Tenet Director Feels the Heat on Start-Up Deal

Tenet Healthcare ( THC) director Maurice DeWald is no stranger to investor discontent.

DeWald and another Tenet director -- former Nebraska Sen. Bob Kerrey -- have attracted scrutiny for selling Tenet stock shortly after an analyst raised concerns about the company's Medicare billing practices. Since then, those concerns have boiled over into federal investigations that have sliced two-thirds off the hospital chain's market value.

But DeWald is under fire at another company as well. Although his biography on Tenet's Web site makes no mention of it, DeWald also serves as one of two directors at Omnigon, a private California start-up that -- after years of promises and capital injections -- has little to show for its efforts except a still-unproven technology that has never been commercially deployed. DeWald, a major Omnigon shareholder, recently acknowledged that the company has been "operating on fumes for a good six months."

With Omnigon nearly broke, and its Carlsbad, Calif., headquarters shuttered, some investors are now saying the company misrepresented its prospects in order to raise $35 million in a series of private placements. Even longtime investors, introduced to Omnigon before DeWald joined the company five years ago, are throwing blame DeWald's way.

"He had an obligation to keep the shareholders apprised of what was actually going on," said Nancy Romonaco, who estimates her total Omnigon investment at nearly $500,000. "Everything was so hopeful -- always about how we were about to acquire the rights and services of this company or that person, leading toward all these wonderful things that were already in the process.

"But nothing ever happened."

Michael Whitney, a financial consultant whose business associates poured millions into the venture, says Omnigon routinely offered rosy projections that he believes had little -- if any -- chance of coming to fruition. Whitney says he based his conclusion on a year's worth of research, collecting official Omnigon documents and interviewing Omnigon investors, consultants and former employees. Omnigon recently sued Whitney, who shared much of his findings with TheStreet.com, alleging defamation and interference with its business.

"They're always 30 to 60 days away from success," says Whitney, who owns no Omnigon stock himself. "They always need just $2 million to $4 million more. And they're always working on a new technology."

Whitney says DeWald's reputation and credentials, earned from a career at KPMG and directorships at big companies like Tenet, gave people a false sense of security about investing in Omnigon. Omnigon noted DeWald's track record in the corporate bio section of a 2001 securities purchase agreement, provided in part to TheStreet.com by Whitney, whose business associates accepted that 2001 invitation to invest.

For its part, Tenet lists DeWald as a director at such companies as Dai Ichi Kangyo Bank of California and ARV Assisted Living ( SRS). But the company said it was unaware of DeWald's involvement with Omnigon. Tenet declined to offer further comment about DeWald, who chairs its audit committee and also serves on its corporate governance, compensation and executive committees.

DeWald collects $65,000 a year -- plus thousands more for meetings -- for serving as a Tenet director. His board seat expires in 2004.

Omnigon IOUs

Whitney, who was originally impressed by DeWald's background, now says DeWald should be held accountable for seeking investors for a company that touted acquisitions that were later disputed and for failing to disclose that some of its employees and consultants weren't getting paychecks.

Cal Woosnam, the former CEO of a company Omnigon now controls, also says DeWald has wronged investors.

"Maury DeWald has been completely involved with the laying out of stock issues, the raising of capital -- the promises to shareholders," Woosnam says. "So he is culpable."

So far, at least two of Omnigon's acquisition targets have come forward to say the company misled investors about their relationships. Ed Boren, a founder and former co-owner of Environmental Communications Technologies, says Omnigon told investors it had acquired his company long before a contract -- now allegedly broken -- was even in place. And Woosnam recently served Omnigon with a $23.5 million lawsuit that will attempt to resolve an ongoing dispute related to his former company, Lightway Technologies.

Woosnam says Omnigon impressed investors by showcasing LightWay's technology during demonstrations, held in LightWay's Canadian headquarters, just ahead of a planned merger when the two companies were still on good terms. But he says Omnigon never delivered the $5.5 million it promised in its purchase agreement with LightWay.

