(Saint Paul Pioneer Press (MN) Via Acquire Media NewsEdge) Jan. 28--When a forensic audit of Bixby Energy Systems turned up mismanagement and possible misuse of funds, CEO Robert Walker told the auditors that the fledgling alternative energy company couldn't afford the pricey report.
Jeanette Bazis, an attorney working on the forensic audit, didn't believe the cost was the real worry. Walker knew "we were on to him, and he wanted to try to bury it," she testified Monday at Walker's ongoing fraud trial in St. Paul.
The audit in 2006 found that the company had raised about $26 million, and that millions in "finder's fees" had been paid to Bixby insiders for the fundraising efforts, a violation of the company's private stock offering. The audit also found unearned compensation going to Walker's family members who worked for the company, and artificially inflated sales figures for Bixby's corn stoves.
After hearing what the auditors had turned up, Walker sent an email to Bixby board member Arnold Angelino, saying that "we will have to spin every move we make here over the next few months to stay ahead of rumors that could potentially harm us."
That email and other documents were displayed Monday as the third week of Walker's trial got underway. Walker, 71, is best known as the founder of Select Comfort, the company behind the Sleep Number bed. He's accused of defrauding investors in his next venture, Bixby Energy, by lying about the firm and its prospects. Prosecutors say 1,800 Bixby investors lost $57 million.
Originally, Bixby Energy had decided it needed an audit, in part, to prepare for an initial public offering of company stock. But by the time Bazis and the team from Minneapolis law firm Greene Espel requested an interview with Walker, they ran into resistance.
"Four hours is a lot of time to carve out of my schedule," Walker wrote in a note to the auditors, after their request. He did later agree to be interviewed, but stayed for a little more than two hours.
At the meeting, Walker denied splitting finder's fees with the company's chief fundraiser Dennis Desender, and said instead that Desender had provided him with $750,000 in loans. Desender pleaded guilty in 2012 to using deception to sell securities at Bixby and was sentenced to eight years in prison. He's expected to testify at Walker's trial.
Both prosecutors and Walker's defense on Monday referred to a loan agreement from 2006 between Desender and Walker, which said Walker would repay the loan and its 12 percent interest rate. He'd have to pay it back after Bixby went public, or by January 2010, whichever came first.
But the audit team didn't find the loan agreement credible, Bazis testified. "Based on the evidence we had, we concluded it was made up."
Desender also was the company's contract chief financial officer at one point.
People at Bixby believed that Desender was a contract CFO -- and not a full-time employee -- so that he could collect the finder's fees when he drew money into the company. The company's private stock offering memo said that officers of the company couldn't receive finder's fees from investors they brought to the company.
Soon after the audit's findings began to surface in late 2006, Walker fired the company's new chief financial officer, Michael Brodeur, its law firm, and had two members of the board of directors replaced. Walker eventually succeeded in removing the professional firms engaged in the forensic audit of Bixby, including Greene Espel.
If convicted on charges of mail and wire fraud, witness tampering and tax evasion, Walker could face decades in prison.
John Welbes can be reached at 651-228-2175.
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