In New Jersey the state attorney general last fall filed civil fraud charges against Brian Smith and his wife for promoting Digital Gas (other-otc: DIGG.PK - news - people ). The company lacked even a bank account yet had shares trading on the pink sheets that briefly soared to 90 cents a share last spring, giving it a theoretical value of $22 million. As he pumped the stock with press releases like the one claiming Digital Gas had a "high temperature fuel cell" that would unlock as much as 1.1 billion gallons of oil from a neglected oil shale deposit, New Jersey officials say, Smith was using stock to renovate his home and pay his attorney.
Smith insists, in an e-mail, that he's innocent and his company "is actively seeking to commercialize its energy savings, alternative energy and farming opportunities." For assets, his Web site offers a grainy image of the deed to a 178-acre granite quarry in Nova Scotia, Canada. Despite Digital's legal problems, "We're still in the pipeline," says Theo van Bakkum of iccu Holding bv, a Smith partner who is working on a new method for storing electricity.
KissyKat And The Magic Diesel
Daniel Fisher 02.26.07
forbes.com
When the cry goes up, "Renewable Energy!" an army of penny-stock operators swings into action.
An aerial photo on the web site of U.S. Sustainable Energy Corp. shows a plant in Natchez, Miss. where the company says it will soon begin producing 1.5 million gallons a day of biodiesel-like fuel from soybeans. To put that in perspective, that's double the current biodiesel output in the entire country.
John Rivera, U.S. Sustainable's chairman, admits he gets some skeptical looks when he describes his "secret" process for turning soybeans into liquid gold at a rate (five gallons per bushel) that experts say defies the laws of chemistry and physics. "Everybody comes out here and says, 'Hey, you're full of it,' and then they see me do it," says Rivera, who in the 1990s promoted a similar process for turning used tires into fuel oil. "That's when I turn to them and say, 'Welcome to the Liars Club. Because now nobody's gonna believe you, either.'"
Somebody's buying Rivera's story. His company, which has not yet reported any revenue (it intends to start filing financials with the Securities & Exchange Commission "soon"), carries a market value of $227 million. Hey, that's nothing. A December news release from U.S. Sustainable says that the company could have "an immediate market value" of $12 billion.
Things only get more confusing if you follow the trail to EarthFirst, a Tampa outfit that told the SEC it loaned $3.3 million to U.S. Sustainable Energy last year. EarthFirst Chairman John Stanton put out a news release in April trumpeting U.S. Sustainable's revolutionary biofuel process. In the days before the release EarthFirst's trading volume spiked to 5 million shares from several hundred thousand and the stock price bounced to 17 cents, briefly arresting a long slide to a nickel a share.
No, no, says Stanton. That's a different U.S. Sustainable Energy. Rivera wanted to use the same name for his company, explains Stanton, who admits doing business with Rivera in the past.
Details, details. The big picture: Everyone is in love with renewable energy--George Bush, any congressman you could name, the eminent venture capitalist Vinod Khosla, Goldman Sachs (nyse: GS - news - people ). At the upper end of the investment spectrum the field has attracted $53 billion in private capital over the last three years for windmills, solar panels and low-carbon energy sources. At the lower end there are the penny stocks.
Watch your wallet. Des Moines lawyer Steven Wandro is trying to recover $3.8 million stolen a few years ago from a group of grain farmers who thought they were investing in an ethanol plant. The money passed instead to a film studio and a Florida scamster named Jerry Drizin, allegedly at the behest of a Nigerian in Germany, as detailed in a federal judge's ruling in the case. "People are just running to this thing in a way that I think is scary," sighs Wandro, who recalls how legitimate ethanol projects in Iowa collapsed after oil prices fell in the mid-1980s. "It's a prescription for dashed expectations."
Capitalizing on the popular mania for sustainable energy, the penny-stock operators are converting failed Canadian mining outfits and Internet firms into green machines with names like Western Wind Energy and Hydrogen Power International. Western Wind, run by Vancouver mining-stock executive Jeffrey Ciachurski, paid Khandaker Partners, a New York research firm, $22,000 for a November report touting a "price target" of $11.59 a share. Ambitious, given that the price is now hovering around a buck. Western Wind is trading lawsuits with former employees who accuse the wife of the chief executive of posting unflattering comments on a stock bulletin board, including one suggesting that one of those employees was "caught shagging some Red Head" near the proposed wind-farm site. (Ciachurski denies his wife ever made such comments.) Hydrogen Power of Englewood, Colo. says it has a revolutionary method for making hydrogen fuel out of aluminum. One problem: The fuel source weighs more than the high-pressure hydrogen tank it is supposed to replace. That problem is being worked on.
