$LUSH PROBERS EYE FRAUD RAP FOR QUINN

By BRAD HAMILTON, ANGELA MONTEFINISE and MELISSA KLEIN

April 13, 2008 -- Feds probing the City Council budget scandal are weighing wire- and mail-fraud charges against those who helped send millions into a secret slush fund, The Post has learned.

"If you pick up a phone and tell someone to do something illegal, that's wire fraud," said a law-enforcement source familiar with the probe. "If you send a check, that's mail fraud."

Sources said prosecutors are considering several targets, including council Speaker Christine Quinn, though it was unclear whether they had found any evidence against her.

Other council members and staff are also under scrutiny, along with staffers from the council's finance division and the city Office of Management and Budget, sources said.

Mail and wire fraud each carry a maximum $1 million fine and 30 years in prison.

The federal probe is now squarely focused on who was involved in setting up the fake groups used to hide and hold on to funds for later use in the budget cycle.

Sources said the money - more than $17 million over the past six years - was doled out as political favors to groups affiliated with lawmakers who had been loyal to the speaker's agenda. Quinn claims it helped groups that fell through the cracks.

The feds are also looking at who handled the financial transactions.

Mike Keogh, the council's former budget director who was dismissed by Quinn after the practice was uncovered, told The Post only that he was cooperating with the investigation.

Councilman Kendall Stewart (D-Brooklyn) has been subpoenaed but said he was not a target.

Quinn, a presumptive mayoral candidate next year, also denies being a target.

She has reportedly hired a defense attorney, former federal prosecutor Lee Richards III, to help her handle inquiries by agencies probing council funds.

The Manhattan US Attorney's Office began looking into council finances last fall after receiving a tip that staffers were diverting official funds for their personal use, the source said.

Quinn says she spoke to the feds and the city Department of Investigation when she discovered the bogus organizations last fall - at the same time prosecutors were probing financial records of council staffers.

On April 3, The Post broke the news of the secret slush fund and how her office diverted $4.7 million into pet projects by funding 30 phantom organizations since 2007. About a quarter of the fund recipients are headquartered in Quinn's district, which encompasses Chelsea, Greenwich Village and parts of Midtown.

The news sparked the interest of the Manhattan District Attorney's Office, but after a sit-down with the feds two weeks ago, the DA agreed to step back.

Two council members told The Post that crimes had been committed - and several want an independent audit.

"What happened is at the very least fraud," one said. "It's as clear as day. And if more than two people knew about it, it's conspiracy to commit fraud."

"There are some pretty bold lies being told."

Meanwhile, Quinn announced Friday major reforms that would essentially eliminate slush funds from the system.

From now on, community organizations will need to submit detailed requests for a portion of the speaker's discretionary funds, which amount to $21 million to $25 million, Quinn said.

While some legislators criticized the move as weakening the council, others fully supported it.

"This is real reform, and while it does weaken the speaker's position, it will allow the council to focus on other, crucial budget decisions," Councilman David Yassky said. "It will have a major long-term payoff."