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How Buffett and a group of usually savvy investors were ensnared in a Ponzi scheme -


>>> How a California solar company conned a legendary investor, NASCAR and others in Ponzi scheme


The Sacramento Bee

BY DALE KASLER

JANUARY 30, 2020


https://www.sacbee.com/news/business/article239721438.html


The victims of a nearly $1 billion solar-energy Ponzi scheme in Benicia sound like a who’s-who of American business: Warren Buffett’s conglomerate. Paint manufacturer Sherwin-Williams Co. Insurance giant Progressive Corp.

Some of the nation’s most sophisticated investors got conned by DC Solar Solutions Inc., the bankrupt, crooked company that made mobile generators powered by solar panels. Court records and financial statements reveal roughly a dozen companies fell for DC Solar’s promises of profits and tax benefits, from a $43 billion Pasadena bank to a Philadelphia company with experience investing in solar farms.

DC Solar’s rise and fall is a tale of greed perpetrated by a little-known former auto mechanic, his wife and a small group of employees in Benicia, a working-class town on Suisun Bay, against some of corporate America’s deepest pockets. For consumers and investors, the scheme shows how even the savviest investors can be ensnared by the promise of an easy windfall.

The criminal case reached its zenith last week when company owners Jeff and Paulette Carpoff pleaded guilty to conspiracy charges in U.S. District Court in Sacramento. Four of their employees have also pleaded guilty. The U.S. attorney’s office said a seventh person is expected to admit guilt Feb. 11.

The legal fallout from the Carpoffs’ scheme could go on for years. While they’ve forfeited a stunning $120 million worth of real estate, classic cars and other luxury items, their company is in bankruptcy and federal investigators are searching for more assets. The DC Solar case has spawned several lawsuits already — in some cases pitting victims against each other — and no shortage of ripple effects.

Example: NASCAR wasn’t an investor but several of its racetracks leased mobile generators from DC Solar. Now the stock-car racing circuit is caught up in a lawsuit with Atlanta banking giant SunTrust over millions of dollars in unpaid rental fees. What’s more, DC Solar’s collapse in early 2019 robbed a NASCAR driver of his sponsorship and left the fabled Daytona International Speedway with dozens of busted generators — and no one to fix them — during the running of last February’s Daytona 500.

DC Solar’s generators were attractive to investors mainly as tax shelters. A provision in the federal tax code allowed investors to take generous tax credits on solar energy investments. The law is designed to spur green technology to lower the output of global warming greenhouse gases.

But when federal investigators discovered that most of the DC Solar generators they bought were nonexistent, the companies had to forfeit the tax credits and write bigger checks to Uncle Sam. The U.S. attorney’s office in Sacramento said more than $500 million in tax revenue has been “returned” to the Treasury by DC Solar investors, and more is expected.

The Carpoffs were able to lure a small group of big fish into their scheme; prosecutors said only about a dozen or so investors poured in a combined $912 million in about eight years.

“Several of the investors ... were repeat players in DC Solar’s transactions,” said Andre Espinosa, an assistant U.S. attorney. “They were satisfied with the tax benefits they received ... enough to return, to execute subsequent deals. It is the repeat investments that helped drive the total loss number.”

Perhaps the biggest victim was Berkshire Hathaway Inc., the Omaha, Neb., conglomerate controlled by investor Warren Buffett. The company told investors in a Securities and Exchange Commission filing last year that it had poured $340 million into the business. Berkshire had to add $377 million to its tax bill last year after finding out “those income tax benefits are not valid,” according to the SEC filing.

The SEC filing didn’t identify DC Solar by name, and a spokesman for Berkshire Hathaway couldn’t be reached for comment. But Berkshire did confirm the identity of DC Solar to Bloomberg news last year. Espinosa said the investments were made through Berkshire’s Geico insurance subsidiary.

Not far behind Berkshire Hathaway/Geico was Progressive. The insurance company reported to investors last spring that it had to pay an additional $156 million in federal taxes after learning of “potential fraudulent conduct” linked to the tax credits, according to an SEC filing. Progressive declined to comment through a spokesman.

Sherwin-Williams Co., the paint manufacturer, took a $77 million hit to its bottom line last spring “to reflect the entire loss of the investment with DC Solar and related expected tax benefits,” according to an SEC filing. The company issued a statement Wednesday saying it “remains committed to seeing those entities and individuals that assisted and marketed the Carpoffs’ fraud held accountable.”

