Arel probe results in unique deal

When Pennichuck Corp. shareholders receive their one-time payout after the company’s novel $390,000 mid-December settlement with state and federal securities regulators, the money will mainly come out of the pocket of Maurice Arel, the firm’s former chief executive officer.

The settlement was announced Dec. 16 at a Concord press conference. While agreeing to the deal, neither the company nor Arel would admit to or deny allegations in the settlement.

It was Arel who was mostly responsible for virtually turning over much of the management of the various real estate partnerships of Southwood Corp. – a Pennichuck subsidiary that owns more than 1,000 acres around the water company’s water supplies – to Nashua builder John Stabile, according to the New Hampshire Bureau of Securities Regulation and the U.S. Securities and Exchange Commission.

As a result of the relationship, Stabile reaped millions of dollars in profits, the regulators said.

It was Arel who benefited from Stabile’s $70,000 discount on the purchase price of his home. Stabile also awarded some $1.2 million in business to a landscaping company controlled by Arel’s son Matt, according to regulators — an arrangement first reported earlier this year by the New Hampshire Business Review.

But all of these actions are perfectly legal, even if Stabile’s favors to Arel were explicitly in return for the business provided.

Indeed, Stabile – former chair of the state Republican Party — almost admits as much, saying that he gave the Democratic Nashua mayor a deal on his house “because we worked together in politics and in business and we had a great relationship. I would feel guilty if I put up a mark-up. It’s a professional courtesy (to sell at cost).”

Stabile, however, still insists that he awarded contracts to the landscaping company managed by Arel’s son – MGM Plus Grounds Maintenance — because it was the lowest bidder. Indeed, the bid was “even too low,” he said, to do an adequate job, so Stabile eventually terminated the relationship with MGM, which has since filed for bankruptcy.

Stabile certainly did benefit from the relationship, landing a total of $36 million in construction business – for the most part, without the benefit of appraisal and bidding and, in some cases, the same individual signing both sides of the contract, regulators say.

Indeed in one joint venture alone – Heron Cove — Stabile netted $2 million as half-owner of the partnership and a $1.3 million mark-up for construction and site development, not to mention real estate commissions.

Arel’s apology

According to Mark Connolly, director of the state Bureau of Securities Regulation, Stabile did nothing wrong in such business deals since, as the head of a private company, he was being “a good businessman” and “sharpening his pencil.” Connolly even complimented Stabile for his extensive cooperation in the investigation.

What constitutes securities fraud is the failure of a public company to disclose apparent conflicts of interest to stockholders.

It is Arel who was primarily responsible for “false and misleading statements to shareholders” by hiding the details of these arrangements of real estate “self dealing,” said Connolly.

At different times, the company did disclose that it was doing business with various local contractors, but it did not disclose that the business was often being done with the same contractor, or who the contractor was. It disclosed that Arel bought a house from a joint partnership without mentioning that Stabile was involved, or that Arel got the house for a discount. And it didn’t disclose that Arel’s son benefited at all.

“If you are investing your life savings in a company, you ought to know if they are hiring the CEO’s relatives,” said Walter Ricciardi, the SEC’s New England district administrator.

So it is Arel who has been banned for life from serving as an officer or a director of a public company, and it is Arel who will pay $270,000 of the settlement.

“I apologize for my actions, to the company, to my family for the way it looks, to everybody I dragged into this,” Arel said.

Yet Arel would not comment on whether he is primarily to blame.

After all, if the true crime is the lack of disclosure, did the board and much of the staff at least know something of what was going on?

“None of it was really a secret,” Arel said. “John came to all the public meetings. He was at the planning board. It was all pretty much out there.”

Stabile himself said that Pennichuck’s chief financial officer was at “virtually all the meetings” and added that “I was led to believe that the board had been informed” of the detail of the arrangements.

Charles Staub, the company’s CFO, did not return phone calls by deadline, though the company did issue a statement saying that “our company and board of directors are pleased that this matter has been resolved.”

Unique settlement

The Pennichuck board would certainly like to move forward. It is fighting off an attempt from the city of Nashua to take it over, with the hopes of selling out to a larger water utility.

Connolly does hold the board partially responsible because it abdicated its responsibility for providing sufficient oversight in the operations.

“We are not saying the board is not involved,” said Connolly. “On some level they were aware.”

But there was no hard evidence, he said, that board members knew of the involvement of Arel’s son, nor the break Arel got on his house. When Connolly informed board members of that, “it seemed like a real eye-opener,” he said.

The settlement also concluded that Arel made false representations about the home purchase to Staub.

In addition, there was no evidence that board members benefited financially from undisclosed transactions, as there had been in other cases, most notably Tyco International, a case in which the state securities bureau actually pressured board members into resigning.

And finally, there’s the unique nature of the settlement itself.

Like other similar sanctions, the SEC ban on Arel from serving as an officer or director of a publicly traded company are increasingly common nationwide but are fairly new, a result of the Sarbanes-Oxley Act of 2002. The Arel ban is the first such ban to be imposed in the state, said Connolly.

It was Connolly’s office that came up with the monetary arrangement. The office will collect $110,000 – a $50,000 fine and $60,000 to partially reimburse the cost of the two-year investigation. Such a deal is fairly standard, although having Arel foot the entire tab – as he is required to — is not.

The rest of the settlement is even more unusual for such a case.

Some $280,000, or roughly 12 cents a share, will be sent directly from the company to those who held shares on March 31, 2003 — the date that Pennichuck finally corrected previously inaccurate findings. (Board members and officers who were with the company will not benefit.) Connolly said he knows of no similar arrangement in which shareholders directly benefit from a settlement with government regulators.

The company will have to pay $120,000 of the judgment. Connolly said he didn’t want to fine the company too much because that would eventually be reflected in either the stock price or dividends. “We didn’t want to penalize the people we are trying to protect,” he said.

Thus the bulk of the money will come from Arel, who is not only being held responsible for his own actions but that of the company.

“As the chief executive officer, you can’t really separate Arel from the company,” Connolly said.

While most of Arel’s $270,000 total fine will come out of deferred compensation due him from the company, the rest — some $110,000 — “will come out of my own pocket,” Arel said.

While the state bureau and the SEC have no plans to continue the Pennichuck investigation, the possibility remains that state or federal prosecutors could pursue criminal or civil charges against Arel. But Arel hopes that the whole affair is over and that in the end he will be remembered more for his “service to the community and to Pennichuck” than the ground-breaking settlement that he agreed to.

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