Identifying & Avoiding Scams

Financing large projects that include biodiesel processors, crushers and support equipment has become very complex, attracting a new type of predator with clever tricks to fraudulently divert investment revenue streams to him.

In one case, a large Canadian biodiesel project owner contacted a financial group known to have provided capital for several biodiesel projects. This financing group worked closely with a Swiss company created for the project owner and investor to handle financing. The group said the project would be funded from a variety of anonymous sources controlling $200 million already placed in a hedge fund to finance the Canadian project and three others. The financial advisor hinted the funds would come from Russian petroleum interests. The Quebec project owner flew to Switzerland to review the documents, meet with the investment group lawyers, and arrangements were made for financing. An upfront payment of $225,000 was deposited in the attorney’s trust fund to allow the group to pursue the funds. The attorney retained the money from two projects in the law firm’s trust account. As the attorney for the disbursing company, as well as a founder and director, he was uniquely placed to monitor, review, control and distribute whatever funds the company discovered. Instead, it appears the attorney just took the money, $450,000 placed there by the project owners in spite of clear provisions not to disburse the funds.

Another similar scam used an investment firm recommended by a church group member. Expenses and a retainer were provided by the project owner. After nine months and several trips to Switzerland and Germany, the financing group has yet to produce a penny. A disbursement schedule had been provided effective in 48 hours and the project manager was allowed to talk directly to the hedge fund owner. Last we heard, the money was tied up in Singapore bank and was within hours of being distributed.

There is an amazing consistency in all these tales. A year ago we were talking to a Toronto-based financial group that was to provide funding for several projects. I was allowed to talk to the biodiesel expert at that firm in a conference call between San Jose, Toronto and Calgary where the expert supposedly lived. On verification, the area code and local number for the expert were the same as the financier’s office number except for the last digit. When talking to outsiders, very often the adviser, expert and hedge fund managers are merely accomplices of the original financing team.

An inside scam is more painful because biodiesel projects are built up over time. They may have started in a casual conversation with friends, or a hobby becoming more serious. The types of people working in biodiesel are close to their sources and usually very trusting. This is the ideal setup for a worm to enter the apple. In rural America and Canada, the medium-sized biodiesel facility is often a cooperative effort with local shareholders. The group’s technical and financial expertise is often low and boards are peppered with local bigwigs used to having their way in small-time politics. It was no surprise then when an outside renewable energy expert who cut his teeth with solar and wind projects showed up in a small Canadian town. He quickly incorporated a biodiesel project, bought land and started selling shares. The plan included a 100,000 ton per year processing plant and an 800 ton per day crushing facility, and buying up local canola from area farmers who signed up in droves to become shareholders. The original owner was revealed to be a serial scammer and quickly departed.

The problem remained in the mess he left behind. To present the best possible face to investors, he brought in a German engineering firm as the technology provider, which acquired a large number of shares by offering services for equity. They recycled drawings for an old facility and claimed $3 million for engineering work performed. Those plans were never implemented and three years later the project is still stalled with new management fighting like cats in a bag for control, shareholders still waiting to get on with it, and millions missing from government grants.

What Exactly is the Fraud?

In a well-run scam the actual fraud and guilty people are hard to pin down because of the numerous avenues and documents generated to cover everyone’s tracks. We assume those funds in a currency-short market have real value beyond their intended ability to build projects, provide jobs and pay taxes. Large amounts of money can be loaned out by whoever has their finger on the trigger and generate obscene amounts of revenue in short-term loans. And it’s no surprise that the sharks are swimming most convincingly in the banking cesspool.

Someone in the food chain may be deliberately holding up to $200 million for their sole benefit but earmarked and paid for by investors. The list of possible beneficiaries is large. In the Quebec case, the financer is now apparently living in Italy with clear instructions that if he returns he will face prosecution. The interim banker responsible for procuring the letter of credit to disburse the funds, who probably knows more than most, responded to us by assuring she knew nothing about this particular transaction, and even if she did, that the financer defrauded her of $70,000 in expenses and legal fees. The disbursing bank senior vice president hasn’t responded and the bank itself is looking into his connection to the bank. At no time during the eight months this whole scenario unfolded were the actual funds ever revealed except in written statement from the interim bank that an instrument worth $1 billion was in place. This statement was subsequently amended because it didn’t relate to this particular transaction. It’s possible the funds never existed and the original sin was for someone to pocket the down payment with no intention of coming up with the funds. If so, this fraud resembles some large investment pool companies that some of our contacts have come up against.

Another scam that often occurs is the pay-to-play idea. For a monthly fee between $5,000 and $22,000 the financing group will peddle your business plan to its stable of investors. After three to six months it will announce that your project is being considered for inclusion in a $200 to $500 million financial pool or a hedge fund for renewable energy projects.

Your investment firm will go to the end of the world to promote your project at your expense. We know one project has spent more than $400,000 to keep its team in the hunt, even flying the finance team from Switzerland to live for a month at the project’s expense in a three-star hotel. One hot spot seems to be Geneva, but others have gone to Dubai, Bahrain, Moscow, Singapore and Zurich to meet with fund managers. Although the project owner paid for the trips, he will never be invited to the feast, and we can only wonder who actually was invited.