FROM LAND ROVERS TO SOLAR ENERGY

Jeff Carpoff started with cars. He built a successful auto repair business in Martinez called Roverland USA, which serviced Land Rovers and Jaguars. After cashing out, he was looking for something new to do.

“I wanted to do something different than automotive, and solar sounded like fun,” he told Inc. magazine in an interview published just before federal agents raided his Martinez home and the Benicia headquarters in late 2018.

Carpoff said a friend wanted to power a vacation home in the Sierra Nevada with solar energy but was worried about the panels getting stolen. That gave Carpoff an idea: Build a system of solar panels on a trailer, so they could be moved around for safekeeping. He bought a trailer in Sacramento, put his mechanic skills to work, and began assembling.

Before long, his young company had powered an event at Pebble Beach and was fielding calls from Hollywood producers. According to presentations made to investors, the company established manufacturing and distribution facilities in Benicia, Buena Park and Las Vegas, court records show.

“Within a short time we were doing over $60 million in sales,” Carpoff told Inc.

Federal officials said DC Solar began as a legitimate business in 2009. But within two years it was funneling money between different investor accounts to keep the operation afloat.

Employees noticed that DC Solar had an unusual way of operating.

A former employee who spoke to the FBI recalled that after moving cross-country to work at the Benicia headquarters, he complained to a colleague that he hadn’t been reimbursed for his relocation expenses, as promised. The colleague then “removed $20,000 in cash from a safe in his office” and handed it to the employee “in a matter-of-fact manner,” according to court records.

RAP STARS AND NASCAR

As their business grew, the Carpoffs built a more ostentatious lifestyle, pouring company dollars into a suite at the new Las Vegas Raiders football stadium, a villa on the Caribbean island of Nevis and other goodies, according to federal officials. The rap star and producer Pitbull entertained at the company’s 2018 holiday party, according to a tweet by Jeff Carpoff.

Also in attendance were two NASCAR drivers who had spun into Carpoff’s orbit: Elk Grove’s Kyle Larson and Ross Chastain, both of whom were being sponsored by DC Solar. “The best holiday party I’ve ever been to by far!!” Larson tweeted afterward.

Carpoff loved rubbing elbows with the NASCAR crowd. DC Solar signed multimillion-dollar sponsorship deals with NASCAR racetracks, including the iconic speedways at Daytona and Talladega. In 2018 the company was the title sponsor of two races in NASCAR’s Xfinity Series — the DC Solar 200 in Phoenix in March and the DC Solar 300 in Las Vegas, in September.

Chastain won the Las Vegas race but within months the driver got caught in the middle of the legal drama unfolding at DC Solar. In December 2018, federal agents raided the Carpoffs’ Martinez home and the company’s Benicia headquarters. Within a few weeks a prominent NASCAR team named Chip Ganassi Racing, which was being sponsored by DC Solar, announced it was shutting down its Xfinity team because the sponsorship money had been cut off. That left Chastain temporarily without a car to drive.

Larson was affected, too. A Chevy Camaro he drove to victory in the July 2018 Xfinity race at Daytona was put on the auction block last October as a result of the DC solar bankruptcy. It wasn’t clear from court records whether the car has actually been sold, and officials with the auction company didn’t return calls seeking comment.

In a filing in bankruptcy court in Reno, officials with NASCAR’s International Speedway subsidiary said DC Solar owes more than $5 million in unpaid sponsorship fees.

They said their relationship with DC Solar brought other headaches. The speedways leased more than 700 mobile generators from DC Solar and counted on the company to service and maintain the units. When the company filed for bankruptcy last February, just days before the Daytona 500, more than three dozen of the 100 mobile generators deployed at Daytona International Speedway weren’t working properly on race day.

“The mobile solar generators are starting to deteriorate and break down,” said Joie Chitwood III, then an executive with the International Speedway company and grandson of a racing legend, in a court filing last February. His company “is being forced to expend time and money to locate substitute mobile solar generators from other suppliers.”

BROKERS HELPED LURE PONZI INVESTORS

How was a solar-energy company from Benicia able to solicit investments from some of America’s largest corporations? It used well-connected go-betweens.

Malcolm Segal, Jeff Carpoff’s defense attorney, said the company used brokers who “sent offerings to the investment committees or investment managers of the companies in question.”

