Energex Systems and the Magic of the Capitalist Marketplace

Energex Systems, Orthosonix, LawsuitLately I’ve been receiving a lot of big yellow envelopes in the mail, sent by the law firm McCarter and English. M&E are representing my interests in a class-action suit, Dow et al v. Fagan, et al.

One such envelope arrived in my mailbox several months ago bearing happy news. Thomas Fagan, the former CFO of Energex Systems, a biotechnology device manufacturer based in Allendale NJ, had been ordered by a NJ state grand jury to pay $10.2 million in investor restitution to the nearly 800 investors he had defrauded via the sale of unregistered securities. I am one of those defrauded investors.

My own investment was a small one, the minimum allowable for an initial investment at a time when Energex Systems (then called Orthosonix) was little more than a glimmer in Thomas Fagan’s ambitious eye. I’d written a check to Fagan in 1999, before my wife and I had kids, when we sometimes had some money lying around. Doing the math, I can see that many investors contributed a lot more money than I did.

But Thomas Fagan was a persuasive guy. He was a real go-getter. We didn’t know it at the time, but Fagan had no background in medical technology at all. He didn’t even have a college degree. He built Energex from nothing, one investment at a time. We were always hearing, secondhand, that he was hanging out with Bill Clinton or appearing on TV, touting the benefits of his company’s flagship product, the Hemo-modulator. The company had a spiffy website where newspaper articles and video clips about the Hemo-modulator were featured.

Thomas Fagan and his Hemo-modulator were going to cure AIDS and Hepatitis C. Clinical validation and FDA approval of the Hemo-modulator — a machine that drew patient’s blood, subjected it to some kind of cleansing ray, then restored the good-as-new blood to the ailing patient — were always nine months away, a year away, six months away.

When state investigators finally arrived at the Energex corporate headquarters in Allendale, they didn’t find $10.2 million in assets. They found empty offices, heaps of dusty, outdated office equipment, 165 boxes of business records, and some Energex devices. The Energex Device was a vibrating thingy that was supposed to alleviate the pain of TMJ (temporomandibular joint) Disorder. Energex actually patented this device in 2003, but no dentist ever bought one.

There were no Hemo-modulators to seize. They only existed in Thomas Fagan’s ambitious eye.

The most recent yellow envelope to arrive at my home contained less-happy news. The sum remaining total of Energex Systems’ assets comes to $420,000. That’s the high — and only — bid received at auction for all the Energex assets, which had been moved to an off-site storage locker somewhere.

Energex Systems, Thomas Fagan, Stock Certificate, LawsuitWhere did all the money go? A lot of it went to Fagan in the form of a yearly salary estimated to be “in the high six-figures,” according to investigators. The company never reported any real income at all and Fagan himself filed no personal income tax returns in 2007, 2008, and 2009. In 2010, he filed a fraudulent return.

But a salary like that only goes so far for a man with Fagan’s expensive tastes. Fagan liked to make political donations to local Republican office holders, donations he made with company funds. Fagan is also charged with misappropriating more than $230,000 “for his personal use and enrichment,” including withdrawals of tens of thousands of dollars for casino gambling in Atlantic City and Las Vegas.

Fagan also used company funds to make an unrepaid loan 0f $40,000 to his sister, cover a settlement agreement that ended a civil lawsuit against him, pay for a trip for two to the Beijing Winter Olympics, and fund his wife’s personal expenses. All of these transactions were covered up through a series of cash transfers, checks made out to himself and other deposits and withdrawals.

Fagan, of course, denies every well-verified charge made against him. For a year, he’s been representing himself in court in a farcical series of legal proceedings. “I will never give up,” Fagan said at the time. “Look at anybody that has sold securities in this state, and you will find they violated securities laws. It’s impossible not to violate them because nobody can understand them.”

This personal philosophy enabled Fagan to skip Step One for selling securities in New Jersey, which is to officially register with the state for the right to do so. Fagan just had a bunch of stock certificates printed at Kinko’s and he was good to go. There’s my certificate above, for 10,000 worthless shares of Energex, issued as Certificate #69 when the company was still called Orthosonix.

Anyway, now the money’s gone. Thomas Fagan is about as likely to end up in jail as Jon Corzine, the one-time NJ governor who gambled away $1.6 billion of other people’s money at MF Global and then walked away free and clear, without even being charged.

As a postscript, the last communication from McCarter and English informs me that the first payment has already been made out of the $420,000 in Energex funds set aside for investor restitution. William D. Wallach, Esq. reports that he has written a check against the balance, payable to his employers, McCarter and English, for some $150,000, in payment for legal fees in the form of services provided by said law firm at the rate of $550 per hour.

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