Green schemes: How fraudsters are cashing in on the rewnewable energy boom
Deborah Murray was the new economic development director of Caldwell County, North Carolina, when Robert Leslie Stencil came calling in early 2012.
The county, in the foothills of the Blue Ridge Mountains, was hurting: Unemployment was mired in the double digits. Some 10,000 jobs had evaporated in the previous decade, and 6 million square feet of buildings sat vacant – most of them furniture factories, closed by the mass migration of manufacturing jobs overseas, she said.
“We were at our most vulnerable time as a community back then,” Murray said.
Then along came Stencil, a Charlotte man peddling hope with a 21st century pitch to open an auto manufacturing plant for electric vehicles, and plans to convert regular vehicles to run on compressed natural gas. Murray said Stencil, the founder of Niyato Industries, told her he needed a building for his enterprise that could create 200 to 300 “highly skilled” jobs.
“We wanted to diversify our economy, and here comes this fellow talking about very exciting battery-operated cars,” said Murray, a former newspaper publisher.
“I wanted to be the one to land the great big fish.”
What could go wrong?
Everything, according to federal prosecutors, who eventually exposed Niyato Industries as a $2.7 million investment scam built on the hype, hope and promise of the green energy industry. In January, following a three-week trial, Stencil and an associate were sentenced to a combined 17 years in federal prison for their roles in bilking investors, many of them elderly.
Caldwell County escaped without losing a dollar – just wasted time and dashed hopes, Murray said. But thousands of investors in similar schemes haven’t been so lucky.
While the U.S. Department of Energy declares America to be in the midst of a clean energy revolution – one that is generating “hundreds of billions in economic activity” – fraudsters have definitely arrived at the revolution.
And they, too, are cashing in.
“It’s very evident that green energy scams are truly evergreen,” said Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority. The not-for-profit organization, supervised by the Securities and Exchange Commission, is authorized by Congress to oversee registered brokers and broker-dealer firms nationwide, helping to protect investors from fraud.
In December, the regulatory authority published an article aimed at investors wanting to “put money where their values are,” such as environmental or socially responsible arenas. Among other things, the agency warned to “be on the lookout for ‘green’ scams” and noted that investors should be especially wary of pitches that dangle the prospect of large gains involving small, thinly traded penny stocks.
Niyato Industries, for instance, had promised that its 50-cent-per-share stock would yield 10- to 16-fold returns when the company went public.
“I kicked myself all over the place for being so stupid,” said Ernie Friesen, 79, of Yuba City, California, who lost $300,000 to Niyato and a related green scheme. “Honestly, I think I got greedy. … I learned my lesson.”
Walsh and other fraud experts told FairWarning it is hard to quantify the prevalence of green scams. They do not appear on top 10 scam lists, which feature more familiar money grabs such as “Nigerian prince” emails, get-rich seminars or Social Security and IRS impostors.
But a FairWarning review of federal indictments, along with media accounts, reveals the breadth of schemes that recently have seized on renewable or waste-to-energy projects:
“Fraudsters can turn on a dime when it comes to changing their pitches,” said Walsh of the Financial Industry Regulatory Authority. “Whatever the hot new industry … they’re able to shift their focus to pitch frauds that capitalize on those themes.”
A $1 billion scheme
Last year, federal prosecutors in Northern California announced a $1 billion solar energy fraud scheme that ripped off the U.S. Treasury and big institutional investors through the manipulation of federal tax credits, along with bogus equipment sales and rentals. Instead of retirees, the front-line victims of this scheme – besides the IRS – included the paint manufacturer Sherwin-Williams, the insurance giant Progressive Corp. and Warren Buffet’s conglomerate, Berkshire Hathaway Inc..
“The government was absolutely harmed by this,” McGregor Scott, the U.S. Attorney for the Eastern District of California, told FairWarning. “The government was out a billion dollars in tax revenue.”
Described as the biggest criminal fraud case in the history of the Eastern District of California, based in Sacramento, the investigation into DC Solar revealed a complex plot between 2011 and 2018 involving mobile solar generators, false financial statements and phony lease agreements. For the “vast majority” of investors, the big attraction was the federal tax breaks they would receive for investing in renewable energy, said Assistant U.S. Attorney André Espinosa.
In January, the company’s husband-and-wife owners, Jeff and Paulette Carpoff, pleaded guilty to the scheme in which investors agreed to buy generators manufactured by DC Solar, which had touted their versatility and environmental sustainability. The units were mounted on trailers and could be moved around to provide emergency power to cellphone towers and lighting at sporting events. Investors agreed to have the company lease their solar units to third parties to give them a revenue stream, on top of their tax breaks.
Except at least half of the 17,000 mobile solar generators didn’t exist, and many were never deployed to the places described in the so-called lease contracts. Investors were given fraudulent reports supposedly tracking their generators and who was leasing them when, in fact, some locations contained only a buried GPS device and no generator at all, said Espinosa.