Cornell Capital of Jersey City, N.J. has pumped at least $100 million into green-themed companies in the past couple of years. "Solar, wind, clean technology plays--we love the space," says Troy Rillo, a Cornell managing director. "We think the trends are great."
Great for Cornell, which gets shares at a discount that it can then sell in the open market. Great for investors paying full price?
Check out some Cornell clients. NewGen Technologies, which says it plans to build several hundred million dollars' worth of ethanol refineries, was formed out of a shell company. XsunX, formerly known as Sun River Mining, is now a solar-cell company with no revenue and no orders. Market cap: $86 million. Earth Biofuels, whose mascot is country music star Willie Nelson, raised $52.5 million from Cornell and other convertible-debt buyers but sank more than half the dough into a Louisiana ethanol refinery project that has stalled amid charges of excess costs and failed financial commitments. Power Technology (otcbb: PWTC.OB - news - people ) is on the verge of producing what it claims is a revolutionary lightweight lead-acid battery but has yet to find any potential customers. Still, it's aiming to raise capital in a public share offering; proceeds will repay a $1.4 million loan from Cornell.
Don't like the Cornell portfolio? Maybe there's something in the cozy family of GreenShift Corp., a holding company for six publicly traded entities--combined shares outstanding: 3 billion--with names like gs CleanTech and GS AgriFuels. GreenShift is working on technology to feed carbon dioxide to algae and then harvest the algae as if they were corn stalks. If you find this impractical you are presumably not among the investors whose enthusiasm has given GreenShift a market cap of $114 million.
In 2005 a predecessor of a GreenShift unit, called Incode, was flogging KissyKat, an online dating service for pet lovers. That operation didn't work out. Reincarnated as resource firm, GreenShift lost $9 million on sales of $17 million over the first nine months of 2006. Most of that revenue came from a waste-disposal business and a machine shop in Ohio. But GreenShift's chairman and controlling shareholder, Kevin Kreisler, has dreams, and the algae venture is just one of them. Another is to convert the waste material from corn ethanol plants into oil that can be used to make biodiesel. GreenShift says it has sold several of the $1.6 million units so far, but there's a reason it has the business largely to itself: Michael Ladisch, a Purdue University engineering professor, says that few ethanol plants produce enough waste oil to justify trucking it to a biodiesel plant.
No problem, says Thomas Scozzafava, president of GreenShift's gs AgriFuels unit and a former Lehman Brothers (nyse: LEH - news - people ) merchant banker. All you do is cluster the corn-oil units around biodiesel plants that use another money-saving GreenShift innovation: a "continuous base catalyst reaction" system that relies on a "proprietary process intensification and advanced separation technologies"--whatever those are. There are plans to use them in a new Mean Green Biofuels plant, in Memphis. Mean Green is meantime applying for emissions permits.
EarthFirst, John Stanton's firm, claims to be at "the forefront of alternative energy sources," according to its Web site, but still gets most of its revenue from moneylosing waste-disposal and biodiesel-import businesses, and recently filed to allow Laurus Capital to sell 76 million shares, whose proceeds would be used to retire convertible debt held by Laurus. A self-described turnaround expert, Chairman Stanton doesn't disclose in EarthFirst's sec filings anything about the $157 million collapse of Keller Financial, a used-car finance firm in Florida he briefly ran. A plaintiff attorney reportedly claimed that Keller preyed on unsophisticated, elderly investors. Stanton later paid $181,000 to settle a bankruptcy trustee's claim.
