The SEC also announced that R. Gordon Jones, a former Blue Earth accountant, has agreed to a deal that would force him to pay a $70,000 penalty and prevent him from working as an accountant before the SEC going forward.
S. Jeffrey Jones, a former Blue Earth auditor, has agreed to a deal that prohibits him from practicing before the SEC, but will have the option of asking to have that ban lifted after two years.
Under the terms of the administrative settlements, neither Jones admitted or denied the SEC's findings.
Brent Baker of Clyde Snow & Sessions, which represents Potts and Woodard, told Law360 on July 1 that his clients "are looking forward to having all the facts come out and putting this matter behind them as soon as possible."
"This case is overreaching, overly-aggressive and after a 3-year staccato investigation, is thinly pled," he added.
https://www.law360.com/securities/articles/1174166/sec-accuses-4-execs-of-masterminding-accounting-fraud-
SEC Accuses 4 Execs Of Masterminding Accounting Fraud
By Ryan Boysen
Share us on: By Ryan Boysen
Law360 (June 28, 2019, 7:53 PM EDT) -- The U.S. Securities and Exchange Commission on Friday hit four former executives of Blue Earth Inc. with a suit alleging they repeatedly lied about the defunct clean energy company's prospects to investors and the Nasdaq to raise nearly $30 million.
In its nine-count complaint, the SEC said executives Johnny R. Thomas, John C. Francis, Jonathan Brett Woodard and Robert C. Potts blatantly lied about the status of a batch of contracts over and over from 2014 to 2015, violating securities laws in the process.
In SEC filings, investor presentations and an application to be traded on the Nasdaq, the four men and Blue Earth repeatedly claimed they held contracts with an unidentified meat processor that would allow them to build clean power plants at seven sites, transforming Blue Earth into an independent power producer and locking in several hundred million dollars in future revenue.
Those contracts were supposed to be the beating heart of Blue Earth's business model, but in Friday's complaint, the SEC said there was one major problem: The "contracts" were actually just nonbinding term sheets, essentially planning documents.
The meat processor only ended up signing contracts for two of the seven sites, and Blue Earth only ever began work on one relatively small project, even as it trumpeted its nonexistent progress on all seven.
The four men "defrauded investors by materially misrepresenting the company's scope of business operations and financial condition," the agency said in a statement.
The SEC also announced that R. Gordon Jones, a former Blue Earth accountant, has agreed to a deal that would force him to pay a $70,000 penalty and prevent him from working as an accountant before the SEC going forward.
S. Jeffrey Jones, a former Blue Earth auditor, has agreed to a deal that prohibits him from practicing before the SEC, but will have the option of asking to have that ban lifted after two years.
Under the terms of the administrative settlements, neither Jones admitted or denied the SEC's findings.
Brent Baker of Clyde Snow & Sessions, which represents Potts and Woodard, told Law360 on July 1 that his clients "are looking forward to having all the facts come out and putting this matter behind them as soon as possible."
"This case is overreaching, overly-aggressive and after a 3-year staccato investigation, is thinly pled," he added.
Led by "longtime business partners" Thomas and Francis, Blue Earth was a relatively small clean energy installation company when it sought to transform itself in 2013 by purchasing IPS Power Engineering Inc. and Global Renewable Energy Group Inc.
Both companies were run by Woodard and Potts. IPS "purported to specialize" in the engineering and construction of combined heat and power plants, although at the time it had "minimal assets and liabilities, and total revenues of only $2,500 as of [June 2013]," the SEC said.
GREG's primary business, meanwhile, was to "assist IPS in raising capital for possible CHP projects ... as of June 30, 2013, its sole asset consisted of $221 in cash," the SEC said.
What GREG and IPS did have, however, was a budding relationship with the unnamed meat processor. Blue Earth acquired both in exchange for roughly 15 million shares of its common stock, and Blue Earth valued its new subsidiaries at $44 million, a valuation that was almost entirely dependent on the hypothetical power plants it hoped to build for the meat processor.
Before and after the merger, Blue Earth issued press releases saying it planned to build the plants and expected to "generate recurring revenues of more than $800 million."
The next month, Blue Earth signed seven nonbinding term sheets with the meat processor to explore the construction of seven power plants that would supply power to the meat processor at a cheaper rate than local utilities.
The SEC said those documents were exceedingly clear that they were not formal contracts, however, and only expressed the parties' intention to continue looking into whether or not the power plant projects might ultimately make sense.
Nonetheless, over the next year, Blue Earth's four principals repeatedly characterized the term sheets as binding "contracts" and said the power plant projects were well underway.
Those statements were made in a Form 10-K filing, press releases and investor pitches, among other things, the SEC said.
In the spring of 2014, Blue Earth successfully applied to have its stock traded on the Nasdaq, an approval that again hinged on the company's representation of the contracts as totally locked down.
In reality, the SEC said, the meat processor only agreed to sign two of the contracts, and Blue Earth wasn't even able to complete the smaller of the two projects due to a lack of funds and other complications.
From late 2013 to the end of 2014, Blue Earth was able to raise a total of $27 million from investors through stock sales, with $10 million coming from a single investor.
By late 2014, Blue Earth's relationship with the meat processing company had soured, the SEC said, and the company finally fell into bankruptcy in 2016. It's unclear from the complaint exactly how much money Blue Earth's investors ultimately lost.
The SEC did not respond Friday to a request for comment. Contact information for Thomas, Francis, Woodard and Potts was not available.
The SEC is represented by its own Suzanne J. Romajas, Carolyn M. Welshhans, Nina B. Finston, Margaret W. Smith, John S. Crimmins and Victor Tabak.
Thomas and Francis are represented by Randall Lee of Cooley LLP and Adam Trigg of Bergeson LLP.
Potts and Woodard are represented by Brent R. Baker and Keith Woodwell of Clyde Snow & Sessions.
The case is Securities and Exchange Commission v. Thomas et al., case number 2:19-cv-01132, in the U.S. District Court for the District of Nevada.
--Editing by Jay Jackson Jr.
Update: This article has been updated with additional counsel information and additional comment from counsel for Potts and Woodard.
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