A CFO suspected of possible insider-trading violations keeps getting hired to govern other companies.

Gerald Luterman of

KeySpan Energy

(KSE)

has landed two new board seats in the past 10 months, despite a lingering probe of his past actions at KeySpan. Late last year,

Ikon Office Solutions

(IKN)

followed the lead of

Technology Solutions

(TSCC)

by offering Luterman a lucrative side job as an outside director. But Ikon went a step further by acknowledging that its new director is the target of two government probes.

"Mr. Luterman, along with other officers of KeySpan, has been named in a formal investigation by the

Securities and Exchange Commission

and the U.S. Attorney's Office, Southern District of New York, relating to his trading activities with respect to KeySpan common stock," Ikon revealed in a proxy statement filed last month. "As of the date of this proxy statement, this investigation has not been closed."

The government began questioning the company after senior executives sold stock just before announcing a big charge that sent the shares plummeting in the summer of 2001. Although KeySpan disclosed the probes, it never singled out Luterman as a specific target. The company instead allowed

Houston Exploration

(THX)

-- which it partly owns -- and now Ikon to make that revelation.

The latest notice by Ikon instantly caught the eye of Michelle Leder, author of

Financial Fine Print: Uncovering a Company's True Value

.

"If you're a KeySpan investor, wouldn't you want to know that your CFO was the target of a formal SEC investigation?" Leder asked the day after Ikon filed its proxy. "Ikon gets credit for disclosure here. But you have to wonder whether there's no other qualified board member, other than one being investigated by the SEC."

KeySpan told

TheStreet.com

this week that it doesn't comment on investigations or pending litigation.

Luterman sold a chunk of KeySpan stock near its $40 peak in 2001. The stock, hammered by news of the charge, slid beneath $30 a few weeks later. It is now approaching its old high following Thursday's solid fourth-quarter earnings report, adding 12 cents to $36.74.

Raw Deal

Just six months after Luterman joined the company, following a brief stint at

barnesandnoble.com

(BNBN)

, KeySpan carried out a notoriously ill-fated transaction.

The company inked a deal to buy Roy Kay, a New Jersey contracting firm, for roughly $35 million at the beginning of 2000. The deal, intended to expand KeySpan's deregulated businesses, backfired the following year.

Up and Down
KeySpan, three years

According to a lawsuit filed by Roy Kay, KeySpan realized -- only after the transaction -- that federal utility laws would limit KeySpan's ability to engage in some key Roy Kay businesses. But KeySpan, which later filed a lawsuit of its own, insisted that it had simply been misled about the true value of the contracting firm.

"We clearly knew there was a problem in April

2001," KeySpan spokesman Bob Mahoney told the

New York Post

months later. "And we tried to solve it."

KeySpan promptly booted the Kay family out the door and took over what was left of their company.

"At the same time that the KeySpan security group was downloading computer files. ... KeySpan President William K. Feraudo was having what appeared to be a congenial lunch with Roy Kay at the nearby Empire Diner," a 2001 press release issued by Roy Kay states. "When Kay ... confronted Feraudo, he was handed four termination documents -- one for each family member."

Three weeks after that luncheon, KeySpan executives -- including Luterman -- began cutting their stake in the company. They netted millions, selling KeySpan at or near its peak, by the time the company publicly disclosed problems inside its new Roy Kay division.

"The performance of the Roy Kay companies under their former management was not commensurate with the high standards demanded by KeySpan," CEO Robert Catell announced in July 2001. But "we have taken appropriate steps to address these issues and have every confidence that the actions we are undertaking will mean better service for KeySpan customers and enhanced value for our shareholders."

In the meantime, however, KeySpan found itself taking a $30 million charge -- and triggering a huge selloff in its shares -- due to cost overruns and accounting problems at the Roy Kay division. The company would go on to announce more than $100 million in additional writedowns tied to the doomed acquisition.

And the SEC would formalize its probe of the KeySpan executives who profited just ahead of the bad news.

Fuzzy Math

Since then, KeySpan has caught heat for yet another big blunder.

The company somehow caused its largest customer -- the Long Island Power Authority -- to overstate its electricity sales by $62 million during a two-year period. The company, which manages much of LIPA's business, repeatedly double-counted power sales from multiple plants in 2001 and 2002. And KeySpan detected the problem only after LIPA kept questioning its numbers.

"Had LIPA not mistrusted the sales figures for months,"

Newsday

reported in 2002, "the overstatement would have caused the authority to spend itself into a deficit."

Although KeySpan downplayed the situation -- saying it neither hurt LIPA customers nor helped itself -- the authority was clearly not amused.

"Obviously, this is a major error," LIPA Chairman Richard Kessel said in a press conference covered by

Newsday

. "We are launching several audits of KeySpan. Until those audits are completed, we're not going to accept any of KeySpan's numbers."

Following those reviews,

Newsday

reported, LIPA issued a draft audit late last year showing that KeySpan may have overcharged the authority by some $110 million during a five-year period. That audit is currently in KeySpan's hands.

"We're trying to be as cooperative as possible ... before we jump to conclusions," LIPA spokesman Bert Cunningham told

TheStreet.com

last week.

But at least one LIPA trustee has already suggested that the authority should sever all ties with KeySpan.

"Whether it will happen depends on what is discovered now that we're looking into it," Trustee Jonathan Sinnreich told

Newsday

in 2002. "If the problems discovered are as bad as what some members of the board think they might be, it would be hard not to."

KeySpan, which relies on LIPA for more than 10% of its revenue, told

TheStreet.com

on Monday that it is "working with the LIPA to resolve any issues raised by the draft audit."

Bonus Pay

In 2002 -- the same year the LIPA debacle first surfaced -- Luterman did see his bonus chopped in half. But the cut was based on his prior-year performance. And it was offset by a 12% hike in base pay and a huge slug of restricted stock.

Indeed, Luterman's track record hasn't really hurt him at all. He is now supplementing his income with paychecks from at least three other companies and big stock options grants from his own.

Since 2000, Luterman has sat on a Houston Exploration board that pays its directors $20,000 a year and an extra $1,000 per meeting. But he landed more lucrative posts last year. Technology Solutions tapped him as a director -- for $30,000 plus 40,500 stock options -- just two months before it announced last June that it was pursuing "strategic alternatives" amid a serious business downturn. Ikon followed up in November with an equally generous offer that includes $35,000 worth of both cash and options, and extra pay for meetings.

Like KeySpan, Ikon has had its problems. The company sprang its own big charge on investors six years ago and wound up paying a $111 million class-action settlement as a result.

KeySpan still faces a similar shareholder lawsuit that, last July, the court refused to dismiss. The executive stock sales, carried out by Luterman and others, serve as one basis for that case. But neither shareholder complaints nor government probes have stopped Luterman from selling stock. Since May, Luterman has cleared $700,000 from KeySpan stock transactions and has announced plans to sell far more.

KeySpan told

TheStreet.com

that it "doesn't comment on the personal financial transactions of our employees." At the same time, it also indicated that it has no concerns about Luterman's increasingly busy schedule.

"We have a written policy on board memberships," KeySpan spokesman Edward Yutkowitz said on Monday. "Everybody's in accordance with the written policy."

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