A federal judge on Friday approved New York Attorney General Andrew Cuomo's request to delay the U.S. Securities and Exchange Commission's pension kickback case, rejecting defense attorneys' arguments that this could give the federal regulator an unfair advantage.

Cuomo, a Democrat, is investigating millions of dollars of fees investment firms paid to middlemen in return for being hired to invest some of the state's $110 billion pension fund.

The SEC is conducting a separate, civil probe of the same ties between investment firms and the agents, lobbyists and lawyers they hired.

This litigation is a non-entity until the criminal matter is concluded in the New York State Supreme Court, said Judge Colleen McMahon, of the Southern District of New York in Manhattan, at the hearing.

Cuomo's request is common in such investigations, as prosecutors fear that defendants in criminal trials will benefit from any materials turned over to them in civil proceedings.

A New York grand jury indicted the former comptroller's fund-raiser, Henry Morris, and pension investment officer, David Loglisci. Lawyers for the two say they are innocent.

Grand jury proceedings are sealed, which means Cuomo cannot share any information reaped from them with the SEC.

But these secrecy rules do not apply to the state securities law, the Martin Act.

While the stay stops discovery for the SEC and the defendants, Cuomo could give the SEC what he gleans under the Martin Act, said an attorney for Dallas-based Aldus Equity Partners, which the SEC charged in the pay-to-play probe.

Defense attorneys suffered another setback when State Comptroller Thomas DiNapoli, who has sued Aldus, said he might sue other firms. He said pension lawyers had advised him against revealing how the probe-linked firms performed.

If their investment results were solid, it would be harder to show the public was harmed, lawyers say. That is why so much of the probe focuses on whether the fees were disclosed.

The lawyers noted that all investments were vetted by multiple staffers and outside consultants, as required.

The key part is the decision-making process was 100 percent analytically arrived at (according to) policy and procedure, a source familiar with the issues said.

Glenn Colton, the attorney who represents Aldus Equity, said neither the SEC nor the comptroller has said that Aldus was not a prudent choice as an investment advisor, or that the pension fund paid inflated fees, or that the pension dollars were invested in a subpar manner.

The actions of ruining people's businesses ... and creating the impression of pensioners being bilked in an Enron- or WorldCom type of way is grossly inaccurate, he said.

The cases made by Cuomo and the SEC -- at least so far -- face other hurdles. Aldus was recommended by Memphis-based Consulting Services Group, which asked the SEC to correct inaccurate allegations about its pact with Connecticut-based Searle & Co, where Morris was registered as a broker-dealer.

Any case against Morris partly hinges on his ability to influence pension staffers in choosing which firms were hired.

The SEC's case is SEC v Morris et al, 09 cv 2518.

(Additional reporting by Grant McCool)

(Editing by Dan Grebler)

New York