Some renewable energy investment opportunities seem too good to be true-and occasionally they are. How can a potential investor tell a wise investment from a shell game?
By Anna Austin
Historically, the number of investment fraud cases in a given industry increases with the level of hype surrounding it. If it’s frequently in the news and on the Internet, chances are it’s also plagued by gimmicks, scams and/or embellished technological advancements camouflaged by enticing promises of high and quick returns.
Rapidly expanding and increasingly profitable, the renewable energy industry is seeing its share of fraudulent business conduct. Perhaps the most notorious case within the biomass sector was brought to light in November by the U.S. Securities and Exchange Commission, which charged Pennsylvania-based Mantria Corp. with more than 300 cases of investor fraud via a $30 million Ponzi scheme. Mantria allegedly targeted elderly investors or those approaching retirement age to finance a supposed carbon negative housing community in rural Tennessee, as well as biochar, while claiming to be the world’s leading manufacturer and distributor of biochar with multiple facilities producing at a rate of 25 tons per day.
According to the SEC, Mantria never sold any biochar and had just one facility engaged in testing biochar for possible future commercial production. Mantria’s only source of revenue was from its resale of vacant lots for its purported residential communities in Tennessee, but those sales didn’t generate enough cash to pay investor returns, rather, the company provided 100 percent financing for almost all of its vacant lot sales to buyers using other investors’ funds, the SEC says.
Interest in biochar as a means to sequester carbon and as a substitute for charcoal has reached new heights in the past few years, a likely reason why scammers are hot on its trail, according to John Gannon of the Financial Industry Regulatory Authority. “When an area is hot for investors, scamsters understand that and so that’s where they target their scams,” he says. “When oil prices are high, we see oil and gas scams. When Hurricane Katrina hit, we saw scams there as well. Whatever is in the news is what scamsters and fraudsters target. The legitimate stories in the media help them build credibility about the purported investment that they are pitching.”
Swindling Styles
FINRA is a private corporation that oversees nearly 4,750 brokerage firms, about 167,000 branch offices and approximately 634,000 registered securities representatives. Formed by a consolidation of the enforcement arm of the New York Stock Exchange, NYSE Regulation Inc. and the National Association of Securities Dealers Inc., one of FINRA’s many functions is to issue alerts and advice to investors to help protect their money and avoid scams.
Gannon, who is FINRA’s senior vice president of investor education, says there are two main ways of being scammed. The first, which is the scam that Mantria allegedly employed, is a Ponzi scheme. Named after Charles Ponzi who became notorious for using the technique during the early 1920s, the operation pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. Mantria scammers allegedly encouraged investors attending seminars or online webinars to liquidate their traditional investments such as retirement plans, stocks, bonds and mutual funds and urged them to borrow as much as possible against their homes or businesses so that they could invest in Mantria. The funds acquired from new or existing investors were then used to pay other investors.
The other most common scam is a “pump-and-dump” scheme. “The idea is to increase the price of the stock quickly by putting out bogus press releases, touting it on the Internet and in other various solicitations, basically creating a lot of activity to quickly jack up the price of the stock, and then they sell the shares they own and gain a big profit,” Gannon says. “The prices then quickly go down when there’s no more news/hype, and the investors who bought in at that time are left holding the bags.”
In 2008, for example, the SEC filed charges against Mississippi-based Sustainable Energy, alleging that the company made false claims to boost share prices from 25 to 45 cents a share, even above 70 cents after some wildly exaggerated press releases. In one release, Sustainable Energy said it could produce 5 gallons of biofuel from one bushel of soybeans, at a price of 50 cents per gallon. As a result of the alleged embellished claims, stock prices soared quickly-and artificially-prompting Sustainable Energy CEO John H. Rivera’s girlfriend to sell more than 2.6 million shares and then transfer a substantial portion of the proceeds into a bank account held jointly with Rivera.
Whether Ponzi, pump-and-dump or other, before an investor is lured into a bad investment, Gannon says it’s likely that multiple red flags will be present that should be carefully analyzed.
Look for Red Flags
Investors should always raise an eyebrow when the initial investment opportunity discovers the potential investor, rather than vice-versa, Gannon says. “Especially when the individual or organization presenting the opportunity is unknown or fairly unknown to the investor,” he says. “Ask yourself ‘why would somebody you don’t know bring you a promise of the next-greatest investment out there? Why are they targeting you with this pitch? If it’s so good, why aren’t they investing themselves?”
