Divorce Settlement Dissolved Over Fraud : Woman Had Been Told Couple’s $70-Million Firm Was of Little Value

Finding that a husband fraudulently persuaded his spouse that their $70-million firm had little value, a judge on Friday dissolved a 1983 divorce settlement that left the wife with property worth $750,000.

“I was sure that the system would come through for me,” said Connie L. Stewart of Huntington Beach after the verdict. “It’s been a long haul. I’m really very grateful.”

Orange County Superior Court Judge Judith M. Ryan found against Keith B. Stewart on every point in the case, including allegations of fraud, concealment and violations of securities laws.

Ryan set a September hearing to determine a fair split of the property accumulated during the Stewarts’ 20-year marriage, and said she would award punitive damages against the husband.

Marvin Gross, who with his son Marc, represented Connie Stewart, has asked for $2 million in punitive damages.

Connie Stewart testified that she relied on her estranged husband’s statements that his firm, now Gradco Systems Inc., was heavily in debt while they negotiated the property settlement. He concealed plans to make a public offering of the privately held firm, of which he controlled 55% of the stock, she testified.

The Stewarts separated in 1981, at the request of the husband. Both signed the divorce settlement, by which she received a home in Huntington Harbour, property in Coto de Caza, an automobile and $6,000 a month, including support for two children.

Keith Stewart received ownership of 2.1 million shares of Gradco stock under the same agreement, signed on April 7, 1983.

One day later, April 8, 1983, a letter was sent notifying existing Gradco shareholders of the planned public offering in which stock would be offered for $16 to $18 per share. That pricing made Stewart’s stock worth at least $33.6 million.

The principal asset of the firm was ownership of a patent for a device used to sort documents produced by copying machines. Stock sold over the counter at $14 per share Thursday, with the price varying between $17 3/4 and $10 1/8 in the last year.

“We still have to collect,” Gross said after the verdict. He said Stewart had transferred his shares to several trusts operating in the Cayman Islands.

Ryan tried the three-week case without a jury. In announcing her decision, Ryan said she found Keith Stewart’s testimony had “undulated with each moment.”

Connie Stewart, on the other hand, was “consistent” and “truthful,” Ryan said. The case involved an array of accountants, lawyers and investment bankers involved in the Gradco stock sale, many of whom had “severe memory problems,” Ryan said.

Ryan found that the husband, in negotiations with his wife, solicited her trust about the financial condition of Gradco. “He promoted the kind of confidence that she placed in him,” Ryan said.

In fact, nothing Keith Stewart said in the six months before the settlement was signed was truthful, because he concealed optimistic future earning projections for the firm and the imminent public offering of Gradco stock, Ryan found.

Ryan noted that the stock offering immediately followed the property settlement.

“You don’t wake up one morning and decide to have a public offering,” Ryan said.

The judge also found that there was “no possible doubt” that Connie Stewart had been “purposefully misled.”

‘Right to Sink or Swim’

Defense attorney Vernon W. Hunt Jr. argued that Connie Stewart was willing to give her estranged husband the business and “the right to sink or swim.” Hunt claimed the firm was in debt at the time, and had only “speculative value.”

Hunt presented evidence showing that the wife was represented by an attorney during the settlement negotiations, and that a Gradco lawyer met with her attorney voluntarily six months before and mentioned the possibility of a public stock sale.

“We don’t agree with the court’s ruling,” Hunt said. “We feel there are some significant legal issues involved.”

Hunt said future proceedings that will determine the final outcome of the case will determine whether an appeal is filed.