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Thomas J. Fagan, 57, of Rye, NY, was indicted by a state grand jury earlier this month in connection with a scheme that defrauded nearly 800 investors of $9.5 million by selling unregistered stock in one of the companies, Energex Systems, Inc.
More than 225 of them were in New Jersey, state Attorney General Jeffrey S. Chiesa said, adding that Fagan often used the money for overseas vacations and gambling junkets to Atlantic City and Las Vegas.
A Superior Court judge ruled on summary judgment that Fagan and his primary company, Energex Systems of Allendale, violated the Securities law through sales of unregistered securities by an unregistered agent. They appear headed to trial on the remaining charges.
The settlement announced today fully resolves the state’s civil complaint, Chiesa said. It orders Fagan to pay $1 million in civil penalties, Energex to pay $9.5 million and two other spinoff companies — AAP and ASI — to collectively pay $700,000.
Fagan also is permanently barred from selling securities in New Jersey, and from holding controlling interest in or serving as an officer or director of any company that issues securities in New Jersey, including his former companies.
Fagan’s wife, Candace Fagan, must disgorge $20,000 under a separate settlement announced today.
“The State is bringing every available enforcement tool to bear on this defendant, who illegally raised millions of dollars by selling unregistered stock to hundreds of investors – and allegedly defrauded those investors by spending the money on vacations and other personal expenses,” Chiesa said.
Fagan was president and CEO of Energex, which was “promoted as a developer of various biotech products, including ones related to blood safety,” the attorney general said.
“Only one Energex product received FDA approval, and the company never had significant sales,” he added.
In 2009, Chiesa said, Fagan founded Arbios Acquisition Partners to gain control of Arbios Systems, Inc., a medical device company, and sold over $1.6 million in unregistered Arbios Systems promissory notes and stock.
“Investors entrusted Fagan with millions of dollars of their hard-earned money, which they expected he would use to advance these high-tech companies, but he allegedly repaid their trust by stealing and misappropriating hundreds of thousands of dollars and running the companies into the ground,” Chiesa said. “He rightfully faces serious criminal charges.”
The grand jury indictment returned earlier this month charges Fagan with misapplication of entrusted property, theft, money laundering, and corporate misconduct.
He is also charged with three counts of failing to file personal income tax returns in New Jersey, for tax years 2007 through 2009, and filing a fraudulent state tax return in 2010.
The charges stemmed from an investigation by the state Division of Criminal Justice Financial & Computer Crimes Bureau, which received a referral from New Jersey Bureau of Securities, Chiesa said. The bureau filed suit against Fagan and his companies in July 2011.
“We are making it a priority to investigate major financial crimes,” said DCJ Director Elie Honig. “This type of white collar crime has a devastating impact on victims.”
Chiesa said Fagan commingled investor funds among the two companies, stealing or misappropriating more than $230,000 “for his personal use and enrichment,” including withdrawals of tens of thousands of dollars for casino gambling.
Fagan paid himself several hundred thousand dollars a year in salary, bonuses and reimbursement of business expenses, as well, the attorney general said.
Although those amounts aren’t the subject of the indictment, Chiesa said Fagan also “took additional unauthorized funds for his personal use either by making company checks directly payable to himself, making bank counter withdrawals, or making ATM withdrawals from company accounts.”
The indictment also alleges that Fagan wrote Energex checks to himself in 2008 totaling $117,772. The checks were categorized in company books and records as “other” expenses.
It says he used $60,772 of those checks to cover gambling losses in Atlantic City and Las Vegas, $40,000 to give to his sister, and $17,000 toward payment of a personal out-of-court legal settlement.
What’s more, the indictment alleges, Fagan made $114,031 in cash withdrawals for personal use from accounts of Energex and Arbios Systems, including withdrawals made in Atlantic City and Las Vegas.
He also “disguised the source and ownership of company funds he stole or misappropriated through a series of inter-company cash transfers, cash deposits and withdrawals, and deposits of company checks into his personal account, followed by withdrawals as cash or cashier’s checks,” Chiesa said.
That includes structuring at least $84,000 in transactions to conceal or disguise instances when he stole or misappropriated company funds, the indictment alleges.
“This vigorous investigation, and its outcome, underscores our commitment to rooting out investment fraud,” said Eric T. Kanefsky, director of the State Division of Consumer Affairs. “Would-be scammers should realize that when they attempt to defraud to enrich themselves, they ultimately do not profit but instead end up paying a high price for their greed.”
Rudolph G. Bassman, chief of Enforcement for the Bureau of Securities, conducted the investigation. Deputy Attorneys General Victoria A. Manning and Paul E. Minnefor of the Securities Fraud Prosecution Section in the Division of Law represented the bureau.
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