Ramsey-based alternative-energy start-up Bixby Energy Systems admitted that it defrauded investors of between $2.5 million and $7 million and is cooperating with a government investigation into its former officers and employees, the U.S. attorney's office in Minnesota announced Wednesday.
Bixby was charged by information, and without a grand jury indictment, with one count of securities fraud. In exchange for accepting responsibility for the actions of its former workers involved in the fraud and working with the government, Bixby will not be prosecuted; the arrangement is part of an agreement reached between the company and the U.S. attorney's office.
"When a company does what is right; when it accepts responsibility for the wrongdoing of its employees, officers, and agents; cooperates with the government in its investigation; and takes steps to insure similar offenses will not occur in the future, the government will work with the company toward a just outcome for all," U.S. Attorney B. Todd Jones said in a statement. "That is what Bixby Energy did in this case, and in doing so, it demonstrated true corporate responsibility and leadership and serves as a fine example for other companies."
The fraud took place between 2006 and May 2011. During that period, Dennis Luverne Desender-a consultant and former acting chief financial officer for Bixby-and an unnamed co-conspirator used "manipulative and deceptive practices" in an effort to sell its securities, according to the U.S. attorney's office.
Specifically, Desender and the co-conspirator lied to investors-some of whom weren't "accredited" to invest in ventures like Bixby-in order to induce them to commit large sums of money to the company for business projects, including a coal gasification energy system, the U.S. attorney's office said. Some of the funds were used for those projects, but the two used a large portion of the money to pay "substantial salaries" and commissions to themselves and others.
They also provided false information to investors and potential investors in an effort to entice them to provide additional funding, according to the U.S. attorney's office. For example, they told investors that Bixby was going to go public when they had no such plans for it, they assured investors that the company was in good financial standing when it wasn't, and they knowingly concealed information-including the fact that the company's goal gasification project wasn't ready for market like they represented it to be.
In May, two outside directors took control of Bixby's board, replacing the unidentified co-conspirator, who previously controlled it, and forcing that co-conspirator and his associates to leave the company, the U.S. attorney's office said. At that point, the company agreed to cooperate with the government's investigation and even voluntarily conducted a preliminary internal investigation after which it reported all findings to the government.
According to the Star Tribune, the description of the alleged co-conspirator fits that of former CEO Bob Walker, who reportedly resigned his post in May in the wake of federal criminal and civil investigations and lawsuits that alleged gross mismanagement. The Minneapolis newspaper reported that Walker-who previously founded Select Comfort-drove Bixby away from its original business of making pellet stoves into coal-gasification technology, which is now being tested in China.
"Based on what we know, we expect the government to come out with allegations against Mr. Walker shortly, or an indictment, but we look forward to defending the case," Ryan Pacyga, who's representing Walker along with Peter Wold, told the Star Tribune. "We think that there's a lot of information out there that will vindicate Bob Walker if and when he's indicted."
Desender, 64, pleaded guilty in September 2011 to one count of securities fraud for his role in the scheme. He is awaiting sentencing and faces a maximum 20-year prison term.
The Star Tribune reported that two previous lawsuits alleged that Bixby had accumulated $141 million in losses and that Walker had put his relatives on the payroll, spent recklessly, and didn't pay suppliers; both suits were reportedly settled in conjunction with Walker's departure from the company.
Former U.S. Representative Gil Gutknecht, who reportedly filed one of the suits, in May became chairman of Bixby's board and has been working to turn the company around.
Bixby-through its agreement with the U.S. attorney's office-must develop and implement a compliance and ethics program designed to prevent against and detect future securities laws violations.