Back in the days before the Federal Bureau of Investigation started snooping around, a lot of people remember that Tom Connelly and Bill Reeves were pretty good friends. The two met quite by chance four years ago, right after Connelly hired on as a criminal prosecutor at the U.S. Attorney's Office in Phoenix. Connelly was poking around a barn in north Scottsdale, looking to buy an Arabian horse for his wife. Reeves happened to own a few Arabians, and soon sold Connelly a fancy stallion named Preodney.

Reeves seemed so magnanimous. The middle-aged investor seemed to have everything--a beautiful young wife, a corporate airplane, plenty of cash, Arabian horses. He'd often invite others to share his success by tipping them off on investments within his vast business empire--his gypsum mine, his cattle ranches, his gold-mining properties and his lucrative bonding deals for government construction projects.

These days, you can bet that Connelly wishes he'd never heard of Bill Reeves. In the summer of 1988, at the height of their friendship, Connelly made a terrible, devastatingly stupid mistake.

It's a mistake that put him for a short while under the watchful eyes of the FBI, although he's not the target of a criminal probe at the present time. And it's a mistake that raised serious questions about how someone trusted as a U.S. attorney could dabble in a strange world of white-collar con men and thugs.

Connelly's incredible gaffe was uncovered by New Times during a one-month probe of his financial dealings with Reeves. The newspaper discovered that in his official capacity as an assistant U.S. attorney, Connelly signed an affidavit assuring the government that "to the best of my knowledge," Reeves was worth $138 million.

That affidavit meant money in Reeves' pocket. He now qualified as an "individual surety"--a well-heeled businessman who had enough assets to cover bonds required for federal building projects. The way it's supposed to work is if the contractor doesn't pay his subcontractors, the individual sureties step in and reimburse them.

But a Maryland lawsuit reveals Reeves defaulted on the very bond that was advanced by Connelly's signature on the affidavit. As a result, some subcontractors were left in the dust, short thousands of dollars for work they say they'd already completed.

And people started asking a lot of questions about how this happened.
Similar defaults have bred what the Wall Street Journal calls "a nationwide federal contracting scandal." Federal officials estimate that subcontractors have lost tens of millions of dollars when sureties default on bonds based on bogus fortunes, the Journal has reported. The "scandal" is so widespread that congressional fact-finding hearings were held earlier this summer to see what can be done to help the ailing subcontractors.

Which naturally raises the question: Did Connelly's role in Reeves' default prompt his surprising resignation from the U.S. Attorney's Office two weeks ago?

By then, New Times already had discovered from a Scottsdale police report that Bill Reeves was under investigation by the FBI in connection with a "large fraud case." (Reeves tells New Times he is not the focus of an FBI probe but is cooperating with the federal agency in an investigation of surety defaults.)

The newspaper probe also shows that before and after Tom Connelly put his signature to that document, he had business dealings with Bill Reeves.

HOW IN THE WORLD can a U.S. attorney get involved with a man who's linked to a fraud case by the FBI?

"All of us from time to time get taken in by folks whose appearance, demeanor and approach is disarming," he will only say. "Apparently I didn't know him [Reeves]." Although he's not anxious to talk about the situation at all, he lets it slip that he thinks his ex-friend and business associate is "a well of poison." Connelly absolutely refuses to say anything more about his relationship with Reeves.

Comments seem in order. New Times has found that Connelly's association with Reeves goes far beyond the federal affidavit.

New Times has learned that from 1987 to 1989 Connelly:
* Was listed in Reeves' ledgers as the recipient of more than $10,000 for "loans" and "stock," including checks for $2,500 after Connelly signed the federal affidavit.

* Obtained or help obtain a total of $55,000 from investors for deals put together by either Reeves or Gary Anderson, who had served time in prison for robbing Pizza Hut outlets. All of the investment money was lost.

* Signed over what turned out to be worthless stock to Reeves as part of a complicated plan to pay one of Reeves' debts.

THE SIGNATURE on the affidavit of surety is the most troubling of these business transactions, especially in light of the fact that Connelly was a criminal prosecutor for the U.S. attorney at the time. Officials at the U.S. Attorney's Office won't detail specific cases Connelly handled, but they admit that his division sometimes prosecutes fraud cases. So it follows that an assistant U.S. attorney ought to be able to spot suspicious financial statements, which sometimes mean a white-collar con man is near.