Espinosa said the Carpoffs “had relationships with individuals in the financial industry with significant connections to corporate interests with an appetite for tax avoidance and minimization.”

Once its representatives got inside the corporate suites, potential investors were spun an elaborate web of lies. “Pitch books” prepared by brokers explained that DC Solar was making as many as 900 mobile generators a month — and was capable of producing profits of 40 to 50 percent — according to a lawsuit filed last week against the Carpoffs by the Securities and Exchange Commission.

None of the brokers has yet been named in court filings by the government. “The investigation remains ongoing and there are a few additional potential targets that we will pursue in the criminal case,” Espinosa said.

In a lengthy court filing describing the scheme, FBI Special Agent Christopher Phillips said investors paid $150,000 for each mobile generator — an array of solar panels mounted on a wheeled trailer, suitable for powering temporary venues and special events.

The investors put up down payments of $45,000 and were able to claim that same amount, $45,000, in renewable energy tax credits on each unit, Phillips wrote. Instead of holding onto the generators, the investors leased them to an affiliate of DC Solar, which turned around and leased them to the ultimate customers. Investors were told the lease revenue would pay for the rest of the $150,000 sale price — “a critical component of the transaction,” the FBI agent wrote.

DC Solar routinely inflated the size of its business when trying to lure investors. In his written plea agreement, Jeff Carpoff said the company took in enough money from investors to pay for 17,000 of the mobile generators. In truth, only about 6,000 of the units were ever made. According to the SEC’s lawsuit against the Carpoffs, the company “essentially ceased production” of new generators in 2016.

What’s more, many of the finished products never made their way to customers. Phillips wrote that hundreds of units were mothballed in warehouses in Benicia, Visalia and Las Vegas. While the company claimed it was taking in tens of millions of dollars from renting out the machines, the agent said more than 90 percent of the money was actually coming from new investors — the very essence of a Ponzi scheme.

UNTANGLING A PONZI SCHEME

Ponzi schemes can be notoriously difficult to untangle, long after the perpetrators have gone to prison.

When the scheme collapses, much of the assets are gone usually gone and the bankruptcy court and government investigators have to resolve how to divide up the money that’s been recovered.

The process can take years. A bankruptcy judge is still sorting out the payments to victims of Ponzi mastermind Deepal Wannakuwatte, the owner of a West Sacramento medical-supply company who was sentenced to prison more than five years ago. In a quarterly report filed this month, Beverly McFarland, the bankruptcy trustee overseeing the remains of Wannakuwatte’s company, said $5.1 million has been paid to victims with another $1.3 million left to be paid.

The system can sometimes pit one investor against another. Early investors who got repaid with funds supplied by new investors “could be subjected to clawback claims,” said Christopher Sullivan, the trustee’s lawyer. McFarland has sued several of the investors, claiming they helped Wannakuwatte find new victims. That case is still pending.

Lawsuits are starting to bubble up in the DC Solar case. In November, the company’s bankruptcy trustee Christina Lovato sued the Mandalay Bay Resort & Casino in Las Vegas for $500,000, demanding the return of $500,000 that Jeff Carpoff paid the resort in September 2018 to cover his gambling debts.

The lawsuit says the $500,000 was wired to the casino from a DC Solar bank account, making the payment a “fraudulent transfer.” If she’s successful, the funds would get put into the bankruptcy estate and eventually returned to creditors.

Investors in DC Solar are unlikely to get full recovery. Lovato has been able to earn about $6 million by auctioning solar generators, according to records in U.S. Bankruptcy Court in Reno.

The U.S. attorney’s office in Sacramento said it had seized $120 million worth of personal assets from the Carpoffs, including an array of real estate holdings in Lake Tahoe, Las Vegas, the Caribbean and Cabo San Lucas, Mexico. The government auctioned off 148 cars owned by the Carpoffs, including a Pontiac Trans Am owned by late actor Burt Reynolds that was a replica of the muscle car he drove in “Smokey and the Bandit.” The car auction alone generated $8.2 million.

But some of the money is simply gone. The Carpoffs used DC Solar money to buy, among other things, a now-defunct minor-league baseball team, the Martinez Clippers.

Assistant U.S. Attorney Kevin Khasigian said investigators have turned up 60 bank accounts and are continuing to look for additional assets that could yield payback for investors.

“It’s unlikely we’re going to get the full amount of the fraud but we’ve really put ourselves in the best position possible,” Khasigian said.

<<<



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