The Delaware bankruptcy of Springdale’s NanoMech Inc. has taken a bizarre cloak-and-dagger turn: Former CEO Jim Phillips, under oath in September, cited “national security” when refusing to answer questions about 46 transactions that its top financial officer knew only as the “CIA arrangement.”
According to bankruptcy court filings, NanoMech received 24 wire transfers totaling $1 million from Rhinebeck Technical Consulting, headquarters unknown, and its predecessor, Timpano Technology Services, between January 2012 and September 2017.
On the backside, Nano-Mech paid 22 invoices from AmeraMax Consulting of Plantation, Florida, totaling $905,260 between May 2012 and October 2017.
NanoMech’s former senior vice president of finance, Wyatt Watkins, said the deal resembled “potential money laundering.”
“No legitimate goods or services were exchanged in connection with the receipt by or payments made by NanoMech,” Watkins said in a sworn statement dated Oct. 24. “If the apparent sham transactions were in connection with official government business or national security operations, I have never seen any evidence of that.”
But Watkins did sign a curiously low-tech “nondisclosure agreement” handed to him by a Rhinebeck representative who identified himself as a CIA operative. Watkins also went to a hotel in Rogers to meet with the man, who engaged in security precautions like turning on the TV to mask conversations.
NanoMech’s participation in the five-year arrangement was uncovered during an audit investigating possible claims against the company’s directors and officers liablity insurance.
Some NanoMech investors hope to mitigate their losses by tapping NanoMech’s two D&O liability insurance policies worth up to $6 million combined.
As it stands, New York’s Michaelson Capital is first in line for up to $5.4 million of any D&O payout or deal.
Some information on the “CIA arrangement” was filed Oct. 25 in the public court record of NanoMech’s bankruptcy but was put under seal and redacted four days later.
Phillips, who was pushed out as chairman, president and CEO in March, was compelled under court order to appear for questioning on his management of the company. The bankruptcy deposition, called a 2004 exam, was conducted Sept. 10 in the Rogers offices of the Wright Lindsey & Jennings law firm.
The puzzling CIA deal was one of few topics Phillips had little to say about during the lengthy and contentious 2004 exam. His often evasive and non-responsive answers to questions sometimes took the form of long-running soliloquies interspersed liberally with caustic accusations against his critics.
The unsatisfactory outcome of the combative round of questioning prompted NanoMech lawyers to seek a court order to compel Phillips to sit for another 2004 exam.
When questioned by Delaware attorney Michael Busenkell about a consulting contract between NanoMech and AmeraMax, led by Derik Epperson, Phillips didn’t seem to recognize the name until his memory was jogged with a copy of the agreement bearing his signature.
Busenkell: “Who is Derik Epperson?”
Phillips: “I cannot answer for national security reasons.”
Busenkell: “Was AmeraMax a branch of the government?”
Phillips: “It’s associated with a branch of the government. I’m sworn to secrecy, and I signed a national security agreement.”
Busenkell: “Can you tell me what services or goods Amera-Max supplied to NanoMech?”
Phillips: “I can’t say anything about AmeraMax. It has to do with the United States national security, very important, and I’m sworn, and I’ve signed on that, as have a few directors.”
Phillips said he had met Epperson a few times but had not met a man associated with Rhinebeck/Timpano named Eric Fabian.
Phillips: “I’ve talked to him on the phone a couple of times.”
Busenkell: “Who does he work for?”
Phillips: “I’m not allowed to disclose that.”
Busenkell: “Okay. Are you aware that payments were made from NanoMech to AmeraMax?”
Phillips: “And vice versa. It involves the security of the country.”
Watkins, NanoMech’s former SVP of finance, was able to shed only a little more light.
“This (AmeraMax) agreement was not part of the corporate records upon my review, and I don’t know whether the dating on the agreement is accurate,” Watkins said in a sworn statement. “But I do know that money was passing through NanoMech’s accounts under the so-called CIA arrangement, commencing in Jan. 30, 2012, following the July 1, 2011 dating of the consulting agreement.
“There were no consulting services provided of any kind to my knowledge.”
Watkins served as NanoMech’s top finance executive and board secretary during the 29 months leading up to the company’s April 15 filing for Chapter 11 reorganization. In his statement, Watkins said that he met Fabian twice.
The first time, Watkins said, he was introduced to Fabian by Phillips, who indicated he had never met Fabian in person. That meeting occurred after Watkins questioned Phillips in late 2016 about NanoMech’s business relationship with Derik Epperson, whom Watkins noticed was listed in corporate records as both a vendor and employee.