“The false periodic reports helped lull the investors into believing, ‘OK, everything’s on the up and up,’” he said.
William Portanova, a Sacramento attorney representing Paulette Carpoff, told FairWarning that the company began legitimately, but over time, “corners were cut, then concealed, then lied about to investors.”
“As with most investment fraud cases, everyone had a good time until the music suddenly stopped and there were not enough chairs,” Portanova said in an email. “Paulette deeply regrets her involvement and has done everything in her power to make amends. … She does not ask for sympathy.”
The break in the case came by way of a whistleblower in July 2018, Espinosa said. Eventually, the investigation revealed the astonishing proceeds from the scheme headed by the couple from Martinez, a city near San Francisco. According to the government, the Carpoffs used victims’ money to pay for a minor-league baseball team, a NASCAR race car sponsorship, luxury real estate around the world, a subscription private jet service – and a collection of some 150 antique and exotic vehicles. Among those auctioned off last fall by the government was a 1978 Pontiac Trans Am once owned by the late actor Burt Reynolds, a memento of the car he drove in the movie “Smokey and the Bandit.”
The Carpoffs are scheduled to be sentenced in May; four others also have pleaded guilty. And, several companies have initiated paybacks to the IRS, said Assistant U.S. Attorney Kevin Khasigian.
Malcolm Segal, a Sacramento attorney representing Jeff Carpoff, said his client had “a tremendous product,” and investors “flocked to the table” because of the tax advantages. Ultimately, though, DC Solar couldn’t keep up with investor demand for generators or find enough customers to sub-lease the units – and the troubles began, he said.
“Jeff Carpoff was a hard-working mechanic who had spent most of his life in the automobile repair business,” Segal said. “The creation of the mobile solar generator was the best thing that ever happened to him – and the worst.”
Carpoff forfeited his many properties and cars because “what he wants is for all that money to go to the investors,” Segal said. “His desire is to see them made whole, if that is possible.”
Scott, the U.S. attorney, said that $500 million has been returned to the U.S. Treasury and $120 million has been collected so far in forfeited assets – a process he says will continue.
The anatomy of a green energy scam
John Smirnow, general counsel for the Solar Energy Industries Association, said that other than the high-profile DC Solar case, the trade group is “not seeing much investor fraud at all” within the solar industry.
“We don’t see any unique attributes of solar that would lead to investment fraud,” said Smirnow, who oversees the trade group’s consumer protection program.
Solar is increasingly recognized as “a mainstream energy choice,” he said. Trade group data show that the number of installed residential systems increased more than 13-fold from 2010 through 2018.
“Investor fraud doesn’t really seem to necessarily target specific industries,” Smirnow said.
The Financial Industry Regulatory Authority, however, saw the need in 2009 to issue a green energy scam alert, warning investors to beware. It was the early days of the Obama administration, which had vowed to create a “new energy economy” and made it a cornerstone of the stimulus package that year. In its alert, the authority cited solar and wind-power companies that made aggressive, dubious claims.
A decade later, Walsh of the regulatory authority said there’s no reason to believe the threat is over.
“The change of administrations, the passage of time, has not changed the reality that there are still people seeking to capitalize on green energy,” she said.
According to the regulatory authority, green investment frauds typically follow one of two paths: The classic Ponzi scheme, or a so-called pump-and-dump stock fraud.
In a Ponzi scheme, such as the Carpoff solar generator case, the scammer promises high rates of return with little risk, then uses funds from new investors to pay supposed returns to early investors. A pump-and-dump ploy involves fraudsters who inflate their stock prices through overly optimistic or false or misleading statements, then sell off their own shares while leaving investors with worthless stock.
Green schemer meets a U.S. president
One of the country’s most notorious green scams was the Pennsylvania-based Mantria Corp., which worked its way into the highest echelons with lofty promises – until the Securities and Exchange Commission filed suit in 2009. Months earlier, the company had been honored by the Clinton Global Initiative for its work to “help mitigate global warming,” and its founder, Troy Wragg, was photographed on stage with the former president.
Wragg and others raised some $54 million touting their green projects, which included a supposed “carbon negative” housing community in rural Tennessee and a “biochar” charcoal substitute made from organic waste. Investors were promised returns ranging from 17 percent to “hundreds of percent” annually, according to the SEC.
“I can see how people could get sucked into that,” said James G. Bohn, a Boston area economist who has studied green energy fraud. “They had a very compelling sales pitch, and the technology sounded reasonable, I guess – until it turned out to be a total sham.”
In fact, Mantria was a Ponzi scheme, according to the SEC. The company that claimed to be the world’s largest producer and distributor of biochar had never sold any, and had only one facility that was testing its viability, the SEC charged. The housing development in Tennessee was never finished. Mantria built some roads and a model home, but no other houses were ever built – and most of the property lacked potable water, according to a 2015 federal indictment in Pennsylvania.
Federal prosecutors accused the Mantria defendants of preying on the emotions of victims, who wanted to invest in sustainable, environmentally friendly products while also making a profit. Last August, the 37-year-old Wragg was sentenced to 22 years in prison and $54 million restitution.
