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Up until February, Boca Raton, Fla.-based Eagle Building Technologies boasted of millions of dollars in sales from its housing construction project in Bombay, India, with more projects about to start in Mexico and China. The company also touted the potential for big sales of explosives-detection and anthrax-sterilization devices to the federal government in the wake of the Sept. 11 terrorist attacks. Eagle also looked solid to investors because it had several political heavyweights on its board of directors, including Sam Gejdenson, a respected former Democratic congressman from Connecticut, and Charles A. Gargano, a top adviser to New York Gov. George Pataki and chairman of the Empire State Development Corp. There was only one problem: The company had “no substantive operations” in India, the ostensible source of most of its reported sales, according to the U.S. Securities and Exchange Commission, which suspended trading of the company’s stock Feb. 15. And the company’s supposedly promising security devices had never undergone sufficient testing to pass government muster, according to the SEC. Now, the company faces a civil fraud lawsuit filed by the SEC in U.S. District Court in Washington, D.C., at least three shareholder fraud lawsuits filed in U.S. District Court in West Palm Beach, Fla., and four wrongful termination suits by four former employees, including former CEO Paul-Emile Desrosiers, filed in Palm Beach Circuit Court. In addition, according to Desrosiers’ attorney, North Miami solo practitioner Karl S.H. Brown, the Department of Justice is investigating allegations by Desrosiers of “fraudulent and intentional misconduct” by Anthony Damato, Eagle’s former CEO. Damato is cooperating with the SEC investigation, says his attorney, John M. Dowd, a member of Akin Gump Strauss Hauer & Feld in Washington. Dowd says he has not heard from Justice, but that his client will cooperate with any potential investigation. The DOJ does not confirm or comment on pending investigations. But Desrosiers’ attorney, Brown, and Tim Deehan, CEO of Actionable Intelligence Technologies, both say that Justice is investigating. Deehan says Justice has obtained from him documents subpoenaed by the SEC concerning Eagle. “It’s now under active investigation by the SEC and Department of Justice, so we’re not allowed to comment on it,” Deehan says. “We were interviewed by the SEC and Department of Justice and did turn over all records as a result of subpoenas.” $12 MILLION OVERSTATEMENT ALLEGED Eagle says in press releases and on its Internet site that it builds affordable housing in developing countries using a unique concrete block design and building system to which it acquired rights several years ago. It has a major project under way in Puerto Rico, according to company press releases. But even that’s in question, because the owner of the concrete block technology is claiming that Eagle is in arrears on its licensing agreement payments. On Feb. 15, the SEC suspended trading of Eagle’s stock on the Over-the-Counter Bulletin Board for 10 days. The agency’s civil complaint followed on March 1. The complaint alleges violations of federal anti-fraud provisions. The company had been in the process of applying to be listed on the American Stock Exchange and listed the nonexistent India sales in that application, an SEC official says. Eagle’s stock, which plunged from a 52-week high of $12.30 last April to $1.44 at the time of the trading suspension, has since resumed trading on a different venue, the OTC US. Despite the federal probes and lawsuit, the company continues to operate; its stock traded at $3.80 per share Monday morning. According to the SEC complaint, Damato, 33, was chairman of the board of Eagle from May 1999 until he resigned in February of this year. He served as the company’s president and CEO from June 1, 1999, until Aug. 15, 2001, when Desrosiers was given those titles. Damato directed Eagle’s day-to-day business activities while president, the SEC filing says. Damato admitted in an SEC deposition on Feb. 22 that he concocted bank statements to make the company seem healthier than it was. According to SEC trial counsel Leslie Hendrickson Hughes, based in Denver, Damato, in the deposition, admitted to approving several news releases about the anthrax and explosives detection devices that the SEC considers misleading. But he disagreed with the SEC’s characterization of the press releases. He also admitted to fabricating the income statements in an effort to pump up the stock value. The SEC Denver office has been assigned the case. The SEC alleges that the company’s 2000 annual report and three quarterly reports in 2001 overstated earnings by more than $12 million. The company has said in documents filed with the SEC that it plans to restate its past financials in coming months. Of the company’s nearly $3.4 million in sales reported on its 2000 annual report, at least $2.5 million were attributed to “purported” sales from operations in India, the SEC complaint states. But Damato “knew there were no substantive operations in