From the Providence (R.I.) Journal:
2.2.2001 00:16
Connell says she was misled
The former secretary of state says she did not participate in the fraud but simply sold what she thought were legitimate shares.
BY BOB WYSS
Journal Staff Writer
Former Secretary of State Kathleen S. Connell says she may have made up to $190,000 from a fraudulent stock deal but the federal government is wrong in asking her to pay back the money.
Connell says she was misled, along with other investors, and did nothing wrong.
The Securities and Exchange Commission earlier this week filed a civil suit in U.S. District Court in New York against Connell and five others accusing them of selling shares of stock that were not registered with the SEC.
The stock was with Systems of Excellence, a Florida company that went bankrupt. Its chief executive, Charles S. Huttoe, went to prison. Huttoe was sentenced to 46 months in prison after he admitted to manipulating the company's stock and issuing 43 million shares of stock that were not registered with the SEC.
Connell said in an interview yesterday at her ocean-view home off Tuckerman Avenue in Middletown that she first became acquainted with Huttoe about two years after she left office as secretary of state. Now 63, she served from 1987 to 1993.
Connell said she was approached about a job working for Software of Excellence, in Coral Gables. The company is also run by Huttoe.
She wasn't interested but she did talk to a friend, Thomas Clines, and others who felt that Software of Excellence should merge with a McClain, Va., company, ICMX Federal Products.
Clines formerly worked for the Central Intelligence Agency and in 1990 he was convicted on felony tax evasion charges, including willfully failing to report profits from secret arms dealings with the Nicaraguan Contras during the Iran-Contra affair.
For their help in bringing the two companies together, Connell, Clines and others were rewarded with shares in the company, which later became known as Systems of Excellence, also headed by Huttoe, Connell said.
Connell said she received 150,000 shares in January 1996.
Others given shares and charged in the civil suit with Connell were Clines, his wife, Heidi Deconde Clines, Wall Street Management Group, its president, Robert Ciofalo, and its consultant, Calvin Moore.
At that time shares in the company were trading on the Over-the-Counter Bulletin Board exchange for about 25 cents each. But Connell was impressed with the company's future.
"I believed in this company," she said. "It had all of the trappings of a growing company."
She was so impressed that she paid $25,000 in early 1996 to buy another 209,484 shares.
Connell was quickly rewarded.
"The stock went up and up," she said.
It went as high as about $5 a share. But the federal investigation has shown that the reason was that Huttoe and associates were using tactics to manipulate the stock price.
Meanwhile, Connell was selling some of her shares. By the time the stock was suspended in October 1996 by the SEC and Huttoe was charged a month later, Connell had sold enough shares to realize a profit of $190,086, says the government.
Connell said she was surprised when problems began to surface in the fall of 1996 that led to Huttoe's indictment. She said the collapse of the company left her with thousands of worthless shares of stock.
The heart of the SEC's claim against Connell is that she should not have sold the shares because they were never registered with the SEC.
Connell and her husband, Gerald, say they never knew the shares weren't registered.
"It was my belief [that they were registered], the broker's belief, the trading agent's belief, it was everybody's belief," Gerald Connell said yesterday.
Gerald Connell is experienced with securities. He was a Newport stockbroker until 1991, when he pleaded guilty to laundering money for federal agents posing as drug dealers. He was sentenced to 30 months in federal prison.
The SEC complaint against Connell says that when she bought the $25,000 worth of stock she signed an agreement acknowledging that she had read warnings that the stocks had not been registered with the SEC.
Connell yesterday questioned why the SEC is seeking repayment from her when she did not participate in the fraud but simply sold what she thought were legitimate shares.
"Is there a reasonable explanation why an investor four or five years down the line would be called upon to return their profits?" she asked. She said others also profited after she sold her shares to them. "Where do you go with this, how far down the line do you go?"
Mark Braswell, branch chief for the SEC's enforcement unit, said the goal of the government is to recoup money to compensate the stockholders who lost money by buying stock in Systems of Excellence. He said that so far $12 million has been collected as a result of 8 lawsuits that the government has brought against 40 individuals.
He said a court-appointed receiver will determine how any money that is recovered is redistributed, but it is unlikely that Kathleen Connell would be elgible. He said if a federal judge rules that Connell owes the money, the $190,086 requested already deducts her $25,000 investment in the company. That means she would break even on her investment, Braswell said.
Others will not be as lucky. Braswell estimated that the amount recouped and sent back to investors probably would amount to "pennies on the dollar."
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