If the company offering an investment is a public company, one should confirm that they are registered with the SEC. “Learn information about the company from that filing,” Gannon says. “Many of the stocks that are used to defraud people haven’t been in business that long. A lot of them have been created through a reverse merger, which is when a company will be in a certain business line and then suddenly, because an industry such as alternative energy is hot, change their name and complete a reverse merger resulting in the company being in a totally different business line. That is a red flag that tells you the investment could be a scam.”
Most unsolicited recommendations involve stocks that cannot meet the listing requirements of a major national exchange such as the NASDAQ Stock Market or the NYSE. Rather, they are quoted on the OTC (over-the-counter) Bulletin Board or in the Pink Sheets, where there are no minimum financial and other quantitative standards that have to be met by the company, and no obligations to file annual or quarterly reports to publicly disclose information.
Yet another red flag is when a vast amount of wealth is promised to an investor in a short time. “It’s a very common tactic,” Gannon says. “One solar panel stock scam touted a 200 percent gain, and another scam claimed the company’s stock ‘soared 500 percent in one week.’ When you see pitches like that step back, because it’s highly unusual.”
By examining information on a company’s financial statements Gannon says it’s relatively easy to determine if a company has revenue and how much, and whether it’s making a profit. Never rely on information you received in unsolicited faxes, e-mails, text messages or blog posts. It could be a paid promoter or con artist, especially online where a single person can use multiple aliases to create the illusion of widespread interest, Gannon says.
Good Intentions, Bad Assumptions
Even if a new company’s intentions aren’t exactly to pull the wool over an investor’s eyes, one must proceed with caution. Energy expert Ronald Rapier, chief technology officer for bioenergy holding company Merica International, says he thinks assumptions (relevant to the biofuels industry) regarding the cost of biomass is one of the worst some companies are making today. “I see many companies claiming they will produce cheap biofuel, but when you take a closer look they are basing that on getting cheap, free or even negatively valued biomass,” he says. “Unless one can lock up a long-term supply agreement with someone who has a track record of being able to deliver biomass, I don’t think this assumption will hold up.”
A high degree of skepticism should be applied to claims of processes being capable of handling “any type of biomass,” Rapier says. “Different feedstocks behave very differently in different processes,” he says. “In a gasification process, some high-ash or high-moisture feedstocks can be problematic. In a cellulosic hydrolysis process, there are certain feedstocks that produce strong enzymatic inhibitors. In general, processes are optimized around specific feedstocks, and they don’t respond favorably to having inconsistent feeds.”
All technology has to start somewhere, which is typically in the laboratory. For successful commercialization, lab-scale results have to be replicated at larger scales-an event that Rapier says isn’t likely for the majority of energy technologies. “My own observation has been that most technologies die in the lab, and most that make it to the pilot stage die there. Very few survive all the way to commercialization, but government policies/funding can result in some surviving that shouldn’t have survived.”
Reported results are almost always the best that a technology has ever achieved, according to Rapier. “When someone says ‘up to 100 gallons per ton’ I discount that heavily,” he says. “People who tend to hype their technology don’t report typical results. They report the best results to investors and present them as typical, but when they build their plant, typical results are what they will get.” Rapier adds that such assumptions are common among renewable energy companies today, a fair number of which have already resulted in bankruptcy. “[Faulty assumptions] will undoubtedly lead to a few more bankruptcies in the future,” he says.
Spreading the Word
Regardless of whether you have fallen for a scam or were lucky enough to avoid one, the best thing to do is to report it to firms such as FINRA or the SEC. “If it didn’t fool you, chances are there probably is or will soon be somebody who is falling for it,” Gannon says. “By doing this, we can alert people to the issue.” To further deter bogus investments, FINRA has developed a research-based scam meter, a free online tool that analyzes a user’s investment to determine whether it has the red flags of a potential scam (www.finra.org/meters/scam).
One investor who lost $20,000 to a bogus green energy company told Biomass Magazine he simply put too much trust into the individual making claims about a company’s technology and product, and discovered it much too late. “Don’t believe everything you read on the Internet,” warns the investor, who didn’t want to be identified. “If you really want to know about something, do your own due diligence-you just can’t do enough. Do lots of research, contact people, check out the patents and see if they are there and licensed to the company, and make sure the person or persons are who they say they are.” BIO
Anna Austin is a Biomass Magazine associate editor. Reach her at aaustin@bbiinternational.com or (701) 738-4968.