"Omnigon had numerous meetings with investors in our office, purporting all along that they had just acquired us," Woosnam said in a recent interview. "The problem is, they never paid for us. And over the next two years, they raised $20 million on the LightWay story."

In addition to suing Omnigon, Woosnam has filed a pro se suit -- meaning he is acting as his own attorney -- against DeWald, alleging breach of contract, fraud, conversion, Racketeer Influenced and Corrupt Organizations (RICO) act violations, negligent misrepresentation and negligence. Woosnam says DeWald served as Omnigon's CFO throughout the company's negotiations with LightWay.

Omnigon describes itself as the victim in both the LightWay and the Environmental Technologies transactions. Omnigon, in fact, sued Woosnam first, for allegedly misrepresenting LightWay's technology. But Whitney says Omnigon failed to disclose the battle under the litigation section of its 2001 offering documents, meaning that shareholders had little way of knowing that a dispute existed at all.

Revolution No. 9

Omnigon touts as its centerpiece something called Prof-IT, a "revolutionary" pattern-recognition technology that supposedly defies the limits of standard mathematics. The technology, if successfully launched, could speed the discovery of new drugs, explode the powers of media technology and -- some say -- change information processing forever.

Chairman Dirk Wray, Omnigon's only director besides DeWald, describes the company as the next Oracle or Microsoft. And even some Omnigon detractors remain sold on Prof-IT's potential.

"If I could travel 200 years into the future and bring back one technology, this would be it," says Bob Little, a former Omnigon employee who is less enthusiastic about the company's leadership. "But after Dirk Wray and Maury DeWald took control, it was all about raising money -- it wasn't even about the technology any more."

Under the direction of Wray and DeWald, Little says, Omnigon evolved into a big fund-raising "machine" that mistreated its talented employees. As an example, he says, Omnigon forced him to accept overpriced company stock -- valued at $6 a share when insiders were paying only 18 cents for their shares -- in lieu of cash for his salary.

DeWald called Little's allegations "off the wall." But even he acknowledged that Omnigon has fallen considerably behind on payroll. Some former Omnigon employees, who've organized through a Web site, estimate the company owes as much as $750,000 in back pay to a staff that numbered 65 at its peak last year.

Meanwhile, at least one Omnigon consultant claims he never got paid at all.

Shelby Brewer, an assistant secretary of energy during the Reagan administration, says Omnigon still owes him thousands of dollars for his preliminary work modeling a power grid for a district in mainland China. Another respected consultant, who asked to remain unnamed, put Omnigon's unpaid debt to him in the six-figure category.

But those bills haven't stopped Omnigon from hiring a new slate of consultants in recent months. The new crew, experts in the life-sciences arena, confirmed they're being paid -- although they stressed that they work not for Omnigon itself but for Vizion, a new subsidiary.

"These guys are the subsidiary kings," complained one investor, who invited friends, family members and close business associates to invest in Omnigon. "They're 'Omnigon Gaming,' or 'Omnigon Medical Devices,' or 'Omnigon something else.'

"But Omnigon can't point to a single commercial application that's driven one dollar of revenue for six years."

The 'Omnigoners'

An estimated 200 private investors have poured money into Omnigon. But many say the company has yet to give them a single financial statement.

Although private companies operate outside the stringent disclosure rules imposed on publicly traded corporations, they often supply investors with detailed financial information anyway.

When asked, Omnigon declined to provide its financial statements and prospectus documents to TheStreet.com, citing confidentiality concerns. But it stressed that, as a privately held company, Omnigon invites only sophisticated, "accredited" investors who can withstand the risks. It also provided pages of risk factors that were laid out in private placement memorandums provided to investors. Those risks include, but are not limited to, additional financing needs, negative cash flow and acquisition risks. In the disclosure, Omnigon also claims "broad discretion" in the use of capital.

"Although the company's management anticipates utilizing the proceeds of this offering as set forth in the company's business plan ... management's failure to apply these funds effectively could have a material adverse effect," a recent offering document states.

