April 14 (Bloomberg) -- Carlyle Group is being investigated by New York prosecutors and the U.S. Securities and Exchange Commission over whether it illegally paid intermediaries to secure $1.3 billion in investments from the state’s pension fund, according to a person with knowledge of the matter.

State Attorney General Andrew Cuomo and SEC lawyers are investigating Carlyle, hedge funds and other private-equity firms that did business with New York’s employee pension fund, according to the person, who declined to be identified because the probe isn’t public.

“Carlyle has fully cooperated with the New York attorney general’s investigation,” Christopher Ullman, a spokesman for Washington-based Carlyle, the world’s second-largest private- equity firm, said today in an interview. “We understand this is an industrywide investigation and that we are not the focus.”

The investigation is related to civil lawsuits and criminal charges filed last month by Cuomo and the SEC against former New York Deputy Comptroller David Loglisci and Hank Morris, a political adviser. After a two-year investigation, the governments accused the men of soliciting millions of dollars in kickbacks from firms managing the state’s retirement fund.

Morris was a so-called placement agent for Searle & Co., a registered broker-dealer that arranged deals between Carlyle and the New York State Common Retirement Fund, the person said. Morris allegedly pressured the investment firms to use Searle’s services and received payments in exchange, according to court papers.

Sham Fees

Loglisci arranged for the $122 billion pension fund, the third-largest in the U.S., to invest $5 billion with private- equity firms and hedge-fund managers that paid “sham” finder fees to Morris and others, the SEC said in last month’s complaint in Manhattan federal court. Loglisci told managers the payments were required to do business with the fund, the regulator said.

A 123-count indictment filed last month in New York State Supreme Court in Manhattan named Morris, who advised ex-New York Comptroller Alan Hevesi, and Loglisci as key figures in a “web of corrupt actions for both political and personal gain,” Cuomo said at the time. The defendants have denied any wrongdoing.

The SEC’s complaint against them last month seeks to impose unspecified fines and forfeiture of wrongful gains. In addition to Carlyle, it identifies HFV Management, Liberty Oak Capital Fund and Odyssey Investment Partners as being among the investment firms that were solicited and paid fees.

Investigation Continues

John Nester, a spokesman for the SEC, said the investigation of the pension fund is still in progress. He declined to say whether Carlyle is under investigation. Cuomo’s spokesman Alex Detrick didn’t return a call seeking comment. The New York Times reported the probe earlier today.

Other funds named last month by Cuomo and the SEC as having paid fees to Morris and his unidentified partners were the Access/NY European Fund, the Aldus New York Emerging Fund, GKM/NY Venture Capital Fund, Olympia John Street Fund, Paladin Homeland Security Fund (NY), Pequot Diversified Offshore Fund/Pequot Private Equity Partners Fund IV, and Strategic Co- Investment partners, according to court documents. They weren’t charged with wrongdoing.

Morris and Loglisci were accused in the indictment of committing fraud through their business dealings with Quadrangle Capital Partners II from 2003 to 2007. The fund’s operator, Quadrangle Group LLC, was co-founded by Steven Rattner, the U.S. Treasury’s chief auto-industry adviser.

Goodtimes Entertainment

Quadrangle is also connected to last month’s indictment through the multimedia firm Goodtimes Entertainment. Goodtimes was owned by Quadrangle in 2005 when it released on DVD an independent film produced two years earlier by Loglisci’s brother.

According to last month’s indictment, Loglisci improperly used his position to direct more than $250,000 worth of contributions from Morris and others to development of “Chooch,” a comedy about a disgraced softball player from Queens, New York, who is kidnapped in Mexico. Goodtimes usually releases animated children’s films and fitness videos.

Quadrangle spokesman Adam Miller couldn’t immediately be reached for comment.

Refusal to Pay

Pharos Capital Group refused to pay Morris or his partner, and was blocked from a contract with the pension fund, documents showed.

Carlyle also does investment work for Illinois and Connecticut and has “achieved excellent returns in several funds on their behalf,” Ullman said.

Cuomo last month declined to estimate the financial damage to the pension fund due to the improper selection of investment managers. Thomas DiNapoli, who succeeded Hevesi, last month blamed declining stock prices for a drop in the funds’ assets.

The charge of enterprise corruption carries a minimum sentence of one to three years and a maximum of 8 1/3 years to 25 years. Morris faces charges with a maximum penalty of 340 years in prison, and Loglisci faces 193 years, according to a statement from the attorney general’s office.

Hevesi resigned as comptroller in January 2007 to settle charges he improperly used state workers to chauffeur his wife. The comptroller is the sole trustee for New York’s pension fund, which paid $576 million to money-managers in the year ended March 31, 2008.

Monthly Pension Review

DiNapoli said he hired a consulting firm to review all pension transactions since he became comptroller in February 2007 and has published monthly reports of money mangers hired or dismissed by the fund. He has not filled the newly created position of compliance officer.

The comptroller requires money managers seeking fund business to disclose names and payments to placement agents, before investments are made, under procedures in place since July 2008. The information goes to a three-person committee rather than a single person.

Searle, based in Greenwich, Connecticut, said in an August 2007 statement that it was cooperating with an investigation of the New York pension fund by the attorney general’s office and the Albany County district attorney.

The authorities had been questioning Carlyle and another investment firm, Hunt Financial Ventures, about the fees Searle received for referring the pension fund’s business. Searle said at the time it was unaware of any wrongdoing.

Levitt on Pensions

Two months later, Arthur Levitt Jr., a senior Carlyle adviser and former SEC chairman, said the U.S. public pension system was at risk from unclear accounting rules, inadequately informed trustees and political interference. He cited Hevesi’s being “drummed out of office” for misusing state resources.

The Board of Elections and pension records revealed in 2006 that Hevesi received campaign donations from Carlyle and about 46 percent of the hedge funds and private-equity managers he picked to manage state money for the first time.

Blackstone Group LP, based in New York, is the world’s largest private-equity firm.

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: April 14, 2009 19:29 EDT