UPDATE 2-NY's Cuomo expands pension probe with new charges

* Hedge fund manager pleads guilty, to serve as a witness

* Ex-NY Liberal Party leader charged in pension probe

* Some "sham fees" for private equity investments-Cuomo (Adds Hevesi's lawyer's response and details throughout)

By Joan Gralla

NEW YORK, April 15 (Reuters) - A former New York state political party leader was criminally charged in a probe of kickback fees paid to manage state pension investments, New York's attorney general said on Wednesday.

Joined by the U.S. Securities and Exchange Commission, Attorney General Andrew Cuomo also announced that a former hedge fund manager, Barrett Wissman, pleaded guilty to a felony for his role in the "pay to play" scheme, and will serve as a witness in the continuing investigation.

Wissman, formerly associated with Texas-based Hunt Financial Ventures, agreed to pay $12 million in forfeiture and penalties to the state over three years.

The state Liberal Party's former leader, Raymond Harding, was charged with getting over $800,000 in illegal fees on a $100 million pension investment in the Pequot Diversified Offshore Fund and a $20 million stake in the Paladin Homeland Security Fund. Pequot and Paladin are private equity firms.

A Pequot spokesman declined comment. The indictment said Cuomo's investigator believes Harding concealed the payments from Pequot. A Paladin spokesman was not immediately available to comment.

Harding backed Cuomo, a Democrat, when he ran for governor in 2002 before Cuomo withdrew in favor of the then sitting state comptroller, Carl McCall.

Cuomo told reporters he expects more charges from the scheme that he said turned the New York State Common Retirement Fund into a "piggybank" to raise campaign funds, enrich individuals and reward favors.

"When you follow the money in the State of New York, it takes you to the Common Retirement Fund," Cuomo said, adding that "the State pension fund should not be used as a political tool -- it is held in trust for over one million State employees and their families."

But Cuomo said he had no evidence that the current comptroller, Democrat Thomas DiNapoli, was involved.

DiNapoli replaced Democratic Comptroller Alan Hevesi after Hevesi pleaded guilty to an unrelated felony and resigned in 2006. The probe has focused on decisions made under Hevesi.

Cuomo declined comment on whether Hevesi would face charges. Hevesi's lawyer, Bradley Simon, noted that the former comptroller "has not been charged with any misconduct with respect to the mismanagement of the New York state pension fund." The lawyer added: "As he has for the past two years, Mr. Hevesi continues to vigorously deny any wrongdoing."

Hevesi's son, Andrew, should not step down from his state Assembly seat, Cuomo said, adding he has no evidence that the Democratic Assemblyman knew the incumbent whose seat he won in a special election became vacant because Harding helped the sitting Assemblyman "get a six-figure job" with an insurer.

Last month, Henry Morris, Hevesi's fundraiser, and David Loglisci, the pension investment chief, were charged with taking millions of dollars in kickbacks from money managers. William Schwartz, Morris' lawyer, and Irving Seidman, Loglisci's lawyer, said their clients were innocent.

Cuomo repeated calls for reforms, saying other states risk similar problems though New York's are among the worst. Its pension fund is run by just one person -- the comptroller -- instead of a board, and people can donate up to $50,000 to a candidate.

The SEC, which brought civil charges against Harding and Wissman, alleged that "Wissman arranged some of the payments made to Morris, and Wissman was rewarded with at least $12 million in sham 'finder' or 'placement agent' fees." (Reporting by Joan Gralla; Additional reporting by Grant McCool; Editing by Jan Paschal)