TRENTON – Attorney General Jeffrey S. Chiesa announced that a former Bergen County executive was indicted today on charges that he stole more than $230,000 in investor funds that he allegedly diverted from his two biotechnology/medical device companies for his personal use. The executive was previously sued by the Attorney General’s Office for defrauding nearly 800 investors of $9.5 million by selling unregistered stock in one of the companies.
Thomas J. Fagan, 57, of Rye, N.Y., formerly of Emerson, N.J., was charged today in a state grand jury indictment with misapplication of entrusted property, theft by unlawful taking, money laundering, and misconduct by a corporate official. Each of those charges is a second-degree crime that carries a sentence of five to 10 years in state prison. He is also charged with three counts of failure 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 resulted from an investigation by the Division of Criminal Justice Financial & Computer Crimes Bureau. The criminal investigation resulted from a referral by the New Jersey Bureau of Securities, which filed suit against Fagan and his companies on July 15, 2011.
“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,” said Attorney General Chiesa. “He rightfully faces serious criminal charges.”
“We are making it a priority to investigate major financial crimes,” said Director Elie Honig of the Division of Criminal Justice. “This type of white collar crime has a devastating impact on victims, and we will aggressively prosecute this man and any others who prey on investors and consumers.”
Fagan was the President and Chief Executive Officer of Energex Systems, Inc., for which he sold approximately $9.5 million in unregistered stock to at least 784 investors, including 228 New Jersey investors. Energex Systems was promoted as a developer of various biotech products, including ones related to blood safety. Only one Energex product received FDA approval, and the company never had significant sales. In 2009, 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. Energex and Arbios Systems were based in Allendale, N.J.
Fagan allegedly commingled investor funds among the two companies, and stole or misappropriated 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. Those amounts are not the subject of the indictment. It is alleged that, beyond those amounts, he 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.
In connection with the count charging misapplication of entrusted property, it is alleged that Fagan wrote Energex checks to himself in 2008 totaling $117,772. The checks were categorized in company books and records as “other” expenses. Fagan allegedly 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.
In connection with the count charging theft by unlawful taking, it is alleged that between December 2008 and August 2011, 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.
In connection with the money laundering count, it is alleged that Fagan 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. He allegedly structured at least $84,000 in transactions to conceal or disguise instances when he stole or misappropriated company funds.
Fagan and his companies, Energex Systems and Arbios Systems are also charged with multiple third-degree counts of failure to file New Jersey corporate tax returns.
Deputy Attorney General Peter Gallagher presented the case to the State Grand Jury. It was investigated for the Division of Criminal Justice Financial & Computer Crimes Bureau by Detectives Edward Augustyn III and Cheryl Smith, Lt. David Nolan, Lt. Michael Fallon, Deputy Attorney General Gallagher and Analyst Alison Callery. Also investigating the case for the Department of Taxation, Office of Criminal Investigations was Special Agent William Makar and Supervising Forensic Auditor Michael Mullane.
Second-degree crimes carry a sentence of five to 10 years in state prison and a fine of up to $150,000, while third-degree crimes carry a sentence of three to five years in prison and a fine of up to $15,000. The second-degree money laundering charge carries an enhanced fine of up to $500,000, and an additional anti-money laundering profiteering penalty of up to $250,000.
The indictment was handed up to Superior Court Judge Thomas W. Sumners, Jr., in Mercer County, who assigned the case to Mercer County, where Fagan will be ordered to appear in court at a later date for arraignment. The indictment is merely an accusation and the defendant is presumed innocent until proven guilty.
As a result of the civil case filed in July 2010, the Bureau of Securities obtained court orders freezing the defendants’ assets, appointing a receiver, and enjoining Fagan from engaging in any securities-related activity. The civil case is pending and a trial date has been set. Rudolph G. Bassman, Chief of Enforcement for the Bureau of Securities, conducted the investigation of this case. Deputy Attorney General Victoria A. Manning, Assistant Chief of the Securities Fraud Prosecution Section in the Division of Law, and Deputy Attorney General Paul E. Minnefor are representing the Bureau of Securities.