On January 24, 2020, the Securities and Exchange Commission (“SEC”) charged a California-based couple with orchestrating a seven-year, nearly billion-dollar Ponzi scheme involving alternative energy credits through their solar generator companies.
The SEC’s complaint against Jeffrey and Paulette Carpoff of Martinez, Calif., is a textbook example of how fraudsters often try to lure investors by associating themselves with trendy technologies. It’s a reminder to consider the same philosophy used by legendary investor Warren Buffett and only invest in concepts you understand because if an opportunity seems too good to be true, it usually is.
The Carpoffs allegedly raised approximately $910 million from 17 investors between 2011 and 2018 by offering securities in the form of investment contracts through two solar generator companies, promising investors tax credits, lease payments, and profits from the operation of the generators.
The SEC’s complaint, however, says that most of the generators were never manufactured and the majority of purported lease revenue came from new investor funds. The Carpoffs touted themselves as major industry players with extensive experience and thousands of solar generators. The SEC alleged further that they perpetuated their scheme by creating false financial statements, lease arrangements, and generator certifications.
In turn, according to the SEC complaint, the Carpoffs treated themselves to $140 million of investor money in order to fund a lavish lifestyle that included 150 luxury and sports cars, dozens of properties, including business properties, luxury properties, and vacation homes, and a share in a private jet service. The SEC stated that they also transferred tens of millions of dollars to joint and individual bank accounts and accounts of other companies they owned.
The Allure of Energy Tax Credits
The ability to fool a number of investors over several years took a series of carefully orchestrated steps that, according to the SEC charges, began in 2011 when the Carpoffs first sold investment contracts through their privately held alternative energy companies DC Solar Solutions, Inc. (“DC Solar”) and DC Solar Distribution, Inc. (“DC Distribution”).
The investments were described as designed to take advantage of tax credits that were available to certain alternative energy related projects. As such, investors purchased generators from DC Solar and then immediately leased them to DC Distribution. But DC Solar manufactured and put into service far fewer generators than it claimed, and made virtually no revenue from leasing generators to end-users.
Intensive efforts by investors to locate the generators identified less than 6,600 of the approximately 17,600 generators for which DC Solar entered into investment contracts and sold to investors, meaning investors paid hundreds of millions of dollars for generators that never existed.
In one specific example, as claimed by the SEC, in preparation for a scheduled inspection of some of the generators owned by an investor, Jeff Carpoff and another DC Solar employee developed a list of inspection sites and coordinated the delivery of generators to those sites before and on the day of the scheduled inspection.
Additional Acts of Deception
The SEC alleges that Jeff and Paulette Carpoff each knowingly hid, and oversaw others in hiding, from investors that DC Solutions had not manufactured their generators and that DC Distribution generated minimal amounts of legitimate lease revenue. DC Solar offered securities to investor in two types of investment contracts: (1) Investment Fund Contracts and (2) Sale-Leaseback Contracts.
Investors expected to profit from the investments due to tax credits, depreciation on the generators, and lease payments. Investors thus played an entirely passive role: the success of the venture, and thus the profits to investors and DC Solar, turned entirely on the efforts of DC Solar to make, maintain, market, and lease the generators, all of which, according to the SEC, added up to a handy Ponzi plan.
Pitch-books provided a “Summary of Investor Returns” with estimated internal rates of return ranging from 40 to as high as 50 percent. Yet in mid-2016, when DC Solar had essentially ceased production of generators, the complaint indicates that Jeff and Paulette Carpoff still continued to fraudulently execute agreements even though they knew that the terms of those agreements would not be fulfilled and that investors would be duped out of hundreds of millions of dollars.
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