June 24 (Bloomberg) -- EnTrust Capital Inc., a hedge fund firm that’s handled New York Attorney General Andrew Cuomo’s personal and campaign money, received state pension funds to invest from a company he has identified as paying possible illegal kickbacks.

The investment presents a potential conflict of interest for Cuomo, legal ethics experts said. After Cuomo spokesman Richard Bamberger declined to respond to repeated e-mails and calls about whether EnTrust has been or is under investigation by his office, he said in a statement today that the attorney general has had “no investment interest in EnTrust for more than a year.”

Starting in 2006, EnTrust’s Capital Waters Fund Ltd. received more than $20 million from Liberty Oak Capital Fund LP, according to Robert Whalen, spokesman for New York state comptroller Thomas DiNapoli. Liberty Oak’s parent, Consulting Services Group LLC, got access to state pension money after signing an agreement that paid Henry “Hank” Morris about $1 million in kickbacks to get the business, the U.S. Securities and Exchange Commission said in a complaint against Morris.

EnTrust was founded in 1997 by Goldman Sachs Group Inc. alumni Gregg Hymowitz, Michael Horowitz, and Mark Fife, according to the firm’s Web site. Its Capital Waters Fund is an offshore fund the firm launched in 1999. Cuomo, 51, is a limited partner in EnTrust’s Capital Diversified Fund LP, where he has held his investments since at least 2005, according to his state financial disclosure forms from 2005 through 2008. Statements for 2009 haven’t been published yet.

‘Not Subject’

“EnTrust is not a subject of the investigation because it did not use Hank Morris as a placement agent,” Bamberger said in the statement. “CSG used Hank Morris as a placement agent to help secure the New York state pension Fund’s investment in Liberty Oak. Many hedge funds, including EnTrust, then obtained investments of capital from the Liberty Oak fund of funds. EnTrust did not use Morris as a placement agent to help secure the funds it received from Liberty Oak.”

Neither Bamberger nor Cuomo spokesman Alex Detrick would comment on Cuomo’s relationship with EnTrust and Hymowitz until after the story was published even though Bloomberg News had sent e-mails and made phone inquiries about the matter since May.

Hymowitz did not return a call for comment, after an assistant called Bloomberg News to find out the subject of the inquiry. Fife, another managing partner, also did not reply to an e-mailed question about how the pension fund came to invest with EnTrust.

EnTrust Statement

Brandy Bergman of Sard Verbinnen & Co. in New York, who identified herself as a spokesperson for EnTrust, made the following statement today:

“Neither Entrust Capital nor anyone at the firm ever paid a finders fee to Hank Morris or retained him or any of his entities as placement agent for investments by the New York State Retirement Fund or any other pension fund. The New York State Retirement Fund did not allocate any capital to Entrust. New York State did make an investment in Liberty Oak, a fund of funds it established with CSG which invested in dozens of hedge funds including Entrust. Entrust had no role in CSG’s manager selections and received less than 3 percent of the New York State funds allocated to Liberty Oak.”

Ethics Expert

Given his relationship with EnTrust, Cuomo, a Democrat, shouldn’t decide whether it should be a target of a probe, the ethics experts said. Monroe Freedman, a legal-ethics professor at Hofstra University Law School in Hempstead, New York, said Cuomo, who has been leading a nationwide probe of corruption involving public pension funds, should recuse himself from the case and an independent counsel or special prosecutor should take over.

“It appears that Cuomo does have a conflict of interest,” Freedman said. “When you’re personally involved, it’s too easy to persuade yourself that this case can go forward without investigating them.”

Freedman said the fact that Cuomo sold his interest in EnTrust during the year he was probing the pension fund payments doesn’t eliminate the potential for a conflict of interest.

“I do not think it makes a difference,” Freedman said. “The relationship has been too close and that leads to a reasonable inference that he would be inclined to favor them. It’s been a beneficial relationship to him.”

Recusal Question

Freedman said it typically should have been made public if Cuomo had a special counsel or independent counsel appointed. He said he would be “troubled” if Cuomo recused himself and let someone else in his office handle it.

“Anyone in his office would know that Cuomo is recusing himself because he cares or there’s an appearance he cares and that person, being subordinate to him or dependent on him, would have a similar conflict, a personal conflict of interest.”

Morris, the chief political consultant to then-state comptroller Alan Hevesi, whose office administers the pension fund, was charged criminally by Cuomo in March with selling access to fund assets in exchange for kickbacks from money managers such as Liberty Oak.

Memphis-based Consulting Services Group, which created the Liberty Oak fund-of-funds for the state, is identified in both the Morris indictment and the SEC complaint as having paid him fees. CSG hasn’t been criminally charged or sued by the SEC.

Liberty Oak Payment

Liberty Oak received $200 million on July 1, 2006, the same day EnTrust received $15 million from Liberty Oak, according to Whalen. EnTrust got another $5 million through Liberty Oak on June 1, 2007, he said.

EnTrust, whose partners have contributed to Cuomo’s campaign funds, is not named in either proceeding.

John Nester, a spokesman for the SEC, declined comment on whether EnTrust is under investigation.

