CT-backed med-tech investor faces fraud allegations

Last February, state officials hailed the impending move of a New York City-based medical technology investment firm to a distressed Hartford corridor, where the company planned to house three startups in a newly built office building and create 195 jobs in exchange for $3.6 million in taxpayer money.

The funds to CliniFlow Technologies LLC, whose $45 million Hartford project was being pushed forward on a “fast-moving timeline” and envisioned as a key piece of a medical-technology innovation hub between Hartford Hospital and Trinity College, were approved unanimously Feb. 1 by the state Bond Commission, including by its chairman, Gov. Dannel P. Malloy. That approval came on the heels of a separate $400,000 incentive deal granted to CliniFlow in January by the state Department of Economic and Community Development (DECD).

But before those deals were either approved or granted, David Wagner, CliniFlow's chairman and CEO, and other companies he's associated with were named in several civil lawsuits in various states. One suit, filed in New York federal court in May 2016, accused Wagner and associated companies of “outright fraud” and running a “Ponzi-like” scheme that used money from new employee-investors to pay back-wages of existing workers, federal court records show.

Wagner — a Trinity College alum who until recently sat on the private school's board of trustees — and his various companies have been named in several other civil lawsuits, accused of accepting loans or investments and misusing funds or breaking contractual agreements.

He has denied the allegations in court. All lawsuits Wagner has been named in are civil cases, not criminal.

Wagner, a Rhode Island resident, and his companies have settled at least one suit brought by a former employee, and another resulted in a $181,480 judgement, court records show.

Meanwhile, two suits are ongoing in New York and a judge overseeing both cases has restricted the assets of an array of Wagner companies, including two that were slated to relocate to Hartford: 3si Systems LLC and Vox MediData, according to court records.

Now, Wagner's and CliniFlow's Hartford project, which has received little press to date, appears uncertain.

In August, the state pulled the plug on its $3.6 million in bond funds, which were never distributed to the company, after CliniFlow failed to meet certain project milestones.

Taxpayers, however, are still on the hook for the $400,000 aid package provided to CliniFlow from DECD's Small Business Express program.

The incentive package, which includes a $300,000 loan and $100,000 grant, requires CliniFlow to create eight full-time jobs in the city by Jan. 2018, according to the company's Small Business Express Loan application, obtained by the Hartford Business Journal through a Freedom of Information request.

If it fails to adhere to the terms, CliniFlow would be in violation of its agreement and could face penalties, including a loan clawback.

As part of its original pitch, CliniFlow planned to relocate three of its health technology companies — 3si Systems, SpearFysh and Vox MediData — to a newly built, 70,000-square-foot office building on properties owned by Hartford Hospital, said DECD Deputy Commissioner Bart Kollen.

In an emailed statement to HBJ, Wagner said CliniFlow still plans to bring “high-tech jobs to Hartford,” but its business plan has changed somewhat over the past six months.

“CliniFlow now plans to utilize private capital rather than public funding,” the email said. “Also, CliniFlow now plans to focus company spending on technology development and customer support rather than funding the development of large new buildings.”

He and his attorney didn't elaborate further or respond to HBJ's follow-up questions by press time.

But the status of CliniFlow's operations remain unclear.

The company's website (www.cliniflowtech.com) doesn't work and in August CliniFlow stopped making rent payments on 4,152 square feet of Hartford office space it leased at 425 Franklin Ave., according to a lawsuit filed in state Superior Court in September by the building's landlord, The Greca Plaza LLC.

Some of the Small Business Express funds were to be used for leasehold improvements and rent, Kollen said.

Meantime, Hartford HealthCare, which confirmed it had “exploratory discussions” with Wagner and CliniFlow, said in a written statement that it ended its relationship with both earlier this year.

Deal oversight

Kollen said DECD was unaware of Wagner's past legal troubles before the agency seeded CliniFlow with Small Business Express funds and the Bond Commission approved the $3.6 million, raising questions about the state's ability to fully vet companies to which it provides economic incentives.

Information on several civil lawsuits filed in federal court against Wagner and companies he's associated with was available online through the federal court system's PACER database.

CliniFlow, however, was not named in a lawsuit until May 2017. DECD, Kollen said, doesn't routinely check to see if companies, or their top executives or related firms, are named in federal lawsuits, before incentive deals are approved. The agency does check Connecticut state courts.

Kollen said CliniFlow provided DECD limited financial information, which isn't unusual for startups. DECD also reviewed CliniFlow's business plan, conducted a basic Google search, and cross-referenced the company with the state Department of Labor and Secretary of the State's office.

Kollen also said CliniFlow showed DECD a signed lease to occupy office space on Hartford Hospital's campus, but it's not clear if they ever occupied that space.

DECD officials also relied on information in CliniFlow's Small Business Express application. However, information in the application, which was submitted in November 2016 and bears Wagner's signature, appears to have at least one inaccuracy. One application question asks if the company or its owners have any “outstanding, pending or anticipated” legal issues. The application said “no.”

“They filled out 'no' and they signed it,” Kollen said. “That will be a reason to follow up with the company,” well before DECD is supposed to audit CliniFlow in Jan. 2018, he said.

The larger $3.6 million aid package was allotted from the state's Manufacturing Assistance Act (MAA) program and landed in front of the Bond Commission on Feb. 1. In exchange for the 10-year, 3.25 percent interest loan, CliniFlow promised to create 195 full-time jobs within five years and maintain the jobs for 24 consecutive months.

