To pull the wool over someone's eyes is to fool them, especially by pretending to be friendly while actually cheating or stealing from them.
If your friend offered to help you out by holding your wallet while you're taking a quick swim in the lake, but you realized later he'd taken a ten dollar bill from it, you could say he pulled the wool over your eyes. Likewise, when citizens feel they've been mislead by the government, they might accuse it of pulling the wool over their eyes. This phrase most likely comes from the fashion of wearing wool wigs several centuries ago.