Liberty Oak was established in June 2006 for a portfolio of hedge fund investments for the New York state Common Retirement Fund. CSG, as general partner of the fund, managed the hedge fund investments for the state.

In July 2005, CSG entered into an agreement with Searle & Co., Morris’s broker-dealer, to pay it 30 percent of the management fees received from the state for managing the fund assets. According to this “undisclosed quid pro quo arrangement,” the SEC complaint says the pension fund bought a $635 million limited partnership interest in Liberty Oak Fund in 2006, and $130 million in 2007. In exchange, CSG paid Searle $1.15 million, 95 percent of which went to Morris, the SEC said.

CSG Statement

“CSG did not engage in a pay-to-play scheme,” the company said in a statement on its Web site. The company’s agreement with Searle complied with the SEC’s rules and was fully disclosed, the company said.

Robert E. Orians, an attorney representing CSG, declined further comment, including why Liberty Oak gave the state pension money to EnTrust.

EnTrust managing partner Hymowitz is also a major Cuomo campaign contributor. He gave the campaign fund, “Andrew Cuomo 2010,” $55,000 since January 2008, according to state Board of Elections records.

Hymowitz’s last recorded contribution to Cuomo was $20,000 on Jan. 14. Michael E. Horowitz, of Stamford, Connecticut, and Mark Fife of Manhattan’s Upper East Side, also each gave Cuomo $10,000 in January 2008. This is in addition to tens of thousands of dollars Hymowitz contributed to Cuomo’s earlier campaigns.

National Co-Chair

Hymowitz served as national co-chair for the 2004 presidential campaign of U.S. Representative Richard Gephardt, a Democrat from Missouri, according to the EnTrust Web site.

In December 2004, Andrew Cuomo For Attorney General Inc. another campaign fund, received $91,475 in interest from EnTrust Capital, according to state Board of Elections records. In September 2004, the campaign got $17,865 in interest and in June 2004, it received $8,617, the records show.

Morris pitched EnTrust to state pension fund officials before Liberty Oak received the state fund’s initial investment in July 2006, according to another person familiar with the case. At a meeting attended by Hevesi and former deputy comptroller David Loglisci, among others, Morris pushed for the state to invest money with the hedge fund firm, the person said.

‘Working with Hymowitz’

“I’m working with Hymowitz,” Morris said at the meeting, according to the person.

Morris also said he had his own money invested with Hymowitz and had data with him showing EnTrust’s fund performance, the person said.

Loglisci was indicted with Morris on charges of benefiting from and facilitating the kickback plot. Loglisci and Morris have pleaded not guilty to the charges.

The conversation was similar to when Morris pitched the Carlyle Group, the person said. Carlyle paid almost $13 million to Searle & Co., the broker-dealer Morris was associated with, to secure investments from the state retirement fund.

CSG, originally hired by the state pension fund to vet money managers, paid “finder” fees to Searle, which gave 95 percent of the $1.15 million to Morris, according to the SEC complaint.

Carlyle Probe

Carlyle paid $20 million last month to settle a probe by Cuomo and agreed not to use placement agents like Morris or other third parties to negotiate with public pension funds to obtain business. Their agreement prohibits the firm from doing business with a public pension fund for two years after it or its employees make a campaign contribution to a public official who can influence the fund’s investment decisions.

Morris repeated his pitch for the pension fund to invest with EnTrust on numerous occasions, the person said. Hevesi himself also pushed EnTrust, and ultimately signed off on initial money for Liberty Oak, some of which went to EnTrust, the person said.

Hymowitz and his partners also were contributors to “Hevesi of New York,” according Board of Election records. In October 2004, Hymowitz contributed $5,000 to Hevesi. Fife also contributed $2,500 in October 2004, and Horowitz contributed $2,000 in November 2004. All three made additional campaign contributions in June 2005, records show.

Hevesi Comment

Hevesi attorney Bradley Simon declined comment. Irving Seidman, an attorney for Loglisci, also declined comment. Morris and his attorney William Schwartz declined comment.

Cuomo and the SEC have been investigating money managers who used ties to public officials and kickbacks to buy and sell access to the $2 trillion in U.S. pension systems. The regulators’ indictments and civil complaints depict officials allowing political and personal ties and financial self-interest to trump merit when deciding who will be entrusted to invest taxpayer money.

The ties between Cuomo and EnTrust suggest at least the appearance of a conflict of interest in probing whether the firm might be culpable in the scandal, according to Stephen Gillers, a professor of legal ethics at New York University.

“It’s an appearance issue,” said Gillers. “Cuomo, given the relationship with the managers of the fund, should not be making the decision whether to charge the fund civilly or criminally,” Gillers said.

The appearance standard was one Cuomo said he would abide by when he campaigned for Attorney General.

“I always err on the side of caution,” Cuomo said, when asked in a Bloomberg interview in the fall of 2006 about possible conflicts of interest. He also said that “the appearance of integrity is just as important as the reality.”

The Hank Morris criminal case is People v. Morris, 00025 2009, New York state Supreme Court (Manhattan).

To contact the reporter on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net.

Last Updated: June 24, 2009 15:30 EDT