India,” it continues. He created a fictitious purchase order and a fictitious contract and fabricated account statements from a bank in India, New India Co-Op Bank Ltd., that showed fictitious receipt of payments for sales of concrete blocks, equipment and consulting services, it says. The quarterly reports for 2001 state the company had about $10.2 million in revenue from Bombay operations that did not exist, the SEC complaint says. Asked where Damato, the company’s former chairman, could be reached for comment, a receptionist at Eagle’s headquarters April 18 replied: “No one knows.” But Damato’s attorney, Dowd, says Damato was under the care of a doctor and is fully cooperating with the SEC. He refused to comment further. ‘ALL HELL BROKE LOOSE’ The shareholder fraud suits, which seek class action status, mirror the SEC allegations. These lawsuits allege that investors were defrauded by the company’s overstatement of earnings and by misleading press releases artificially inflated its stock price. The plaintiffs in the wrongful termination suits include Desrosiers, who first reported financial irregularities to the SEC in January. Damato’s alleged misconduct, according to Desrosiers’ suit, includes embezzlement, unexplained cash flow problems, unreported loans made to Eagle from board members and shareholders, gross understatement of debt and numerous transactions involving the sale, pledge or transfer of company stock “which were unreported and without knowledge of the full board of directors.” The employment suit also alleges that, despite its reported sales revenue from India, Eagle bounced numerous checks. But Desrosiers also alleges, according to his attorney, that the company channeled millions of dollars through numerous accounts that he, as president and CEO, had never been told about. “Paul was trying to find out what was going on and that’s when all hell broke loose,” says Desrosiers’ attorney, Brown. “He said, ‘Where is all this money coming from, because our projects are not generating this kind of money?’ “ Desrosiers’ lawsuit was filed Feb. 7 in federal court in Las Vegas, Nev., where Eagle is incorporated, then moved to Palm Beach Circuit Court on March 20 on a motion by Eagle. The company’s headquarters are at 225 NE Mizner Blvd. in Boca Raton. According to the employment suit, Eagle and its affiliate, Fort Wayne, Ind.-based BioSterile Technologies, are controlled by board member Meyer A. Berman, a prominent hedge fund manager. Berman, who in 1981 founded M.A. Berman Co., a securities broker-dealer that shares offices with Eagle in Boca Raton, has been quoted for his stock market expertise in The Wall Street Journal and Barron’s and has appeared on CNBC. He is a major Democratic Party campaign donor. Former congressman Gejdenson, who lost a re-election bid in 2000 after 20 years in the House, has been serving on Eagle’s board of directors since February 2001 and has been active in its meetings. He is also on BioSterile’s board. Also on the Eagle board from June 2000 until he submitted his resignation on Oct. 12, 2001, was Gargano, who’s currently vice chairman of the Port Authority of New York and New Jersey, which controls the region’s three major airports and its seaports. He also serves as chairman of the Empire State Development Corp., which is overseeing redevelopment of the World Trade Center site. Gargano was the chief fund-raiser for George Pataki’s first campaign for governor in 1993. According to Eagle financial forms submitted to the SEC, Gargano was to receive $5,000 plus 62,500 restricted shares of Eagle common stock per year for his service on the board. Gejdenson, who also served as a vice president, was slated to earn $40,000 in salary for that job and receive 20,000 shares a year as a director. Berman did not return calls requesting comment. Eagle’s attorney, David A. Carter, a solo practitioner in Boca Raton, referred all calls to Peter V.B. Unger, a member at Fulbright & Jaworski in Washington, D.C. Unger did not return calls for comment. In New York, a spokesman at Empire State Development Corp. said in an e-mail message that Gargano resigned from Eagle’s board via certified mail last October. “He never attended a board meeting and indicated in his resignation letter that he did not have the time to commit to serve on the company’s board,” the spokesman said. DAMATO ‘LIED’ TO BOARD Gejdenson said in an interview that if he and the other board members had known what was going on, they would have stopped it. “It was completely dishonest,” he said. He insists, however, that Eagle has a “great product” in its concrete block construction system, which he says is earthquake-resistant and affordable. “Damato lied to the board members about what was going on. And then there are other issues as to what he did with assets of the company. I think there is a legal battle to recover some of those assets.” “I think things are now under control,” he continued. “They have to raise some dough, obviously, to make up for things that happened.” The shareholder fraud suits were filed after the SEC took action. The suits allege that company officials falsified revenue