Wragg’s attorney, Joseph D. Mancano of Philadelphia, said his client apologized in court and was “very remorseful” about the deception. Mancano said Wragg suffered from psychological problems, struggled with alcoholism and had “very difficult circumstances growing up” that contributed to his conduct.
“I’m not saying they constitute an excuse,” the attorney said. “It was a sad case all the way around. … But what he did hurt a lot of people.”
‘I thought I knew better’
Bohn, the economist, said that emotions can motivate green-energy investors, who have “a desire to do good.” Many others are lured strictly by visions of exorbitant returns, he said.
Both factors came into play in the Niyato Industries case, a scheme between 2012 and 2016 in which Stencil and at least nine others conspired to bilk some 140 investors out of more than $2.7 million.
The pitch was enticing: Invest in Niyato Industries, a so-called leader in alternative fuel technology, government documents show. According to its executives, the company that was incorporated in Nevada had “state of the art facilities,” patented technology and lucrative contracts lined up for its electric car manufacturing business – a pitch that morphed into a supposed business to convert gasoline vehicles to run on compressed natural gas.
“People hear about green cars, electric cars or CNG-run vehicles, and they say: ‘That sounds like a good idea. That’s something we should do. I like it,’” said a Justice Department official who worked on the case, asking not to be named because he is not authorized to speak on the record.
“Having a good idea is really critical to these schemes, because it’s what gets people to think that they should part with their money.”
Stencil and his associate, Michael Allen Duke of Richardson, Texas, were sentenced in January; five others have pleaded guilty, while another defendant from Beverly Hills, California, remains at large.
Federal defenders for Stencil did not return phone calls for comment. Stencil recently filed a notice of appeal and asked for an appointed lawyer because he is “indigent.” Duke also is appealing.
The investors, many of them over 55, were told Niyato was on the verge of an initial public offering of its stock. They were urged to hurry up and get in on the ground floor for just 50 cents a share of the limited stock supply, then watch its value soar to at least $5 a share after the IPO, according to the 2017 indictment in North Carolina.
“The promise that there’s going to be a high rate of return paid out in a short period of time – that is the hallmark red flag,” the Justice Department official said. “Legitimate companies who are going public through a legitimate process – they do not make those types of representations.”
Niyato salespeople targeted elderly victims because they believed they were more likely to forge a “special relationship” with them that could develop almost into a friendship, the Justice Department official said. Other targets included investors who had paid into the scam earlier, and were viewed as ripe prospects to be hit up again, the official said.
Ernie Friesen, who will turn 80 in April, said he sank $50,000 into Niyato and $250,000 into another green investment that the government described as a scam with some of the same players. A former food company executive, Friesen left that industry 35 years ago to open an RV dealership in Yuba City, a community of about 67,000 north of Sacramento. He still works every day at the family business, alongside his son and daughter; his wife of 59 years, Irene, has retired.
As owner of All Seasons RV Center, Friesen said he believed his Niyato investment would enable him to open a filling station for customers who bought the company’s so-called modified vehicles.
“The pitch to me was how successful the company was in signing up government agencies and counties, and that the stock was going to go ballistic,” he said.
Friesen said the scam “took away a lot of our available cash.” Irene Friesen, 79, said she began to grow wary of the aggressive pitchman who continuously called the home number.
And then the calls stopped. Today, the Friesens’ money is gone, and the couple is left with a manila file folder full of stock certificates.
“I don’t blame anybody but myself, because I know better,” he said. “My wife was opposed to it, and we generally don’t do anything that we’re not in complete harmony on. In this case, I thought I knew better.”
In the end, there was no Niyato IPO. There were no electric cars, no lucrative contracts, no patented technology, no facilities – and no capability to manufacture vehicles at all. The company’s stock was worthless. Stencil had paid “a guy in Austin” to convert his truck to compressed natural gas, then he wrapped it in the Niyato logo, the Justice Department official said.
Caldwell County rebounds
As for “plant” locations, Caldwell County was not the only target. According to the Justice Department official, Niyato representatives also paid visits to cities in California and Nevada, similarly talking up a proposed manufacturing plant and seeking an incentive package. The company then issued press releases to stoke investors.
In these kinds of cases, it’s unlikely that victims will recover much, if any, of their money, the Justice Department official said.
Back in North Carolina, officials grew wary of Niyato in 2012 and backed away, said Deborah Murray, who is still executive director of the Caldwell County Economic Development Commission. She is pleased to report that the county’s fortunes have greatly improved since Robert Leslie Stencil and his team blew through – unemployment is way down, the economy is diversified and the furniture industry has made something of a comeback.
“When you’re new in your job, you want to have a win. And this sounded like a tremendous win,” Murray said.
Instead, she said, “the dream was empty.”
FairWarning is a nonprofit news organization based in Southern California that focuses on public health, consumer, labor and environmental issues.