Phony Tax Credits Are The Center of an Offering Fraud Case
Last week it was a marijuana firm licensed under the laws of Washington State. This week it is federal tax credits tied to energy. Next week it may be crypto currency. There is a seemingly endless variety of businesses that are perceived as a quick and painless way to make money through the efforts of others if one is willing to trust the prompter with his or her cash that was typically acquired through a difficult process called work. The promoter of course is selling securities in the form of an investment contract or perhaps an interest in a company. Regardless, the end is typically the same – the seller/promoter makes money; the investor does not.
The Commission’s latest in the never-ending stream of these cases is based on the actions of a husband-wife team that raised over $910 million from investors beginning in 2011. The investors were eager to earn painless profits from federal energy credits. SEC v. Carpoff, Civil Action No. 2:20-cv-00180 (E.D. Ca. Filed Jan. 24, 2020). Unfortunately, the only federal credits investors may have earned might have been some kind of business-investment loss.
Defendants Jeffrey and Paulette Carpoff, residents of California, controlled DC Solar Solutions, Inc. and DC Solar Distribution, Inc. The former was owned by Mr. Carpoff. The latter was owned by wife Paulette. Both firms filed for bankruptcy protection in 2019.
The two firms operated together. DC Solar told investors that it designed, manufactured and leased renewable energy products to serve the needs of a diverse “off-grid” market place. Over a period of several years investors were offered the opportunity to acquire an interest in DC Solar in the form of either an investment fund or a sale-lease back arrangement. Each required investors to purchase generators from DC Solutions while simultaneously leasing the units to DC Distribution. The units would then be leased to end-users. Profits were supposed to come from tax credits, depreciation on the generators and lease payments.
The face value of the deals inked by investors exceeded $2.7 billion. Investors put-up about $910 million in cash but owed more under the agreements which were about 70% financed. Investors were solicited through a variety of mechanism including sales people who at times used a pitch book. Investors were assured that DC Solar had extensive experience and capabilities in the renewable energy field. There was a stable of satisfied investors, according to the pitch.
Investor were not aware that most of the generators sold were never manufactured. Investors were also not aware that most of the revenue payments they received came from cash invested by others. Likewise, they did not know that Mr. Carpoff arranged for investors to receive false certificates, assuring them that all was well with their investments. Inspectors associated with the sale-leaseback arrangements were also deceived by false documents furnished.
Throughout the process the lack of legitimate revenue was concealed through repeated circular bank transfers involving the two firms. False financial statements were also furnished to prospective investors. And, Defendants misappropriated at least $140 million of the investor capital. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of California filed a parallel criminal action. See Lit. Rel. No. 24724 (Jan. 24, 2020).