Stanton owns stakes in U.S. Energy Initiatives, which lost $4.5 million on sales of $426,000 in the first half of 2006 trying to sell kits to reconfigure diesel engines so they run on natural gas; and U.S. Sustainable Energy, which claims a catalytic vacuum distillation process that sounds remarkably similar to the one John Rivera is cranking up over in Natchez. Both involve heating organic materials in a vacuum until they break down into carbon and vapors that can be condensed into a low-grade fuel oil. "Why you'd put soybeans in there, I don't know," says Thomas Adams, a biofuels expert at the University of Georgia. "Sewage works just as well."
Adams questions how Rivera can produce biodiesel without methanol--or transform 60 pounds of soybeans into 37 pounds of biodiesel, versus the 27 pounds generally considered the limit. Rivera says his process is a secret and now claims he means "biofuel." He's not the only one pushing the limits of science: In its sec filings EarthFirst claims it can create more than 20 pounds of carbon, fuel oil, combustible gas and scrap steel from a 20-pound tire.
While scrambling for green-energy investments they can trumpet in news releases, penny-stock operators invariably collide. That's what happened in Plaquemines Parish, south of New Orleans, where Earth Biofuels of Dallas last year announced plans to restart an alcohol refinery, closed since the first ethanol boom went bust in the early 1990s. Months later South-ridge Enterprises, a onetime mining operation now in the ethanol business, said it was buying $6 million worth of equipment from the same plant to build its own 60-million-gallon-a-year ethanol refinery. Its shares jumped 20 cents to $1.84 on the news.
Earth cried foul, saying it owned the equipment. Southridge has sued Earth's partner in the deal, blaming it for the loss of $60 million in market value. A lawyer for the Louisiana partners says he expects the case to be dismissed, but the point seems moot: Earth has since imperiled its own $27 million investment by failing to come up with $80 million to finish the refurbishment by a Dec. 4 deadline. Earth says the project is "still viable."
So, apparently, is AFV Solutions of Irvine, which plans to import hybrid natural-gas/electric buses from China. Up until early 2005 AFV was known as Dogs International and planned a chain of "bed and biscuit" upscale kennels. (It still owned one in Flagler Beach, Fla. as of its most recent sec filing in November.) Dogs International turned green after Jeffrey Groscost, former speaker of the Arizona House of Representatives, took over as chief executive. Groscost was famous in Arizona for pushing through a subsidy program for alternative-fuel vehicles in 1999 that cost the state more than $200 million before it was shut down; buyers could get up to half the cost of a $50,000 suv back from the state.
AFV shares surged from $1.60 in 2005 to $11.30 in May 2006. That's when it announced $4.8 million in financing and plans to import Chinese buses. AFV has yet to sell a bus, and its share price has since deflated to $4.50. Groscost died suddenly in November.
Some schemes are outright fraud. LeeRoy Allen was ordered to pay $270,000 and barred from involvement with public companies last October after the sec accused him of converting a penny stock called J-Bird Music Group (former home of faded stars like Billy Squier and The Guess Who) into a purported biodiesel company with "no assets, funding or viable product." Allen consented to the charges without admitting or denying guilt.
In New Jersey the state attorney general last fall filed civil fraud charges against Brian Smith and his wife for promoting Digital Gas (other-otc: DIGG.PK - news - people ). The company lacked even a bank account yet had shares trading on the pink sheets that briefly soared to 90 cents a share last spring, giving it a theoretical value of $22 million. As he pumped the stock with press releases like the one claiming Digital Gas had a "high temperature fuel cell" that would unlock as much as 1.1 billion gallons of oil from a neglected oil shale deposit, New Jersey officials say, Smith was using stock to renovate his home and pay his attorney.
Smith insists, in an e-mail, that he's innocent and his company "is actively seeking to commercialize its energy savings, alternative energy and farming opportunities." For assets, his Web site offers a grainy image of the deed to a 178-acre granite quarry in Nova Scotia, Canada. Despite Digital's legal problems, "We're still in the pipeline," says Theo van Bakkum of iccu Holding bv, a Smith partner who is working on a new method for storing electricity.
"We are here to help farmers, lessen the heavy yoke of imported fuel, help to create food and jobs for Americans and offer the greatest solution to the world's need for energy since humans harnessed the power of fire itself," says Taylor Moffit, chief executive of Originally New York, an o-t-c bulletin board and would-be ethanol producer with a grand total $331 in revenue since it launched in 2001. Dream on--you'll get a lot of investors to dream with you.
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