The package was approved by the 10-member Bond Commission by a unanimous vote.

But Kollen said DECD never granted the bond funds because of safeguards the agency built into its MAA contract agreement. CliniFlow had to reach certain milestones in order to obtain the funding. The first $1.6 million would have been granted if CliniFlow signed a land lease with Hartford HealthCare for the parcels on which it wanted to build its facilities. CliniFlow also needed to raise millions more from investors to fund the project. The final $2 million would have been granted once construction of the office building and parking garage started.

None of that happened, Kollen said.

The deal began to falter around late April, when Kollen said Hartford HealthCare informed him that there was no land lease agreement in place.

By August, the state “de-allotted” or pulled the plug on the $3.6 million funding package.

Kollen said DECD built the milestones into its Manufacturing Assistance Act offer to protect taxpayer interests.

When asked if he or other DECD officials thought about changing how it vets financing applicants, he said:

“I would say our current due diligence process is really working the way its supposed to. I don't see an immediate need to change anything specifically, but that might change depending on our further investigation of this situation.”

Revitalization hopes

While CliniFlow is a relatively unknown name to Connecticut's general public, the prospect of the company's relocation to Hartford stoked excitement and optimism among city, state and Hartford HealthCare officials, which put the project on a “fast-moving timeline,” Kollen said.

CliniFlow indicated that one of its portfolio companies, 3si Systems, was growing fast and had other options in terms of where it could move, Kollen said.

The other two companies CliniFlow said it would relocate to Hartford were SpearFysh and Vox MediData.

According to descriptions of the companies laid out in federal court documents, all three are involved in medical software and voice-activated and/or voice-command technology that aims to improve healthcare operations or services.

The original project plans called for CliniFlow to lease land occupied by four vacant buildings owned by and near Hartford Hospital: 216-218 and 224 Washington St. as well as 142 and 146 Jefferson St., according to a project outline obtained by HBJ.

Those buildings were going to be demolished to pave way for the 70,000-square-foot office building at the corner of Washington and Jefferson streets and a 300-vehicle parking garage.

Around May 2016, Kollen said, officials from Hartford HealthCare invited DECD Commissioner Catherine Smith to meet with Wagner, the hospital and city officials to discuss the envisioned project.

”I think in general it's fair to say the city was excited about the vision of having a lot of new employees moving to the city,” Kollen said.

Mayor Luke Bronin's office declined to comment for this story.

The hope, Kollen said, was that CliniFlow's project would breathe new life into Hartford's historic south-central district, which Hartford Hospital has been trying to redevelop for years, and be part of a fledgling medical-technology cluster.

Hartford Hospital, between 2010 and 2012, purchased all four buildings — part of an area known as President's Corner — where CliniFlow planned its new location, city records show. And there was at least one other planned development there before CliniFlow.

In 2010, Hartford Hospital and the Connecticut Children's Medical Center proposed to construct a new 11-story, $35 million medical office tower on Washington Street, but the project never came to fruition.

Today the four dilapidated buildings remain vacant with boarded windows and “no trespassing” signs.

Legal woes

The various lawsuits that name Wagner are complex and involve close to a dozen different companies to which he is allegedly tied.

One company commonly named in the lawsuits is New York-based Downing Partners LLC, an investment firm whose website lists Wagner as the chairman and managing partner. Downing is listed as the parent to some subsidiary companies named in the lawsuits, court records show.

Several suits accuse Wagner, his companies and other business associates of fraud and running a “Ponzi-like” scheme — allegations Wagner has denied in court.

In one suit filed in New York federal court this past May, Ohio-based Wesley Holdings said it loaned 3si Systems, which was slated to relocate to Hartford, nearly $1.3 million to develop the company's medical technology business. Instead, the suit alleges Wagner “withdrew most of the loan funds and used them to enrich himself and to repay prior 3si Systems investors who had sued … or were threatening to sue.”

The suit said Wagner recruited employee-investors for 3si Systems based on representations they would be paid certain salary, commission, bonus and health benefits in exchange for selling products developed by 3si. Wagner also represented during the recruitment process that 3si's products were fully developed and ready to sell, the suit said.

The suit alleges, however, that 3si didn't have commercialized products to sell and that Wagner used investments from new employee-investors to pay old employee-investors who were owed back wages.

The suit said Wagner was also paying himself management fees, while 3si had “no legitimate income or positive cash flow.”

The suit also accuses Wagner of transferring 3si's assets to CliniFlow as part of a complex shell game that violated Wesley's loan agreement. The lawsuit also makes reference to Wagner's overtures in Hartford, stating: “Wagner is currently using 3si Systems' assets to solicit new investors and pursue millions of dollars in bond debt from the State of Connecticut.”

Other individuals who filed lawsuits said they were prior employee-investors of a Wagner-controlled or -operated company. They alleged they had to invest ($250,000 in at least four cases) as a condition of securing employment, but that they stopped receiving their salaries “almost immediately” upon starting work at the company.

When they complained about not receiving salary or expense reimbursements, their managers told them to go recruit new investors, one suit alleges.

In an emailed statement, Wagner wrote that “CliniFlow is confident that it will emerge from this civil litigation with a positive outcome, and that it will be able to return its full time and attention to commercializing innovative medical technologies that improve outcomes for patients and lower costs for healthcare institutions.”

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