statements in public filings and exaggerated or lied about the company’s activities in order to artificial inflate the stock price. One of the suits was filed April 8, on behalf of Long Island investor Robert Gluck, “and all others similarly situated,” by Michael J. Pucillo, a partner at Berman DeValerio Pease Tabacco Burt & Pucillo in West Palm Beach. Robert N. Kaplan, a senior partner at Kaplan Fox & Kilsheimer in New York City, is also representing the plaintiffs in that suit. Another shareholder fraud suit was filed April 16, on behalf of Ingelwood Holdings Ltd., by Kenneth J. Vianale, managing partner of Milberg Weiss Bershad Hynes & Lerach in Boca Raton, along with Daniel A. Osborn, a partner at Beatie and Osborn in New York City. Another shareholder fraud suit was filed in Palm Beach Circuit Court on behalf of shareholders Marc Newman, Kenneth Wait, Anthony Robers and Dana Davis. That suit was filed by partner Adam Doner at Gordon & Doner in Palm Beach Gardens, along with Danny Glass, a partner at Fine & Hatfield in Evansville, Ind. The Gluck suit states that he bought 4,000 shares of Eagle stock between November 2001 and January 2002, at prices ranging from $10.30 to $12.40 per share. When he sold on Feb. 14, 2002, the price had plummeted to $3.53 per share, according to his suit. The other two actions are similar, alleging that investors relied on Eagle’s statements boasting about its housing projects and security devices that, if proven effective, seemed highly marketable in the post-Sept. 11 environment. CONCRETE BLOCK RIGHTS LAPSED In recent weeks, Eagle has been trying to negotiate its way out of a dispute with the Utah company that licenses the rights to Eagle for the concrete block construction system it uses. A lawyer for that company, Integrated Masonry Systems International (IMSI), Jonathan O. Hafen, partner at Parr Waddoups Brown Gee & Loveless in Salt Lake City, says Eagle’s licensing agreement payments are in arrears but that he anticipates a settlement and renewal of the licensing agreement. Without such an agreement, Eagle could not continue to use that construction technology on a major housing project on which it has broken ground, in Salinas, Puerto Rico. But IMSI director and acting president and chairman Rudolf Strobel of Cincinnati, says IMSI has given Eagle “a conditional green light” to use the technology while negotiations progress. IMSI has benefited from Eagle’s false income reports, which it did not know were false, acknowledges Strobel. That’s because IMSI was to be paid a percentage based on sales of the blocks. He did not know exactly how much IMSI received. In addition to the housing work, Eagle, via BioSterile, is marketing anthrax-sanitizing machines for mail processing, as well as explosives-detection devices for airports. Eagle has engaged in heavy marketing of those devices to the federal government since the 9-11 terrorist attacks, including meetings with dozens of congressmen and Federal Aviation Administration officials. The SEC is seeking a court injunction to prohibit the company from making false financial statements in the future. The agency also is seeking as yet undetermined fines from Damato, and is demanding that he hand over profits he received from trading the stock. The SEC is not seeking fines from Eagle. In cases involving allegations of fraud by executives, the agency often does not seek penalties against the company itself “because that ultimately hurts investors,” Hughes explains. FIRED AFTER FINDING PROBLEMS The SEC took action after Desrosiers, who briefly replaced Damato as Eagle’s CEO, provided paperwork to the agency in February that he says supports his claims of wrongdoing by the company. Desrosiers took Damato’s place as CEO in August of last year after serving as a vice president since December 2000. According to his employment lawsuit, Desrosiers e-mailed the Eagle board of directors in early January, asking for a meeting to discuss financial irregularities he said he had found. He claims that he discovered irregularities and subsequently hired a San Diego company, Actionable Intelligence Technologies, to use money laundering detection software and other due diligence services to analyze Eagle’s books. When he raised his suspicions with the board, Desrosiers contends in his lawsuit, he was notified that he was fired. His suit seeks his reinstatement, as well as a percentage the profits of the housing project he set up for the company in Puerto Rico. That project could generate $4.2 billion through construction of 100,000 homes throughout the island commonwealth, said Desrosier, who now lives in San Diego. Its first phase of 5,000 homes would net Eagle $60 million, entitling him to $6 million, he says. Desrosiers said: “I didn’t know where the money came from, nor what it was being used for. In light of the Enron situation, I conducted a mini-investigation into the files of Eagle and its bank records. I reported to the board and requested a meeting. In a nutshell, I told them about it, they did nothing, so I reported it to the federal authorities.”

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