Boardroom battle snares start-up

In court papers, two of Bixby Energy's outside board members allege that the company has been grossly mismanaged.

A Minnesota company with a deal worth up to $1 billion to sell clean-coal technology in Asia is grossly mismanaged, insolvent and facing federal investigations after raising $60 million from investors with the help of a man convicted of bank fraud, according to a lawsuit filed by two of the company's own directors.

The suit against Bixby Energy Systems Inc. was filed by former U.S. Rep. Gil Gutknecht, who joined its board in 2007, and James Bergeron, an Illinois man who is the company's largest investor. Their complaint says Bixby's management, led by Chairman and CEO Robert Walker, needs to be thrown out and replaced by a receiver.

Bixby was founded in 2001 in Ramsey, Minn., with the promise of developing new energy technologies but had accumulated $141 million in losses by the end of last year. The suit filed last week in Hennepin County District Court blames the deficit on "the reckless conduct" of Walker -- the founder of adjustable mattress maker Select Comfort -- as well as Bixby's corporate attorney and a convicted thief who acted as a marketing consultant.

The lawsuit describes Bixby as a company with a promising technology and eager customers in Asia that has been unable to get even five test systems up and running. Meanwhile, the suit alleges that Walker paid himself an excessive salary, put family members in unnecessary jobs and travelled the world first-class at company expense.

"The whole goal here is to get competent management in place so we can protect our contracts, fulfill those contracts and respond to the legal challenges the company has in a proactive manner," Gutknecht attorney Thomas Heffelfinger said.

Walker, citing advice of counsel, declined to comment on specific allegations. But he said that Gutknecht and Bergeron had been "hostile" for a year but were outvoted by a majority of the board. "The company expects to make an announcement about a strategic investor within the next couple of weeks," he added.

A judge on Monday ordered Bixby to turn over financial and other records to the directors' lawyers by the end of Thursday.

Court papers show that Gutknecht, who served in the U.S. House from 1995 to 2007 and joined Bixby's board shortly thereafter, wrote in a March e-mail that Bixby's "management is under a Federal Grand Jury investigation by at least three agencies."

Bixby, in a memo to potential investors last year, disclosed that it is or may be the subject of a grand jury investigation, as well as an investigation by the Securities and Exchange Commission. Court papers say the Internal Revenue Service also is investigating the company.

Bixby initially sold corn-pellet stoves, then in 2008 acquired a now-patented technology offering the promise of converting coal to cleaner-burning gas. But the company bled cash and failed to deliver a commercial-scale version of the coal-to-gas "Bixby Process," resulting in a legal dispute with its inventor.

Along the way, Bixby raised equity and debt financing from 1,800 people and entities, the lawsuit says. A consultant to the company, Dennis DeSender, often made the pitch to investors and appeared to be Walker's "primary confederate and agent in conducting the affairs of Bixby," the suit says.

In 1998, DeSender was sentenced to six months in prison and four years of supervised release on a federal bank fraud conviction. He also was convicted that year in Hennepin County for theft by swindle and hiding criminal proceeds, which resulted in a 10-year stayed sentence. Last month, DeSender pleaded guilty to evading $825,866 in taxes and awaits sentencing.

Part of Bixby's pitch was that it intended to go public -- a step that often enriches early investors -- but the SEC returned its public offering application last year, the lawsuit says. It says that Bixby "operated without meaningful internal controls," and would be ineligible to sell stock publicly because it fails to comply with Sarbanes-Oxley, a 2002 federal law on corporate governance.

The lawsuit accuses Walker, DeSender and corporate attorney Peder Davisson of self-dealing and conspiring "to pilfer Bixby for their own purposes."

The lawsuit alleges that Walker engineered the removal of two outside directors in 2006 -- retired business executives Arnold A. Angeloni and Wendell King -- after they became concerned about how investors' money was being spent and initiated a forensic audit of Bixby's finances. The audit, by the Minneapolis law firm Greene Espel, apparently was called off with their ouster.

Unhappy partner

Last month Global Partners Unified (GPU), a Nevada company with an exclusive contract to sell Bixby's coal-gasification technology in China, alleged in a separate lawsuit that Bixby repeatedly misrepresented the status of its technology, frustrating customers who had invested millions in facilities based on Bixby's claims.

"GPU has paid Bixby over $6 million and still does not have a single completed system in China," GPU Chief Executive Jason Moore said in a court filing.

Bixby had promised that the technology not only would clean up coal, but also would produce activated carbon as a valuable byproduct. But the Global Partners lawsuit, also filed in Hennepin County, alleges that Bixby has never been able to fully activate the carbon byproduct.

"GPU would like to see Bixby as a going concern," said David Davenport, an attorney for the firm. He said his clients believe the technology is viable. "The objective of this lawsuit is to get the court to come in, take over management and run the company the way a receiver sees fit."

Heffelfinger agreed. "The challenge is that, as alleged in our complaint, current management is creating so many problems that it is putting the entire company at risk," he said.

Gutknecht owns, controls, or has the right to acquire 357,425 shares of Bixby stock, the suit said. Heffelfinger said Gutknecht invested in the company but declined to say how much. Heffelfinger said Gutknecht would not comment on the case.

Bergeron, the other director who joined Gutknecht in the suit, is a businessman who owns restaurants in Naperville, Ill. He invested more than $3.25 million in the company and his friends and relatives invested $2 million more, the lawsuit says. He was appointed to the board in 2006.

In 2009, court papers say, Bergeron tried to get Walker to slash spending and suggested his CEO salary be cut from $325,000 to $162,000 and that Walker's two children, who earned $110,000 and $65,000, be let go.

"Bob, I realize the situation with Melanie and Tim [Walker] presents a hardship for you and your family," Bergeron wrote in an e-mail. "The point is, you can't use shareholder money to solve your family's problems. It is not your money."• 612-673-7090 • 612-673-4493 • 612-673-7144

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