`I Never Screwed Anybody'

Lewis A. Schiller, chief executive officer of Consolidated Technology Group Ltd., takes a drag on a thin cigar and leans back in his chair. He is a bearlike, affable man, 63 years old. He is in the conference room at Consolidated's corporate headquarters, on the ninth floor of an old brick office building in lower Manhattan. The atmosphere is mellow. Schiller is recounting one of Consolidated's latest exploits: the acquisition of a string of diagnostic facilities in Florida. Consolidated has been on a takeover binge in recent months, buying an array of impressive-sounding high-tech companies. Schiller is enthused, excited.

But suddenly, Schiller becomes less affable. A sensitive subject has been brought up: the shareholders. There are 20,000 of them, and most lost at least 97 cents out of every dollar they put into Consolidated stock in the 1970s and 1980s--back in the days when Consolidated was called Sequential Information Systems Inc. Sequential was probably the most widely peddled stock to be churned from the penny-stock mills of that era. Schiller, however, is tired of hearing about the penny-stock era. "I'm an honest man," he says. "I never screwed anybody."

The future is bright for Consolidated, he insists. And there's no question that Consolidated is doing quite nicely, at least compared with the bad old days. The company is no longer starved for cash. It is expected to report pretax earnings of $3 million, or 40 cents a share, on sales of $100 million for 1994. Its shares, not traded for years, were listed under the new name on the NASDAQ stock market in September, 1993. But for the sad army of shareholders, any rejoicing is premature. At Consolidated, the old penny-stock days are alive, if not well.

CONVOLUTED TALE. To begin with, the acquisition binge was largely financed the old-fashioned way--by issuing stock, this time to foreign investors. And Consolidated has also been pushed on U.S. investors by the new generation of penny-stock peddlers--Hibbard Brown & Co., the penny-stock firm that went out of business last August. As a key Consolidated market-maker, Hibbard Brown's demise last August was one of the reasons for the collapse of Consolidated stock, from $6 to $1 a share, over the past year (chart). By contrast, the hapless stock buyers in the Eighties paid the post-split equivalent of $40 a share or more. But that's not to say that nobody has been able to turn a profit on Consolidated shares. One man has done that: Robert E. Brennan, the legendary penny-stock merchant.

Indeed, the recent twists in the Sequential-Consolidated story are the latest chapter in a fascinating--if convoluted--tale. Sequential began life in the early 1960s as an electronics firm, but its primary claim to fame involves another invention: the telephone. Sequential shares were aggressively pushed by cold-calling salesmen at Brennan's First Jersey Securities and the now-defunct Rooney Pace Inc. Rooney Pace was later found guilty of manipulating Sequential shares and misleading customers.

HIGH-TECH ACQUISITIONS. When the penny-stock schemes collapsed, so did Sequential stock. By the late 1980s, the shares could not even fetch a penny. The late Eighties and early Nineties were a dizzying nightmare of a nearly insolvent company, lawsuits, and blunders--above all the ill-fated sale of its operating company, Sequential Electronics Systems, to a Long Island firm called General Technologies Group Ltd. A Dickensian succession of lawsuits followed. When the smoke cleared, the SEC had acted decisively--against the people Schiller had sued.

Schiller insists that he didn't blow the whistle on his former cohorts. But he cooperated, and actively, he says. In the end, General Technologies Group Ltd. Chairman Eli Reiter pleaded guilty to fraud charges, as did an auditor at the company's accounting firm, Frederick Todman & Co. Schiller says he is cooperating with the SEC in civil proceedings against another former Todman executive.

All the litigating and cooperating haven't deterred Schiller from expanding Consolidated. The company has purchased magnetic resonance imaging centers and a smattering of other development-stage companies--an employee outsourcing company here, a telecommunications outfit there. The aggressive acquisition campaign was noted favorably by Emerging & Special Situations, a Standard & Poor's publication, in its Dec. 19 issue. (S&P is owned by McGraw-Hill Inc., publisher of BUSINESS WEEK.) The editor, Robert S. Natale, says he was aware of Consolidated's penny-stock pedigree when he listed the firm--which, he notes, was not a formal recommendation.

Another penny-stock watcher has also had his eye on Consolidated--Bob Brennan. According to SEC records, last May 13, Brennan's company, International Thoroughbred Breeders, bought 750,000 Consolidated shares at $6.00 a share--62 cents cheaper than the closing price on that day. ITB then sold 131,000 shares on May 18 at $6.46, 170,000 shares on May 19 at $6.46, and 100,000 shares the following day at $6.47. Brennan is hazy about how much more he was able to unload before the price collapsed. Overall, he says, he "probably sustained a modest loss."

Brennan has an intriguing explanation for the swift dumping of the stock. In an interview, he maintained that the purchase, 6.48% of Consolidated's shares outstanding, violated ITB's policy of not buying more than 5% of a company's shares. The error, he says, was discovered "by the guy who processes our trades." ITB then sold the shares--far more than was needed to put ITB below 5%. Why so much? He doesn't recall.

An SEC filing says the shares were purchased in the over-the-counter market. Yet the huge trade was not made public at the time. NASDAQ records show only 15,000 shares traded on May 13. Was Brennan's huge purchase reported to NASDAQ? Brennan isn't sure--and neither is NASDAQ. James Spellman, a NASDAQ spokesman, says the trade may have been reported out of sequence, and such trades are not always publicly disclosed.

Brennan narrowly escaped a calamity. In the summer of '94, Consolidated shares began their sickening decline from $6 to about $1.19. The pre-split equivalent: 2 cents. Schiller has no explanation for the decline. But the loss of Hibbard Brown clearly hurt Consolidated, because Hibbard was aggressively pushing Consolidated shares. How aggressively? Well, in April, four months before Hibbard bit the dust, the state of Wisconsin suspended Hibbard Brown's broker-dealer license, alleging that the firm used misleading, hard-sell tactics in selling Consolidated shares and two other stocks to Wisconsin residents. State officials said Hibbard Brown was running an old-fashioned boiler-room operation--just the way Sequential had been sold in the Eighties.

OVERSEAS CASH. Schiller denies knowledge of such chicanery. In any event, in his own stock sales he is steering clear of U.S. regulators. The company's biggest injection of cash in recent years came from overseas, mainly Canadian investors, who bought $14 million in Consolidated shares sometime over the past year. As a Regulation S offering, its terms did not have to be disclosed in this country and are of no concern to U.S. regulators.

So Consolidated's army of shareholders has been reinforced. Will the new recruits fare better than the old? "Schiller is quite a guy--he's a survivor. He's dedicated to make the company work," says Brennan, a Schiller friend for 20 years. Schiller, like Brennan, is a master survivor--and so is Consolidated. But will the shareholders ever be made whole? An old expression may put it best: "They should live so long."

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