Speaking in confidence to the head of one of these groups turned up the fact that its minimum pay-to-play monthly retainer was $18,000, and that it was actively engaged in “about 20 projects.” The math is stupendous; every month this company, which consists of the principal and his wife, collects $360,000 and really isn’t providing any funds.

Another pay-to-play option involves the project owner providing an upfront, unrecoverable 2 to 6 percent of the required funds. Most of these projects are above $50 million. Before the intermediary lifts a finger, the project owner is out $200,000 to $300,000 while the shark promises only to do his best to uncover the funds. In one case where we were allowed to look at the contract, the upfront payment of $200,000 was to pay for expenses and grease the skids for a $2 million bridge loan. Needless to say there never was a bridge loan and the “funding team” invoked vacation time to delay for two more months. In the Quebec case we know the financer actively courted other Swiss companies, but the Swiss are tight-lipped about anything with a dollar, euro or ruble sign on it.

Once the business plan is shopped around, the representative will come back with glowing reports of project approval. The three letters of approval we’ve seen simply say the investment consultant has approved the project. And why wouldn’t he approve a project that’s already given him thousands of dollars, free travel to exotic places and contact with some of the best minds in the money-manipulating business? The downside to all this obfuscation is the group that would eventually benefit from knowing who or what it’s dealing with by proxy has no idea where its project is ending up. In the Quebec case, he learned there were several trips to the Bahamas to “meet” with disbursing banks and arrange to sign loan documents. These Bahamas banks were in direct contact, allegedly, with U.S. and Canadian banks where disbursement would happen any day.

Avoiding the Scam

Simple steps can be taken to avoid getting sucked in by these people, and they’re all based on your need to know and your ability to find out. First, be certain you know why they are talking to you. They were either invited by you or an outside source that knew about your project.

This is not a casual question because if someone who you thought was under NDA is discussing your business plan with strangers, you need to know. It’s important to know who brought them to your table and why they are eating your lunch.

If someone recommends a financier to you, make sure to try understanding the nature of the contact. These groups are generous with their finder’s fees for anyone who brings a project to their table—although the chance of ever receiving one is remote. But they have your name and a slick entrée to the trough. We have seen an agreement that would provide the project finder with a serious percentage of the financing just for the introduction and a $250,000 payoff for bringing the project to the table. Of course the payoff is contingent on getting funding, and that never appears to happen.

Verify everything they tell, show or refer you to. Very often the only visible sign that they exist will be a cheap-looking website with incredible statements in the form of press releases, referral statements and a list of offices and executives. One of our con men announced they closed a $140 million ethanol plant financing deal. On checking every name on the release, we found no trace of the company, the plant owner or even the site. Ask the financial organizer to explain this and your phone calls will go unanswered. So when approached by these investment groups, start with your BS antennae always on full-scan.

As you go deeper into the funding dance, continue to ask for proof. If your advisor says he will meet with a hedge fund, immediately ask for the fund’s name, who he is meeting and why. You have the right to know where your information is going. Later, when he will assert that the “banks” are in line, know which banks and at what level he is discussing your project. Two of our projects were stalled for at least three months waiting for “the banks” to clear an incredible set of hurdles. My favorite stall story is still ongoing in which the financing group had to go to Vancouver from North Carolina to sign a document with the hedge fund manager sealing a $33 million deal. 

In the two cases where the client was allowed to talk directly to the hedge fund manager, we learned in the first case the manager who was supposedly in Geneva was sitting next to the financial adviser in his Toronto office. In the second case, we still have no idea who the manager is because he only gave his name and no affiliation.

Always insist on deadlines so as the various excuses pile up, you still retain the option to terminate and recuperate. Clear deadlines can be a lifesaver when attempting to fund the purchase of a building site and the seller has other buyers on the hook. This is also a great time to introduce the concept of incentives for early closing. One group was offered a 0.5 percent premium for closing early and it seemed to magically cut through red tape and make nitpicking due diligence issues melt away.

Day by day the money is promised and every day brings another excuse. After months of waiting what would a few more days mean? Eventually the day comes when the most diehard believer understands that he has been had. Now is the wrong time to discuss the situation with your attorney because you will discover that there is absolutely nothing that can be done about the runaround, lies, delays and your lost deposits.

So the final but first piece of advice is start with your attorney to ensure that it will not end with your attorney. Make sure your attorney is always in the picture. For some reason, attorneys read things differently than we common mortals, they are ever aware of traps, weasel words and cut outs. But keep a wary eye on that attorney if he isn’t fully in your camp. One attorney took all the money deposited in his trust fund and made it disappear completely then folded the company and is now running for office.

Every piece of paper, every phone call, every expense must be recorded, emails carefully kept. Instant messages copied and saved. These people are fast talkers, so keep what you can, and make conference calls followed by summations and call reports. Even then you will end up as the shareholders in Canada, the Quebec project owner, the Nevada developer, the Ontario builder and the expatriate American in Europe wondering how they could have believed for more than a year that the people they blindly trusted to do what they had promised could have not only walked off with the cookies, but were now threatening to sue them for the jar they came in.

There is not enough funding for legitimate projects out there, let alone enough to feed the sharks.

Peter Brown

Founder, Euro Marketing Tools Inc.