Two financial experts who looked at Bixby Energy Systems' books in 2006 testified Wednesday they found serious problems — and then got fired.
The testimony at the fraud trial of former chief executive Robert Walker showed that questions about accounting, felons on the payroll and possible kickbacks arose years before his ouster in 2011 and the collapse of the company the following year.
Michael Brodeur, a certified public accountant who lasted four months as chief financial officer in late 2006, said he learned that the company was falsely telling investors that it had a backlog of orders for its initial product, corn-burning stoves.
"It was conjured," Brodeur said of the phony backlog in U.S. District Court in St. Paul "It was what I call 'cooking the books.' "
Andrew LaFrence, an outside auditor then working for the big accounting firm KPMG, testified that he and others assigned to audit the company's financial condition in 2006 found Bixby had poor controls over money along with missing paperwork, including documentation about finders fees paid to Dennis Desender, the company's chief fundraiser and former CFO.
The separate discovery that Desender and another top executive had felony fraud records, represented "the biggest red flag," LaFrence said. Those and other concerns led him to recommend a deeper look at Bixby's books in what is known as a "forensic audit."
Although the forensic audit led by a Twin Cities law firm got started, Walker ordered it halted in late 2006. Around that time, Brodeur and LaFrence also were terminated.
Walker, 71, is on trial for fraud, conspiracy, tax evasion and witness tampering. He led Bixby, based in Ramsey, Minn., from 2001 to 2011, a time when it went from producing corn-burning stoves to promoting an unsuccessful clean-coal technology. He is accused of defrauding 1,800 private investors of $57 million.
Brodeur said Walker didn't seem surprised to have felons working at Bixby and had told him, "You have to walk through some real rough neighborhoods to get to the good neighborhoods."
Brodeur said he interpreted that to mean that Walker was willing to work with unsavory characters. Brodeur called some executives at Bixby "slimy," but he didn't include Walker.
"He seemed like a genuine, nice person," Brodeur testified.
At the time, Walker was planning to take the company public through a reverse merger, but it never happened. While the forensic audit was underway, Bixby officials continued to raise money from private investors, but didn't disclose the ongoing investigation.
Brodeur testified that Bixby had raised $26 million by late 2006, and $3.5 million had been paid in finders fees, mostly to Desender, who was not a licensed securities dealer. That exceeded the maximum 10 percent fee allowed to be paid to licensed dealers under the terms of the private stock offering.
"We had significant concerns about the finders fees and the propriety of the finders fees," added LaFrence, who now is CFO of the Eden Prairie-based medical technology company SurModics Inc.
LaFrence and Brodeur also were alarmed by company records that indicated "Bob" was to get 50 percent of Desender's commissions. That seemed to indicate that Walker "was getting kickbacks," Brodeur testified.
The defense contends Desender was loaning money to Walker. Desender earlier pleaded guilty to securities and tax charges in the Bixby case, and is expected to testify against Walker in the trial.
The trial, now in its second week, is expected to last five to seven weeks.