Bill Fisch, who invested twice in Omnigon, called Omnigon's risk disclosures the most extensive documentation he ever received from the company. Fisch says he was otherwise left in the dark. He claims he weathered his latest shock last month, when he learned that Omnigon had shut down its office -- but only after the receptionist there stopped answering the phone.

"There were probably 72 flags over the years that should have raised our ire," Fisch acknowledged. "Whatever they're doing sounds like a sophisticated Ponzi scheme. And we weren't thinking of getting involved in a scam."

Omnigon flatly denies operating such a scheme, saying that it has always operated under "the letter of the law." The company has also attempted to discredit Whitney -- its most vocal critic -- by pointing to his past involvement with a company that turned out to be a scam. For his part, Whitney claims he was an innocent consultant unfairly dragged down in the now-dissolved scheme, and that the experience only strengthened his intolerance for shareholder abuse.

Musical Chairs

By now, DeWald has filled board seats at several companies facing challenges.

In 1991, DeWald joined the boards of two companies that later ran into trouble. He accepted a board seat at National Medical Enterprises just as the company was entering years of turmoil for ordering unnecessary psychiatric hospital stays, particularly for children. NME later merged with another company to become Tenet, where two of its hospital doctors now stand accused of performing serious, unnecessary surgeries.

DeWald also filled a board seat at Comparator, a California company that made its name in 1996 -- after DeWald left -- for touting a fingerprinting technology that lacked financing. Today, Comparator is best remembered for breaking Nasdaq volume records during a brief stock explosion just before regulators shut down trading in the penny stock.

As for Omnigon, DeWald acknowledges that the company's investors -- himself included -- are unhappy about their losses. But he dismisses their allegations as "malicious and uninformed."

Meanwhile, a handful of Omnigon backers have rushed to DeWald's defense, saying he has always been responsive to shareholder needs at Omnigon -- a responsiveness, they believe, probably extends to shareholders at Tenet as well.

Indeed, Omnigon investor John Kilfoyle describes DeWald as a "very ethical, moral" man.

"This is good management attempting to succeed in tough times," said Kilfoyle, one Omnigon investor who says he's actually seen the company's books. "I think it's a good team for kind of a combat situation."

Courtroom War

Omnigon has taken a tough stance with its critics. The company has already filed a $1.3 million lawsuit against Woosnam in state Superior Court in San Diego and a $225 million lawsuit against Whitney in state Superior Court in Orange County. Other Omnigon critics interviewed for this story insisted on remaining anonymous, saying they fear backlash from the company.

But the litigation flows both ways. To date, Omnigon has been the target of at least five lawsuits, including three filed this year. Meanwhile, San Jose, Calilf., attorney Ben Johnson says he plans to sue Omnigon on behalf of Frank Renda, who invested $250,000 into the venture, in a San Diego court as early as this week. Other disgruntled investors, feeling new strength in numbers, have said they plan to follow.

"There is that desire to just hang on and not say anything in case things work themselves out," Romonaco says. "But I feel as though I've been financially raped by Omnigon."

Despite such criticisms, DeWald says he's doing everything in his power to make Omnigon a success.

"The bad news is we got caught in a capital markets downturn," DeWald said. "The good news is we're still fighting. ... We won't rest until we can generate value for our shareholders."

More from Stocks

Week Ahead: Trade Fears and Stress Tests Signal More Volatility To Come

Week Ahead: Trade Fears and Stress Tests Signal More Volatility To Come

3 Great Stock Market Sectors Millennials Should Invest In

3 Great Stock Market Sectors Millennials Should Invest In

Why Millennials Are Ditching Stocks for ETFs

Why Millennials Are Ditching Stocks for ETFs

Trump's 'Space Force' Could Launch a $1 Trillion Industry, Morgan Stanley Says

Trump's 'Space Force' Could Launch a $1 Trillion Industry, Morgan Stanley Says

Abiomed Stock Should Rise Some 12% From Here, Piper Jaffray Analyst Says

Abiomed Stock Should Rise Some 12% From Here, Piper Jaffray Analyst Says