NEW YORK, NY July 23, 2009 —The New York State pension fund is one the largest investors in the country, moving billions of dollars each year in and out of Wall Street. That movement of money is now under investigation. State and federal regulators have been examining how the pension fund chooses its private money managers.

The results so far include an indictment, two guilty pleas, two settlements, and yesterday, the Securities and Exchange Commission proposed new rules to crack down on the selection process. WNYC's Lisa Chow reports on the tangled relationships between pension funds and Wall Street.

REPORTER: The New York State pension fund controls $110 billion. If you won that at a slot machine, you'd be listening to this sound for more than a thousand years. In other words, we’re talking about a tremendous amount of money.

It exists for one reason: to help government employees in New York retire. It’s the contract that New York taxpayers have made with their public workers, like fire fighters, judges, building inspectors and state troopers.

Every month the pension fund sends out checks to 350,000 retirees. With that number growing, the pension fund is under pressure to grow as well.

And there are only two ways to do that - raise taxes, or invest the money wisely. That's what Tom DiNapoli does. As the New York state comptroller, he is sole trustee of the pension fund. And his office is now the focus of federal and state investigations.

DINAPOLI: In terms of what happened before,you know, I can't answer that. I wasn't here. I can just say while I'm here I'm making sure we have the right people.

REPORTER: It's as if DiNapoli bought a house and discovered that police have been watching it. And investigators are still creeping around, looking for clues.

They're examining a system in which politicians rely on Wall Street to manage huge sums of pension dollars, and Wall Street is only too eager to help.

MCCALL: This has always been an attractive pool of money, so my dance card was always full.

REPORTER: Carl McCall served as New York state comptroller for much of the 1990s. He says the comptroller's first job is to decide where to put the money: Stocks, bonds, real estate.

MCCALL: Once you make that decision, the next decision is to select managers in all of those asset classes who will actually make all those investment decisions.

REPORTER: McCall means private money managers, That's where Wall Street comes in. Wall Street firms make their money based on how much of other people's money they manage. So the competition is fierce to manage a slice of New York's $110 billion pension fund.

Neal Berger used to run a hedge fund. He says to get hired by a big pension fund, like New York's, you have to impress layers of placement agents, consultants, and pension fund staff.

BERGER: You're dealing with the consultants, first. There's a whole network of pension fund consultants, so you have to be in that network or have some connection to that network, maybe you’re working through an intermediary who has a relationship with a pension fund consultant because you got to keep in mind, these pension fund consultants are bombarded by a million power point presentations a day, why are they going to focus on your fund.

REPORTER: Berger says, if you can manage those relationships successfully and make the right impression, it's all worth it.

BERGER: It's a challenging thing to do, to get pension fund money, but then the pot of gold at the end of the rainbow is that the checks are big and it's sticky money.

REPORTER: And that's the best kind of money that'll stick around because pension funds invest for the long term. So while Wall Street firms are shooting for this pot of gold, the person in charge of the pension fund, the comptroller, is also shooting for something.

MCCALL: In order to head the common retirement fund you got to get elected.

REPORTER: Which means you've got to raise campaign money. Former comptroller Carl McCall says, that's especially tough, running for an office most people have never heard of.

MCCALL: You might have to spend anywhere between a minimum of $5 million to maybe $10 million to get elected. Where are you going to get that money? The only people who really care about this office are the people who do business with it.

Now, lots of people who want government business contribute to campaigns. But rarely is the trade as simple as the case is here. Writing a check - to receive a check.

If you're a bus company trying to get a school contract, or a developer trying to build a hotel, maybe you contribute to the mayor's campaign. but you don't give money straight to the school chancellor or the building commissioner. In this case, Wall Street firms do give money directly to the person in charge.

Roy Smith is a professor at NYU's Stern School of Business, and a former partner at Goldman Sachs. He says there are plenty of things Wall Street firms can do to earn favorable opinions from the comptroller and his staff.

SMITH: Contributions to friends of the politician. Or contributions to some fund or the employment of some relative in that firm. There are many things that can go on and these aren’t so unusual in the sense that similar kinds of who-do-you-know arrangements work throughout the economy.

REPORTER: Contributions to friends, contributions to some fund, maybe it sounds like a bribe. But Smith says, there's a gray area.

SMITH: you're talking about a series of actions that raises the eyebrows. And it's hard for any of us to know how much of any of that constitutes a felony but we can all imagine that some quantity of it does. But the line between these is often very fuzzy and hard to determine.

REPORTER: So far, no one's accused the current or former comptrollers themselves of trading investments for campaign contributions. But, former comptroller McCall says, the temptation is there for everyone, especially when public employees at the top of the pyramid are making $150,000 dollars a year, and the people they're hiring on Wall Street take home millions and millions of dollars.

MCCALL: People in the public sector have a lot of power and they dispense that power to a lot of entities and they get very little of it themselves. And those people who are tempted these are people who are tempted and that's unfortunate.

REPORTER: Hank Morris and David Loglisci, according to the state attorney general's indictment, allegedly tried to bridge the money power gap, and enrich themselves in the process.

Morris was the top political consultant to former comptroller Alan Hevesi, the former comptroller’s top political consultant. Morris allegedly worked as a middleman, playing both sides of the fence and getting paid millions of dollars for deals signed between the pension fund and certain Wall Street firms.

Loglisci was the pension fund's chief investment officer under Hevesi. He allegedly directed Wall Street firms to Morris, and accepted thousands of dollars from Wall Street firms to help his brother produce a low budget movie called Chooch.

The two men have denied the allegations and are fighting the charges. As they await trial, the investigation continues.

The attorney general says if this were a baseball game, we'd be in the 4th inning. For WNYC, I'm Lisa Chow.

REPORTER: Next week, WNYC follows the money. We'll find out how the New York State pension fund invests its billions.