminal court judge on Friday said Attorney General Andrew Cuomo's fraud charges against a central figure in a major pension kickback case partly rested on a "novel" use of the state securities law.

New York's securities law, called the Martin Act, gives the attorney general broad powers over financial fraud.

Judge Lewis Bart Stone did not elaborate on what he believes is "novel" about Cuomo's use of the state law.

Stone, in a courtroom conference with the prosecuting and defense attorneys, did say that Henry Morris, a top political adviser to the former state comptroller who has been charged with taking millions of dollars of illegal fees, did not work for the state.

"This is real judge stuff because Morris was not a state employee," said Stone. "This is very interesting to me -- that will be an issue that sooner or later will get resolved," he added, predicting his decision might be appealed.

Morris' lack of a direct relationship may raise questions about whether he was required to disclose, for example, the fees he was paid from investment firms that sought business from the state pension fund.

Cuomo, a Democrat and possible gubernatorial candidate, extracted guilty pleas from four people in his probe into the often rich fees investment firms paid to politically connected middlemen -- such as Morris -- who helped the companies win business from the state pension fund.

Cuomo's two-year investigation was joined by the U.S. Securities and Exchange Commission and sparked probes in other states, including New Mexico and California. The $200 billion California pension fund known as Calpers is currently investigating $50 million of fees paid to a former board member.

The spotlight on the intersection of money and politics has spurred federal and state efforts to ban pay-to-play, the making of campaign donations to win public contracts.

Lawyers for Morris and for David Loglisci, the former state pension investment officer, say their clients are innocent.

Loglisci has never been charged with taking money from middlemen. Loglisci bought $8,000 worth of stock in a movie made by his brother, "Chooch," which he sold for the same sum before he was hired by the state, a source familiar with the matter said. Loglisci disclosed the stake in state filings because he had yet to be paid.

Some investment firms that did business with the state invested in Chooch.

Cuomo's probe centers on how New York's $116 billion pension fund was run under former Democratic Comptroller Alan Hevesi. Hevesi has not been charged and his lawyer says he is innocent of any crime.

Current Democratic Comptroller Thomas DiNapoli banned the use of middlemen, called placement agents. But under Hevesi, investment firms had 10 days to disclose that they had used placement agents after they were hired by the pension fund.

That time lag might make it harder to prove securities fraud, which usually involves providing false information before buyers invest their money.

Cuomo's chief of staff, Steven Cohen, in April spoke about the disclosure issue to an Albany radio station.

"In many of these instances it is the payoff which may be illegal if it is an illegal quid pro quo, ... plus it is a violation of the New York Securities Law -- the Martin Act -- because of the failures to disclose," he said.

In addition, Cuomo said in the indictment that the investment decisions had been corrupted by Morris or his associates and that the Martin Act charges were based on "multiple theories of fraud, concealment, misrepresentation."

Stone is not scheduled to issue his decision on which of the over 120 counts in the indictment pass muster until June 2010; the trial is likely to start in September and take about three months.

(Editing by Kenneth Barry and Leslie Adler)