“When I asked who Mr. Epperson was,” Watkins stated, “I was told by Jim Phillips that Mr. Epperson worked for the United States government, and that NanoMech was helping the government, in a matter of national security, through Mr. Epperson’s company, AmeraMax, but that he, Mr. Phillips, would have an individual named Eric Fabian come to NanoMech to address my questions.
“A few weeks after I was hired, Mr. Fabian came to NanoMech’s headquarters and Mr. Phillips introduced Mr. Fabian to me, and then Mr. Phillips left me alone with Mr. Fabian in a conference room adjacent to Mr. Phillips’ office.
“Mr. Fabian represented to me that he was an employee of the United States, and, after my prodding and further questions, indicated that he was employed by the United States Central Intelligence Agency and was an operative for the CIA.
“He did not present to me any form of identification or badge, but I believed him.”
According to Watkins, Fabian told him that his company, Rhinebeck Technical Consulting, had an agreement with NanoMech: RhinebBeck paid a consulting fee to NanoMech, and NanoMech paid the fee to AmeraMax.
Fabian also said that Epperson worked with companies in Central America as a consultant for new business development for NanoMech as part of a CIA operation.
“At the end of the meeting, Mr. Phillips joined us again, and Mr. Fabian had me sign a nondisclosure agreement, which I did sign,” Watkins said. “The nondisclosure agreement did not have letterhead and appeared to be a regular word document. I was told by Jim Phillips that he, and others, including Ajay Malshe [NanoMech’s founder and chief technology officer at the time] and Eric Barnes [Watkins’ predecessor at NanoMech], had also signed similar nondisclosure agreements. I did not obtain a copy of the agreement I signed.”
Watkins’ second meeting with Fabian occurred after Phillips resigned from the company in March. Fabian asked to meet him at a Rogers hotel not identified by Watkins in his sworn statement.
“When I arrived at this hotel room to meet Mr. Fabian, he requested that I turn my phone on airplane-mode, and he turned the television on, stating to me that he was doing so for security reasons,” Watkins said. “I was asked to sign an additional nondisclosure agreement, which I did sign, but was not given a copy. Again, there was no official letterhead on this nondisclosure agreement. This was the last conversation I had with Mr. Fabian.”
Watkins said he had never seen the Rhinebeck agreement with NanoMech although he requested a copy of it while preparing the company’s audited financials.
According to Watkins, NanoMech was in a financial crunch at the end of 2017 and used the Rhinebeck money to pay monthly obligations. That delayed payments to AmeraMax and prompted Rhinebeck to stop wiring money to NanoMech.
Launched as Duralor in 2002, NanoMech’s industrial lubricant and coating business never matured beyond its startup existence. Supported in large part by venture capital investors, NanoMech plowed through an estimated $60 million in equity and debt before hitting the financial wall this year.
Only the company’s bankruptcy estate remains after most of the assets were sold in August for $8 million to P&S Holdings, a subsidiary of Vinmar International Ltd. of Houston.
On paper, NanoMech still owns its 20,000-SF headquarters and production facility at 2447 Technology Way, acquired for $1 million in December 2013. However, Arvest Bank of Fayetteville holds a first mortgage claim on the property, now leased to P&S Holdings.
In its bankruptcy, NanoMech listed assets of $7.2 million and debts of about $18.9 million. The debt includes $12.5 million held by secured creditors.
While a potential D&O insurance payout is in play, NanoMech’s bankruptcy estate is trying to recover $576,643 from Phillips. Most of the money was part of a $1 million severance package Phillips negotiated for himself in February as NanoMech teetered on insolvency and angry investors clamored for his ouster.
A court order this summer effectively relieved the company’s bankruptcy estate of any financial obligation to Phillips under his separation agreement. It also opened the door for NanoMech’s recent effort to recoup money paid to Phillips during the 12 months leading up to the company’s bankruptcy.
Those funds include Feb. 28 payments of $344,716 severance compensation per the separation agreement and $155,283 to repay Phillips for personal loans to the company. Also in the mix is another $76,643 Phillips received from NanoMech for loan repayments in May 2018.
Phillips denies any wrongdoing or mismanagement during his eight-year reign as CEO.
The D&O carriers — Scottsdale Indemnity Co., a subsidiary of Nationwide Mutual Insurance Co. in Columbus, Ohio, and Argo Group US of San Antonio — are covering the cost of auditing NanoMech’s books.
As of July 31, the tab for that topped $206,000.