WASHINGTON -- Max Hugel resigned as head of the CIA's covert operations Tuesday, saying that allegations he had engaged in 'improper or illegal' stock market practices made it impossible for him to serve effectively.
President Reagan said he was 'distressed' by the resignation because Hugel had been accused -- but not convicted -- of wrongdoing.
Hugel, 56, a member of the Reagan campaign staff who since May has served as deputy director of operations in charge of clandestine agents and operations, said the allegations reported by the Washington Post Tuesday were 'unfounded, unproven and untrue.'
As he returned to the White House Tuesday night from a tribute to his wife's stepfather, Dr. Loyal Davis, Reagan was asked for his reaction.
'I was distressed that once again we seem to be taking accusation as conviction,' Reagan told reporters. 'He resigned because he didn't want to cause any trouble in the administration. I think it should be remembered there's been nothing but the allegation.'
In another development, it was learned that a federal judge ruled that CIA Director William Casey, 68, who appointed Hugel to his post and accepted his resignation, and seven other men knowingly misled investors in a now-defunct agribusiness firm in New Orleans. The May 19 ruling came as the result of a class action civil suit filed in 1974.
Standing outside his red brick townhouse in suburban Virginia, Hugel told reporters, 'I've done nothing wrong.' But he declined to answer questions.
Hugel said in a letter to Casey, 'Under present circumstances, I feel I can no longer effectively serve you or the agency.'
Accepting the resignation 'with deepest regret,' Casey appointed John Stein, a career intelligence officer, as Hugel's permanent replacement.
White House spokesman David Gergen dismissed reports that White House chief of staff James Baker had told Casey that Hugel had to go as 'flat wrong.'
Gergen said CIA general counsel Stanley Sporkin has begun an investigation into the case. He also said Casey retains President Reagan's full confidence and that Reagan believes Casey, who managed his 1980 campaign, has done 'a first rate job' as head of the U.S. intelligence agency.
'The president was saddened by the events that have led to the Hugel resignation,' Gergen said, adding, 'As far as the White House is concerned, this matter is closed.'
The ruling against Casey was a 'summary judgment' handed down May 19 in U.S. District Court in Manhattan. Judge Charles Stewart said the defendants in the civil case knowingly misled investors in raising $3.5 million for Multiponics Inc.
'We will have no comment because the matter is up for appeal,' a White House spokesman said. The spokesman said the case 'has been matter of discussion as far back as his confirmation hearings' for Casey's appointment as Security and Exchange Commission chairman during the Nixon administration. Sporkin was long-time enforcement chief of the SEC before going to the CIA.
The Post based its report on the allegations of two former Wall Street brokers, Thomas R. McNell, 49, and his brother, Samuel F. McNell, 47, that they joined Hugel in the mid-1970s in prohibited actions intended to boost the stock of his New York wholesale firm, Brother International Corp.
The Brooklyn-born Hugel founded Brother International with two other associates after World War II as the U.S. distributor of sewing machines and typewriters manufactured by the Japanese firm, Brother Industries Ltd. He was its president until 1975.
Hugel was active in Republican politics, meeting Casey in the process. Casey's appointment of Hugel as head of the CIA's cloak-and-dagger activities raised the ire of CIA professionals who attacked his lack of experience.
The Post said the McNells, 'who admit their own culpability,' produced 16 secret tape recordings of telephone conversations with Hugel in 1974 and 1975 and documents to corroborate their charges that Hugel:
--'provided them with 'insider' on the company he headed in advance of disclosure to other investors and the general public.'
--'Improperly funneled funds to McNell Securities, the principal firm trading in his company's stock.'
--'Relying on a business associate, orchestrated the phased purchase of 15,000 shares of his company's stock to create the appearance of increased market interest in it.'
The Post said members of its staff met for four hours Friday with Hugel, his lawyers and Sporkin and again Monday with Hugel and his lawyers.
The newspaper said Hugel called the McNell brothers 'vindictive' people who first attempted to swindle him and later to 'blackmail' him.
Hugel said in a statement issued through his attorney Monday night and printed by the Post, 'I have 'never made a penny of unlawful profit or done anything else to bring discredit upon my company, my family, myself or the United States.
'I deny any wrongdoing, and I can demonstrate that none was intended or committed.'
In a letter to Reagan, Casey said he had known and trusted Hugel for 20 years and that he selected a deputy director from outside the intelligence community to prevent in-fighting for the job.
If the allegations against Hugel were proven, he would have violated regulations of the Securities and Exchange Commission governing insider trading and market manipulation by fraud.
After leaving Brother International, Hugel became executive vice president and a director of Centronics Data Computer Corp., of Hudson, N.H. He had been a stockholder in Centronics and negotiated a joint production agreement in 1971 for Brotherhood International's Japanese parent company to manufacture component's for Centronic's high speed computer printers, the Post said.
Hugel joined the Reagan campaign as Nashua town chairman for the New Hampshire primary. He went on to work in the national campaign, organizing ethnic voters under Casey, who was Reagan's campaign manager.
When Casey took over the CIA in January, Hugel went with him as a special assistant. He was promoted to deputy director of administration before Casey personally chose him to become the CIA spymaster.
In his letter of resignation, Hugel told Casey the charges against him, 'although unfounded, unproven and untrue, have become a burden which I no longer believe is fair to impose on the administration, the agency, my family, and the splendid men and women who work with me.
'Under present circumstances, I feel I can no longer effectively serve you or the agency.'
Casey said in his letter of reply that he accepted Hugel's resignation with 'deepest regret.' He told Hugel he had 'deservedly earned the respect of the those with whom you have worked.'
A CIA statement said:
'Mr. Max Hugel, CIA's deputy director for operations, today tendered his resignation. Mr. Hugel said he had concluded that, although allegations made in respect to certain business activities seven years ago are unfounded and untrue, the allegations have become a burden which he believes is no longer fair to impose on the agency and the men and women who have worked with him.
'Mr. Hugel wishes to emphasize that the allegations against him concern his private life and have no connection whatsoever with his association with CIA or to its activities.'
The Post quoted the McNell brothers as saying that in early 1974 their firm, McNell Securities Corp., agreed to become a 'market maker' for over-the-counter stock of Brother International Corp.
The normal procedure for a broker to is to keep aloof from a firm whose stocks it is buying and selling to other investors in order to give the investors unbiased advice.
'But, from the start, Hugel and the firm established closer ties, including inside tips and improper loans, according to the McNells, special ties never disclosed to investors,' the Post said.
It said Hugel, who owned 11 percent of the outstanding Brother International stock, stood to make substantial profits but this did not happen because stock prices slumped in the economic recession of late 1974.
The McNell firm, overextended on market credit, was forced to close and Thomas McNell began taping his acrimonious telephone conversations with Hugel over repayment of financing, the Post said.
It said the McNells finished only last fall repaying some $400,000 to Hugel.